Asian Chemical Connections

Please read this excellent piece from my colleague Nigel Davis, who is editor of the Insight section of ICIS news.Some further thoughts: if 46% of existing and 45% of future ethylene production is taken offline by flooding, just think of the impact on food pricing and distribution and the resulting social and economic chaos due to the shortage of food--packaging material. These estimates maybe wrong, but if Lehman Brothers are only halfway right God help us, and I don't just mean the chemicals industry. On a more immediate bottomline level, how many banks, consultants and project proponents are factoring in the increased risks of flooding into feasibility studies? Or does anyone really care enough to look beyond their next promotion or their imminent retirement? If you won't be around in 10 years' time, why bother asking awkward and potentially career-threatening questions?

Rex Tillerson, chief executive of ExxonMobil, displayed a careful balance between supporting the oil industry and expressing concern over climate change in a recent speech.Does this indicate a shift in direction at Exxon post Lee Raymond, or merely a more cuddly and warm way of presenting unchanged policy?
The reason why we are still dependent on hydrocarbons is because insufficient investment has been made into alternatives. When the US Gulf Coast refineries and petrochemical plants are under six feet of water thanks to rising sea levels, it will be too late to make the investments.

The petrochemicals industry generally gets a bad press, but producers are unlikely to ever be charged with depriving the public of food. In fact, plastic packaging could go a long way to solving problems such as India's - where 40% of food rots before it can be delivered.
Biofuels producers, however, although they have ostensibly stronger greener credentials, are locked in a row over food versus fuel. Visit Simon Robinson's biofuels blog for some thought-provoking comments on this and other challenges facing this big boom industry.

The famous "Skeptical" environmentalist (unfortunately, the American spelling and therefore the wrong spelling), Bjorn Lomborg argues against the Kyoto Protocol in this article from the special green edition of our magazine, ICIS Chemical Business.He says, in short, that all the fuss about Kyoto is a waste of time and effort. Even if it is fully implemented, Lomborg agues that the rate of global warming will be set back by a mere five years.
And so he contends we should instead spend the huge cost of Kyoto - $150bn a year - on tackling HIV, malaria and other nasty diseases.
He is also in favour of an R&D tax equivalent to 0.5% of each country's GDP to develop renewable chemical, fuel and other technologies. Read more about Mr Lomborg's iconoclastic theories.
His approach would bring the sceptics and the greenies together, as the sceptics cannot deny that in terms of Peak Oil and energy security alone, dependence on the filthy black stuff has to be broken.

Maybe, if the mystery blogger at the excellent http://www.theoildrum.com/ site knows what he is talking about. I've pasted in his arguments below.
You need to register at this site, which takes only a few minutes, if you want to get into the wider debate about how energy issues will have a critical bearing on all those wonderful demand and supply predictions available at a high premium from petrochemical consultants.
And while we are on that subject, just how many of those predictions take into account a sharp decline in Chinese growth on the failure of its energy policy combined with the inability of the world to meet its crude oil import needs? This could occur as soon as 2010, say some crude oil exports, the year when Peak Oil is forecast to finally arrive.
Once you've registered at the oil drum, go to http://www.theoildrum.com/node/2270 for some miserable reading on this very topic.
Happy 'Depression Economics' - a new concept I think I've just invented.

In the old days all you had to do was propose an ethane cracker with PE and MEG downstream and you were away.
But these days if you want to get feedstock, especially in Saudi, you need to offer something a bit different because of the drive to diversify to create jobs.
This is a big opportunity for medium-sized players such as Lucite with the right technologies, hence their methyl methacrylate project with Sipchem.

I think it's about time that the developing world stopped saying "you did it, so why can't we?" when the West raises concerns over rising pollution levels in China, India etc.
In the "good" old days my home country, the UK, had lots of dark, gritty and satanic mills, which were almost as ugly as our corporate headquarters. We used to make children work as chimney cleaners and down coal mines and generally life was pretty miserable.
But the point is that we, fortunately, didn't have the technologies to kill people in as greater a number as the Chinese have, and also we didn't have anywhere near as many people. Chemical and other plants are playing a large part in China's environmental tragedy - and it is no exaggeration to call this a a tragedy.
Expect more legislation from China's government, as a result of disturbing reports on China's environment such as this one by the OECD.
The legislation will make it harder and more expensive to build chemical and other plants. At the same time there are huge opportunities for those selling safer processes and for the water-treatment industry.
But will the legislation work? Probably not because it cannot be allowed to work as so much of China's growth is tied up in low quality, very cheap industrial capacity.
The end result is that China will choke a large number of its people, and its economy, to death.

Paul Hodges, in his excellent chemicals and the economy blog, talks about the recent Shenhua Energy listing on the Shanghai stock exchange and how it shares jumped by 93% following the IPO.
Now it has ample cash to pursue its ambitions.
Shenhau is just one of numerous companies involved in coal-to-liquids projects in China which will provide transportation fuels and also methanol-to-olefins production through to polymers. Cash will not be an objective for a sector which is expected to see Yuan60bn worth of investment in 2006-10
The US is also looking at making much more use of its coal reserves to boost energy security and reduce carbon dioxide emissions.
But just how environmentally friendly are coal-to-liquids technologies? According to the non-profit organisation, the Natural Resources Defense Council, it makes more CO2 sense to refine oil - Download file
However, in the end will the solutions we seek to the peak oil crisis be driven more by energy security issues than environmental concerns?
And when the Greenland ice sheet has collapsed into the ocean, Shanghai has been submerged and hundreds of millions of people have been displaced by the global rise in sea levels, how secure will we feel?

I am having a go at the US here (see article below) - a pretty big target - but don't worry, Asia is the next in line on this blog: the opportunistic, shallow and downright unpleasant palm oil-based biodiesel industry deserves similar treatment.

As for ethanol, Rex Tillerson has a point. The CEO of ExxonMobil was quoted in a recent Forbes article as saying "we can't add anything to moonshine technology" - indicating the company's indifference to investing in the biofuel.

Now I never thought I would find myself agreeing with ExxonMobil on anything.

Maybe Singapore airlines has got the wrong end of the stick by trying to ban first class passengers in their new cabins in the sky from indulging in a little hanky panky.
Perhaps the answer is to equip the walls of these private cabins with super sound-absorbing polymers (polyurethanes, maybe?).
Any suggestions from polymer experts out there would be gratefully received and I'll pass them onto the airline.

After all the optimism, all the hype and a lot of investors' money, the industry has shot itself in the foot by failing to build demand ahead of supply.

Plus the negativity caused by food versus fuel and environmental counter-arguments to supporting this current generation of technologies is making some Asian governments hesitate on providing the support needed to bolster demand......

The two big gaps in the US major's Asian presence (and gaping gaps they indeed are) are cracker complexes in India and China.

China could be fixed through the alliance with PIC - meaning, Dow has leverage to get a license to build a naphtha cracker complex by offering crude supply through its new jv.

Atlernatively, it could achieve te same objective by completing its methanol-to-olefins project.

But India remains blocked by Bhopal. One wonders why a company with the wisdom of Down cannot work its way through the ever-in-flux Indian system, but maybe no foreigner can without the support of a strong local partner.

This is not meant to make light of the lingering misery of one of the world's worst chemical disasters, but the motives of some of those petitioning for more money are perhaps a shade dubious.

What's certain is that the issues cannot be as simple as portrayed in this Voice of America article.

With naphtha prices so high, heavy aromatics and pygas feedstock for producing benzene are not only expensive but are also in tight supply due to operating rate cutbacks.

Longer term also, as we've already discussed here, there are major doubts over whether China will produce enough naphtha to operate all the petrochemical projects it is building when the priority is gasoline and diesel production.

The economics of naphtha and pygas-based benzene look seriously challenged, therefore, both in the short and long terms.

And as the extended article below warns, watch out for King Coal as China ramps up exceptionally economic coal-to-benzene production

In the good or maybe the bad old days depending on your standpoint, methanol was a fairly straightforward product.

You had chemicals demand and that was more or less it. But as the extended analysis below explains, chemical producers who use methanol as feedstock have to factor in direct blending of gasoline into methanol, DME, biofuels and fuel cells as shapers of demand.

Direct blending of gasoline into methanol and the use of DME as a transportation fuel are the biggest of these two new sources of demand in China. Expect a big increase in consumption from these two applications over the next few years.

Whereas the US has opted for ethanol in order to increase energy security (and for bogus environmental reasons), China has chosen the methanol route based on its big coal reserves.

The $64,0000 question is what this wil mean for the affordability and pricing of methanol for chemical consumers.

.......I had heard a company saying it was moving up the value chain (or rather a Euro or a British pound these days), I wouldn't be writing this blog entry while smelling the wonderful aroma of pork sausages being cooked for my tea. Brown sauce and mash as well, of course.

Can Dow Chemical make a success of this often-mentioned strategy? See below for extended analysis.

If it cannot, the prospects for the US producer could be bleak in the long run

The mood at the recent NPRA International Petrochemical Conference in San Antonio, Texas, was mixed, despite all the economic gloom.

Some producers said they were still making money - especially those selling into manufacturing sectors benefiting from a rise in exports due to the weak dollar.

What's certain, of course, though is that things will get worse regardless of the health of the global economy. The down cycle is just around the corner.

But we could quite easily see, as this extended article below speculates, another period of under-investment following all the over-investment that markets will need to absorb over the next 3-4 years.

Plus ca change, plus c'est la meme chose.

Very interesting speech from Alan Kirkley, Vice President of Strategy and Portfolio for Shell Chemicals, which first of all goes over the predictable ground of where we are in the cycle and the threat from the Middle East.

However, he then makes the valid point - which I made earlier this week - that the end of the world has not necessarily arrived for the US and Europe.

There are some big question marks over how much more capacity the GCC region will be able to add post-2012, and perhaps even further afield as global LNG markets take off. Gas cracking may no longer as consistently benefit from feedstock at virtually give-away prices.

The likes of Shell and ExxonMobil have existing technology and know-how to make more highly competitive basic petrochemicals - and to take maximum advantage of the petrochemicals/refining interface.

Kirkley predicts that there will be an increasing use of hydrocracking to make petrochemicals, tapping into light ends that have a diminishing value in the gasoline pool and more revamping of catalytic cracking capacity towards olefin production.

Given the likely continued high cost of EPC and raw materials, anybody with a fully depreciated refinery requiring only relatively modest investment could be in a strong position.

But, of course, the first task is to survive the current downturn in one piece.

Economists refer to externalities as those factors that can influence growth but that are beyond the influence of humans to determine. As ar result, the members of this esteemed profession tend to ignore externalities.

If we've left it too late on the environment, then the environment is clearly such an externality that could limit demand growth in the future.

How will China provide enough water to ensure that growth spreads from east to west?

What happens if the environment has reached a dangerous tipping point where the damage we've inflicted leads to an out-of-control acceleration into catastrophe?

Take, for example, corn-based ethanol.

William Laurance of the Smithsonian Tropical Research Institute in Panama writes in the 12 April issue of the New Scientist that the huge increase in corn planting in the US to feed ethanol has led to less soya being planted.

The resultant rise in soya prices has led to forest destruction in the Amazon as Brazilian farmers clear trees to plant soya. "

The Amazonian forests help to generate their own rainfall, because the dense vegetation quickly recycles moisture and returns it to the atmosphere. As deforestation proceeds, however, less water vapour is recycled, so clouds and rainfall decrease. No one knows how far the Amazon can be pushed before it collapses in rage of droughts and forest fires."

Blimey, if deforestation already accounts - as we are told - for 20% of global emissions, what would this mean for the habitability of our planet?

Never mind - I don't care. I am off to read some wonderful analysis about the endless demand-growth prospects presented by China. Who cares as long as I can get my bonusby building this analysis into a report I can present to my boss?

See below for an extended interview with Shell Chemicals vice president, Ben van Beurden, who talks of the search for new feedstock sources. He raises the possiblity of using syngas from the Pearl GTL project in Qatar to make methanol and then olefins. Or perhaps the high paraffinic naphtha and ethane from the same project will be the way to go for Shell in Qatar?

Meanwhile, more investment in China looks likely. Read on......

For us lesser mortals further down the slippery career pole, it is easy to stare up with envy and contempt at the CEOs of our own companies and other companies.

Many us at times feel (myself included) that we could do a great deal better than our bosses.

I plan to develop a CEO board game with online and "hard copy" versions complete with chance cards such as "You get caught price-fixing at a major industry event. Do not pass Go and do not collect $2,000. Go straight to jail". The reference to Monopoly wasn't meant to be a dreadful pun.

We could then put our supposed superior skills into practice and prove whether we are really cut out for life at the top. And maybe if the game was accurate enough, it could be used to help assess real applicants for the top jobs. Watch this space for a prototype.

In the meantime, management consultants, as you well know, make a fortune from offering all kinds of advice to companies and their CEOs about how to make it big.

This is not always money well spent, according to Victor Newman - former chief learning officer at Pfizer - who is now what he calls an independent Knowledge Activist.

In his excellent video, 4 Faces of CEO, he talks of how one particular consultancy charged several million dollars for 3-4 months work, only to produce findings that he says could have been reached in a couple of hours through internal discussion.

I digress. This is not meant to be a dig at management consultants whose work I admire and whose salaries I envy almost as much as my CEO's.

It must be lonely and tough at the top, although a massive salary and the guarantee of a huge pay-off even if you turn out to be a load of rubbish are considerable compensations.

Newman's video is the opening to a CEO workshop where he tries to tackle the loneliness attached to making big decisions.

He highlights something we can all relate to no matter what our rank: the feeling of powerlessness to achieve what we want to achieve because we lack the necessary skills, resources or simply the time to get to the "ideal world" (in my case, a CEO board game developed within the next six months which becomes a huge commercial success enabling me to retire, save the world and ban caravans from the roads).

He has developed a diagnostic approach where business leaders identify where they want to get to and measure this against how far away they are from their objectives. Results of these evaluations are then shared in what he admits can be a painful exercise, followed with discussion on how each of the CEOs can get closer to their ideals.

Sounds great stuf not only for CEOs but for anybody who cares about progressing in their job.

And what's fascinating is the reason for the 4 Faces of a CEO title of his video.

These four faces are:

*Creators who don't care about money because they are "intrinsically motivated". In other words there is no point in just waving the big salary cheque, the luxury new car and country club membership at these people. The buzz they get is from new ideas and only new ideas. They find implementing ideas boring because they want to move on to the next thing

*Stabilisers who are loathed by the creators. These are the nerdy spreadsheet and process people who love setting up systems and would rather not take risks than risk failure

*Implementers. They can dress in jeans and bizzarely designed T-shirts - just like the creators - and share with these space cases thoughts about the intellectual beauty and complexity of this world. They are just as comfortable mixing with the stabilisers as they can be equally passionate about the latest delivery of paper clips.

*Newton says that only recently he identified a fourth category of business leader - navigators. These are the people who ask all the right questions of the three types of CEO listed above, can pull these types together, are great communicators both internally and externally and can see the big picture.

Other than having no interest in bizarre T-shirts (my sales manager more than compensates for me in this crucial aspect of innovation) I am too much of a creator. I hate loathe, detest and despise process (but begrudgingly now admit it's occassionally useful), which has got me into a lot of trouble over the years.

The ideal CEO might well be the navigator - the person with the great people skills, the zest for entrepeneurship, the huge capacity for detail and the ability to make processes work for people rather than the other way round.

And so - using these above categorie -, let's all indulge in the spectator sport of assessing how chemical CEOS fit in with Newman's categories.

Watch this space!

Believing what you want to believe (or pretending to believe in something because it's in your commercial interests) has always been a problem.

But the stakes have never been higher than in the case of climate change. To yet again refer to the excellent New Scientist magazine, their editorial from the 13 August issue says that predictions are for a modest cooling of the atmosphere over the next ten years because of natural oceanic oscillations.

Robert Watson, former head of the Intergovernmental Panel on Climate Change, observed earlier this year: "Let's say there wasn't much of a warming for the next ten years. How will the public and politicians play this out?"

Watson has warned that - regardless of what happens over the next decade - the earth could heat up by 4% before the century is over, with disastrous consequences.

He was right to worry that evidence of cooling would lead to a backlash against global warming. I did a quick Google news search today and found this link.

I am not a scientist but from what I've read and studied (and, of course, I might be believing what I want to believe!) I think global warming is a reality.

Regardless of who is right or wrong it would do no harm for the chemicals industry to plan for a future shaped by either the reality of significant man-made climate change or the perception that it will happen.

As I have said before further legislation on emissions, recycling etc seems inevitable whether its country-by-country, through big multilateral agreements or a combination of both.

In the history of the planet, ten years of cooling would be an immeasuraby small fraction of a second.

And in the history of oil, the last few weeks amount to almost as small a passage of time. Still, this hasn't stopped a groundswell of opinion developing that recent price falls have also exposed another bogus theory - that the fundamentals of oil supply and demand point to tight markets for at least the next five years.

I'll be blogging on this in more detail over the next few days (as I write, prices have actually rebounded to above $119 a barrel on the East-West crisis), but the comparision with global warming is worth making here: companies might stop making the necessary investments to secure their long-term future.

In the case of oil, this might result in less interest in accessing harder-to-get-at reserves and in renewable energy.

A full list of all those whose deaths were reported prematurely is included here in this A-Z of journalistic blunders from Wikipedia.

The same could be said of the US commodity chemicals industry. Until very recently, just about everyone was predicting that the States would fairly soon shift from a net export to a net import position due to higher gas prices, the build-up of very competitive capacity elsewhere and the constant drift of manufacturing overseas. The country's chemicals industry has lost 120,000 jobs with 3 million jobs lost in manufacturing over the last five years.

But what's changed over the last few months is gas prices which have become relatively cheap compared with crude and the weak dollar. This has created what consultants predict will be the "last hurrah" for the US styrene industry ahead of the big slew of new Middle East capacity due on stream soon.

Further consolidation is expected once the Middle East wipes out the advantage US styrene producers currently enjoy over competitors supplied by naphtha-based C2s.

From a carbon footprint point of view, it does seem ridiculous that oil is shipped from the Middle East to make benzene in South Korea and the C8s are then shipped to the US. The US combines the benzene with its competitive gas-based ethylene to make styrene which is then shipped to Europe - already a net importer of commodity chemicals.

But the carbon footprint argument, along with rising freight costs, could offer a lifeline to the US chemicals industry in general. There has been much talk of "reverse globalisation" recently. This might lead to the economic justification for building new commodity chemicals capacity in the US and elsewhere in the West.

The good news on the radio as I came into work this morning was that Hurricane Gustav had weakened in intensity with forecasts that it might make landfall in the US with wind speeds of less than had been earlier feared.

But this is not the point. The point, as Jeffrey Rubin of CIBC World Capital Markets makes in his report - Supply Crunch - is that just as the US has come to rely more on US Gulf oil and gas production, the frequency of high grade storms (class 3 to 5) in the region has increased.

"With both crude and total oil production inventories running significantly lower than they were when either Katrina or Rital sidelined Gulf oil production, both oil and gasoline prices are more exposed to potential storm-related disruptions than they were three years ago," he writes.

This blog isn't about the short term. But the the short term tension in crude and crude-product markets created by this latest hurricane scare is the result of tightly balanced supply and demand that has long-term implications for the global economy and for our hydrocarbon-dependent way of life.

The Gulf region - now so much more important to US supply because of production problems elsewhere - has itself suffered from delays to new capacity coming on stream. The BP Thunder Horse project, for example, is behind schedule - meaning that new production has grown at a fraction of earlier predictions for the Gulf. This has compounded the crisis caused by depletion of offshore fields as existing oil wells run dry. For example "some one-and-a-quarter million barrels per day from Mexico is likely to vanish (over the next five years) as its giant Cantarell field continues to deplete at a 30% annual rate", Rubin adds in his report.

Without getting into the argument over whether the increased frequency of severe storms in the Gulf is the result of global warming (or whether a long-term pattern of more dangerous weather has established itself - a view dismissed by some in the three years since Katrina and Rita because the region has so far escaped major hurricanes), there seems to me no dispute that supply is very stretched in the Gulf and globally.

Talk of demand destruction in the US benefiting crude pricing over the long term was earlier dismissed by Rubin. He estimated that by 2010 there will be 12 million less motorists on the road in the US. The problem is that ten new motorists in countries such as Brazil and India are buying cars for the first time for every one that leaves the roads in the States, he said.

High oil prices might slow down the pace at which people in emerging markets switch from push bikes to motorcycles and from mortorcycles to cars.

But without a global recession of a severity we have never seen before, it's hard to see how the slowdown will be enough to result in a net reduction in global oil consumption sufficient to end the crude crisis.

Chemical prices have gone through the roof this year on higher feedstock costs, causing greater recycling, greater conservation and a slowdown in the rate of substitution of petroleum-based products for natural materials in emerging markets.

If Gustav causes severe damage to oil and gas production and any further severe hurricanes hit the region this year (Tropical Storm Hana is brewing off the coast of the US as I write this post), the chemicals industry could lose even more ground.

I am afraid I do when it comes to climate change and, as a result, don't always switch off lights when I leave rooms, don't always say no to unnecesssary plastic bags when I buy anything and will happily (and this could be the worst damage of all) jet anywhere in the world either for business or pleasure.

I am feeling guilty today for accepting a 20 minute speaking engagement in Hong Kong which won't generate any direct revenue for our training business.

Of course it might create that intangible benefit of goodwill plus I can also do some other meetings while I am there.

But is this the kind of marginal trip that businesses should cut back on and if this happens, what will be the effect on bottom lines as building goodwill is so important?

Equally important in Asia are all those face-to-face meetings. Relationships can have more value than sometimes even the quality of the product you provide.

How do you decide as a company, therefore, what is essential and what is unncessary travel?

And as an individual, what about those flights at the weekend for short breaks? I've often jetted off to Phuket in Thailand because I've been tired from travelling too much for work!

I was glad to discover I am not alone about my sense of the enormity of it all, for feeling that turning the odd light bulb off is not going to make a jot of difference in the great scheme of things - and for feeling trapped by the corporate machine that so voraciously consumes carbon.

This was thanks to yet another excellent article in the New Scientist on a meeting of the American Psychological Association which took place in Boston, Massachusetts, last month.

"It's easy to feel overwhelmed and think: 'What can little me do?' ", said David Uzzel at the University of Surrey in the UK during the meeting.

Paul Stern of the US National Research Council said a key deterrent was a lack of guidance on which actions would have the greatest impact, and feeling paralysed by the size of the task.

His research paper on this subject provides more detail - and to my great relief tells me that switching light bulbs off when you leave the room doesn't do that much good.

Some impractical suggestions he quotes from the Live Earth Global Warming Handbook include composting household waste, building a bat house or if all else fails, buying a camel.

I can just imagine the reaction of my neighbours, and I am sure the authorities, if I attempted these measures in Singapore. And anyway, my balcony isn't quite big enough to accommodate a camel - although my 20-month-old son would enjoy the rides around the condo.

Enough of the fatalism. I am going to get off my backside and do something practical.

Click here for some positive thinking - Energy%20Carta%20Conference%20Executive%20Summary_general%20150808.pdf

The Asian Energy Youth Summit - organised by the non-profit organisation Energy Carta - is an example of doing something about the climate-change challenge.

Speakers at the event which takes place in Singapore on 30-31 October (please click the link at the top of this post for the full PDF) include Shai Agassi of Project Better Place and Stefan Mueller, Asia Pacific managing director of Conergy.

What's heartening is that a chemicals engineering undergraduate at the National University of Singapore is one of the founders of Energy Carta. The chemicals industry is part of the problem and can hugely reshape its image for the better by being part of the solution.

A very interesting report by McKinsey (you can sign up free for their online newsletter which only takes a minute) expands on the theme of reverse globalisation which I talked about last week.

The cost of shipping a standard 40-foot container has tripled since 2000 and labour cost increases have risen by average of 19% per year in China compared with just 3% in the US.

The consultancy makes the point that you have to do very thorough input-by-input calculations for each product and grade of product before making any decisions. And, of course, you need some reliable forecasts of where the economics of offshoring versus onshoring are heading - including predictions on crude-oil prices. Predicting crude, as I discussed earlier on today, is where I fall short.

You also need to take a view on the direction of environmental legislation - i.e. will there by carbon taxes and/or cap and trade systems introduced globally that penalise producers for extended global supply chains?

If history is anything to go by, McKinsey has worked out that manufacturing a "midrange" product in Asia will cost you an extra $16 today compared with the US when all landed costs are included. In 2003, Asia had a $46 advantage.

Add to this the likelihood that more petrochemical feedstock will become available in the US thanks to declining gasoline demand and perhaps, as again I talked about last week, the industry in the states might be set for a revival. It has been comparatively higher feedstock costs and the drift of downstrean customers overseas that has caused so much damage to the US industry.

For anyone who subscribes to ICIS news, you might find this artice of interest. Allen Kirkley of Shell discusses some of the new emerging feedstock options and converging economics between the West and the Middle East.

Apparently it's a fallacy - ostriches don't stick their heads in the sand.

Investment bankers frequently do, though, especially all the greedy ones who only cared about their end-of-year bonuses when they knew perfectly well that the credit crisis was on its way.

I am sitting here sipping a beer and thinking "Oh my goodness, this really could be as bad as the Great Depression" now that Lehman Bros has been forced to file for bankruptcy.

But the danger is that we'll all forget about the even bigger threat to the global economy which is yes, you've guessed it, Peak Oil and climate change.

We'll all be so grateful when the credit crisis is over that we'll rush out and buy more garbage we don't need, jet around the world once again, talk excitedly about emerging-market growth, and bang - the price of crude will be close to or above $150 a barrel again (not that current levels in the historical context are anything to cheer about).

Read the last chapter of David Strahan's The Last Oil Shock to put the credit crisis in perspective (read the whole book, but the last chapter provides some practical ideas).

The survivors of the energy crisis over the next 20 years will be those who are the most energy efficient. So start growing your own vegetables, invest in energy saving in your home and for goodness sake, sell your SUV you self-indulgent idiot.

The value of your home, your shares and your pension might rebound once the credit crisis is over but in the long run, any investment in the conventional hydrocarbon-based economy seems to be fundamentally flawed.

Back in the heady days of 2006, I asked a group of five like-minded nerds what their favourite business book was.

They unanimously voted for The World Is Flat: A Brief History of the 21st Century by Thomas Friedman.

I rushed out and bought a copy. It has sold by the truck load and was quoted by Mohamed Al-Mady of SABIC during his speech at the Asia Petrochemical Industry Conference in Thailand in 2006.

Back then everybody was talking about a new paradigm of growth, driven by the relentless rise of emerging market consumption. Nobody mentioned that other book, The Limits To Growth, published in 1972 by the Club of Rome, during those heady days of the economic boom.

I ploughed my way through most of The World Is Flat (it is overwritten - all the points worth making could have been made in considerably less than 488 pages) and was profoundly irritated by Friedman's relentless enthusiasm for globalisation.

At that time I must confess I hadn't heard of the Club of Rome book, nor did I give any consideration to the idea that Friedman might be dead wrong for any reason other than a gut reaction to his seemingly boundless optimism.

Now he has woken up to the fact, 36 years after The Limits To Growth was published, that indeed this might be the case with his new book Hot, Flat And Crowded.

In a review in the Financial Times, Rahul Jacob makes the point that we should have all seen the weaknesses behind Friedman's flat earth theory.

Friedman was entranced in his earlier tome by the rise of India, particularly the booming IT hub of Bangalore.

"I have lost count of the times friends or relatives in India have forwarded by email Mr Friedman's comment that, while his parents told him to finish his dinner because there were people starving in India and China, he told his daughters to finish their homework because there were people there eager and willing to take their jobs," writes Jacob in his review.

As Jacob points out, the very roads that Friedman travelled along to get to the headquarters of the IT giants point to the limits to India's particular form of middle class, elitist growth; they are pockmarked and hugely congested with ancient patched-up vehicles pumping all sorts of foul fumes into the air.

India suffers from a self-inflicted limit to how far it can grow without creating unsustainable social and environment pressures - because of a political system that has created virtual development paralysis.

How can a country with terrible infrastructure, poor irrigation and very low literacy rates ever hope to create sustainable economic growth?

According to the CIA Factbook, India's female literacy rate was only 47.8% in 2001. This compares with 86.5% in China, based on the country's 2000 census, adds the Factbook.

The speed limit on Indian and, of course, also global growth is resources - so presciently highlighted by the Club of Rome back in the 1970s.

I've only just woken up to this reality. Back in the dim and distant 2006, all I cared about was riding the global property and share boom while consuming immense amounts of carbon in pursuit of my career. This involved writing my own much-shorter tomes that encouraged others to do likewise.

Many of us became so enamoured by globalisation that we ignored the fact that there are simply not enough resources available to allow all of us to consume as much as the typical Texan, or more latterly a middle class Indian in Mumbai.

Friedman gets excited in his new book, according to Jacob, about China's potential to lead the way in solving the environment crisis.

I agree that China has potential, but some huge challenges lie ahead.

Idealistic enthusiasm (the ungenerous might use the phrase "gormless enthusiasm", which has applied to many of us over the last few years) might have its place in generating the individual energy to make a difference: Each of us need to find new ways of individual and corporate behaviour if we are to prosper in a world threatened by Peak Oil and catastrophic climate change.

This type of enthusiasm needs to result in more than just further consumption of trees through higher book sales (and when do we have the time to read books like The World is Flat? When we're flying, that well-known environmentally friendly form of travel).

We need to radically change the way we lead our lives.

It is September 2025 and the financial system has imploded due to the collapse in value of collaterised green obligations (CGOs).

So how did we end up in this sorry state? Here is a guide to how the crisis developed:

Governments (often sovereign wealth funds that had made a fortune from selling oil and gas), investment bankers, pension-fund managers and hedge funds began transferring cash from traditional hydrocarbon-based investments when Peak Oil arrived in 2015.

A further motive for the enormous capital transfer - amounting to trillions of dollars - was the gradual evolution of the global carbon tax and cap-and-trade system.

Companies that had failed to innovate (including many in the chemicals sector) went under - as did even some of the stock exchanges that had failed to evolve.

But because of woefully bad funding of and interest in science teaching (far too many undergraduates were still taking degrees in media studies), there was a widespread inability to separate the good from the bad new-technology prospects.

The global shortage of science and engineering graduates, which stretches back to the early years of this century, has therefore continued.

Ignorance about good science extended from senior government levels down to the public who poured their money into the new "green" bourses.

Charlatans made fortunes from government funding and ridiculously overpriced initial public offerings by making spurious claims about the commercial viability of their inventions.

But there were some tremendous successes, notably big breakthroughs in carbon capture and storage and a second-generation biofuel made from animal and human nose hairs.

Then, as we all know, the "Green Equities Bubble" went pop in 2018. Wall Street's Renewable Energy Index lost 1,000 points on December 3 of that year alone when investors realised that many of the new-tech companies would fail.

The Federal Reserve, desperate to prevent a recession, aggressively cut interest rates.

This forced lenders to seek higher returns through developing ever-more complex financial instruments, including the now widely discredited CGOs.

But the good news was that homeowners and companies had made a packet in 2015-2018 from trading carbon credits earned by adopting proven energy-saving measures that had been around for decades.

Energy bills were also substantially reduced and most importantly of all, we had capped atmospheric greenhouse gases at 450 parts per million.

The surge in the value of "green homes" continued post-2018 - thanks to the money left in the economy from these carbon-credit earnings and low interest rates.

A new breed of mortgage brokers emerged after the green equities bull-run ended. They made huge commissions from selling mortgages with incredibly low "teaser" interest rates to lenders who initially had to show proof of a strong carbon-credit history.

But by 2021, the greedy brokers were only asking for carbon credit self-certification.

Homeowners who had made false claims on their forms were able to afford to service their mortgages and still have spare cash to spend in the shopping malls. This was because low interest rates and surging green property values more than compensated for high energy bills and the cost of buying carbon credits.

Easy lending conditions gave them even more money to spend as they were able to refinance their homes on rising notional property values.

Mortgages lent to these unsound customers were repackaged with good lending into the now discredited CGOs.

The ratings agencies had no idea of how to value these secondary debt-instruments and so - erring on the side of their customers - gave them all triple As.

As we all know, August 2024 marked the end of the free lunch as the US property market collapsed and the inter-bank lending market gummed up on the realisation that nobody knew the real value of the CGOs.

The price of oil also rose to more than $350/bbl last December - the result of the failure to carry out proper carbon due diligence when mortgages were issued.

Energy profligate homeowners in the US, and more recently in the UK, are being hit by falling property values, higher interest rates introduced to tackle runaway inflation and tougher carbon disclosure and trading regulations.

The boom in emerging market growth has also helped to drive up the price of oil. A lot of this growth was based on exports of supposedly green products to the West.

But in the rush to cash-in on the consumer boom, lax life cycle analysis has led to many of these products being carbon inefficient.

The huge profits earned from the Western consumer bull-run has more than compensated for the need to buy carbon credits to accommodate for wasteful product-chain practices.

There have also been allegations of government officials being bribed to turn a blind eye to carbon efficiency abuses, thereby enabling companies to avoid having to buy extra credits.

Growth has also boomed in the emerging market economies themselves, where energy efficiency standards have also suffered.

Greenhouse gas emissions are on the rise again and last year hit 600 parts per million, according the majority of independent scientific research.

However, the drive to reinforce legislation is being blunted by the work of some scientific institutions. They claim that emissions are in fact falling, but a scandal erupted last year when it was discovered that many of the institutions are funded by companies with questionable carbon practices.

The economic crisis has now become global with developing nations under threat from collapsing stock markets, a lack of credit as financial institutions fail and runaway inflation. The decoupling theory has been thoroughly discredited.

Sound familiar? History repeats itself repeatedly.

But to be more accurate - and to quote the guy who first coined the phrase before I paraphrased it - Clarence Darrow (pictured above), a Defence Attorney in the US between 1857-1938, is credited as saying: "History repeats itself. That's one of the things wrong with history."

I just hope I can get in and get out at the right time and make my family's future financially secure.

As delegates gather for this year's European Petrochemical Association meeting in the unreal world of Monaco (unreal for the 99.9 per cent recurring of us who don't own Ferraris), I thought it was worth summarising some of the issues discussed on this blog over the last few months.

We've dealt with:

*Oil-price volatility and the likelihood that high and volatile crude is here to stay. Crude at or around $100 a barrel seems to be a new long-term level with the strong possibility that geopolitical shocks could send costs much higher. Supply and demand balances remain tight and as soon as global economic growth recovers we will see much higher prices - meaning that the recovery could be nipped in the bud. Are we heading for a new economic climate where recoveries are constantly set back by rising energy costs? For every one barrel we are discovering, we are consuming three.

*The new credit environment that might well emerge from tougher banking regulations. No longer will it be possible for a truck driver from Iowa earning $20,000 a year to borrow at ridiculous multiples of his salary and at "teaser" interest rates. How these regulations will effect emerging markets his harder to read as Asian governments and consumers are in far better financial shape than those in the West. Many of the banks in Asia have been more prudent. But the events in the US will surely lower the appetite for risk globally - and there is no guarantee that the financial-rescue package will work. Ask your consultants or inhouse researchers you use whether their demand-growth predictions factor in the possiblility of lower growth because consumers no longer have access to as much credit.

*Innovation will be the key as the environment becomes a bigger and bigger issue for the chemicals industry. You need right technologies and the right kind of staff. As there is a possibility of a global carbon tax or carbon cap-and-trade system, do estimates of what this might cost need to be factored into feasibility studies? How feasible will it therefore be - given both high energy costs and the possibility of a price on emissions - to continue building plants long distances from major consumption markets?

*One of the big areas of innovation will be attempts to break the link between the refinery and petrochemical industries. BASF is claiming it could be as little as five years away from breakthroughs in catalyst technology that could change the industry forever, enabling highly competitive petchems to be produced from biogass, natural gas or coal.

And finally, other theme I haven't blogged on yet but will do are plant and energy efficiency. Some very interesting research projects are taking place at the National University of Singapore chemical engineering department into monitoring the exact output of plants in differennt climate conditions and a model that might enable producers to much more accurately predict changes in yields from switching feedstocks. Much more later...

Meanwhile, have a great meeting - and let's hope the economic conditions improve.

The dinosaurs are back......

The new "green team" appointed by president-elect Barack Obama might, after all, turn out to be a dream team for the US chemicals industry. This is despite what some of the old disonaurs within the industry seem to think.

A US energy policy needs to place a genuine long-term cost on gasoline, thereby encouraging, belatedly, the kind of innovation that might just save the domestic auto industry and provide a huge boost to chemicals. Higher gasoline taxes need not be political suicide if they are accompanied by explanations of potential tax cuts, or even credits, for energy-positive steps such as, for example, installing solar panels.

Greater conservation - one that's not just driven by the economic crisis - might reduce a huge defence bill that's created global political instability, increased terrorism and created an untold number of deaths and misery for millions. A lower defence bill would mean huge tax savings.

It would be good if some of those in the oil and gas industry could move away from their long-term obsession with drilling. The obsession reached it's trivial low-point with Sarah Palin's campaign slogan, "Drill bay,drill".

Drilling alone will do little to reduce the US dependence on imported oil unless it goes along with greater conservation.

And anyway, you can make a strong argument that wrecking the Alaskan Wildlife Refuge will make very little long term difference to US energy vulnerablity, while creating a legacy of the loss of yet another beautiful wilderness for future generations.

There also needs to be a gradual movement away from conventional hydrocarbons to unconventional ones (provided the environnmental impact can be neutralised through heavy investment in carbon capture and storage, which will probably need big initial government backing to get the economics off the ground ) and to renewables.

Trendwatching.com, an Amsterdam-based consumer trends analysing service, has included something called Econcierge in its outlook for 2009.

This involves a new breed of less conspicuous consumers, straitened by the credit crisis or maybe feeling guilty for the wallops of cash that they made during the boom, who will now be searching for value - and for a conscience-salve in everything that they buy.

What will this mean for chemicals next year? People taking a closer look on the claims on the proverbial tin, expecting whatever they buy to last longer, to be cheaper, and to be made from recycled material - or from chemicals that are proven to be les harmful to the environment, perhaps.

This might be more of a phenomena in the developed rather than the developing world, where wealth affords the luxury of greater concern about the future.

How on earth do you measure this in losses per tonne of sales of good-old bulk commodity chemicals - assuming that these trendspotters are correct?

Do you have a plan, assuming you think you need one?

At the moment, a shell-shocked chemicals industry is still recovering from the impact of destocking following the huge inventory write downs in Q4.

The next step will be to measure the state of genuine, end-user demand and how this compares with the fantastic growth we saw in 2003 right through until the end of H1 2008.

Comparisons will inevitably look bad, even if, as some hope, recovery arrives in the second half of this year. This is bound to have a pyschologically dampening effect on markets.

Plus, chemicals and plastics markets are about to be roiled by large amounts of new capacity.

Recent price rises in the aromatics and olefins chains might, therefore, be reversed.

And so cost will remain King in the second of 2009, and perhaps for several more years.

The rise of private equity in chemicals, which I examined in a previous post, resulted in claims that the sector's more efficient management techniques would result in money being made "even at the bottom of the cycle".

But key to survival may no be longer innovative financial engineering and cutting costs social and bureaucracy costs incurred by previously much bigger, listed companies.

It might instead be all about chemical engineers getting every last cent of value out of production processes through optimising "every pipe and every valve," says my colleague Nigel Davis - editor of the Insight section of ICIS news.

It will be fascinating to watch how this plays out - and what becomes of chief financial officers.

One of the new skills being learnt in this current crisis is how to run plants efficiently at low operating rates.

"It's funny that for years now, we've worried about how to scale up profitably. Now industry is faced with just the opposite, how to scale down profitably," says Mark Matzopoulos, chief operating officer at UK-based Process Systems Enterprise in this article in ICIS Chemical Business.

A friend of mine has just graduated from university with a very good degree in chemicals engineering and has managed to land a job with an engineering company. His fellow graduates have not been as lucky in their search for jobs with chemical companies.

At least somebody is making money out of this crisis

MOVING IN THE RIGHT DIRECTION (SORRY, OUCH....!)

Source of Picture: www.autospies.com

The automobile industry in the West has been bought more time by economic stimulus, as this article in The Economist points out.

But some of the discussions at the Frankfurt International Motor Show, which takes place on 15-27 September, will be about the future of the industry over the next few decades.

Producers face big economic, demographic and fuel-efficiency challenges - and capacity is way ahead of current and projected demand. (separate leader from The Economist with some more useful numbers).

So what might this mean for the polymer industry? Here are a few thoughts:

*Demand for smaller cars will increase. Automakers will need to focus on either ferocious cost cutting and/or adding more sophisticated features if they want to achieve anywhere near the same returns for these smaller vehicles compared with big, luxury lines

*This creates a big opportunity for innovation through both lighter plastics (with stricter fuel-efficiency regulations another motive) and plastics which deliver other design benefits. Added value will no longer be defined by a little bit of extra customer service and the odd clever additive. Breakthrough products will be needed

*Feedstock-advantaged producers will be in an even stronger position to meet what commodity-polymer demand remains

*The Western polymer industry's own cost-cutting will have to be accelerated in the search for higher R&D funding, and as auto plants close down (since this recession started, there have been no closures in Europe, according to The Economist). Those with their own advantaged-feedstock positions in the Middle East and/or strong footholds in China will be in a better position to generate enough revenues

*The decline in US and European gasoline demand might lead to short-term feedstock advantages as the value of light-ends declines. Longer term, though, refineries will be shut down - potentially pulling the proverbial rug from beneath even those polymer producers with the right technologies (Note: Western gasoline demand is expected to keep falling after the economic crisis is over on tougher fuel-efficiency regulations and ageing populations, etc)

Source of picture: www.textually.org

The political sensitivity surrounding Iran is so great that US-based companies are not even allowed to attend presentations by Iranian officials at conferences, a source said.

"I witnessed a recent walk-out during a presentation by the National Iranian Oil & Distribution Company (NIODC)," he said.

But a European office of a US company is able to do business with the Middle Eastern country, provided an entire technology and project is developed by that office.

"If as much as one email passes Europe and the US headquarters, that's enough for an investment to become technically in breach of sanctions," the source continued.

These nightmarishly difficult restrictions come as Iran attempts to build no less than seven grassroots refineries in a attempt to rectify deficits in fuel products - one each at Shahriar, Anahita, Caspian, Khuzestan and Pars and two at Hormuz.

Numerous other expansions at existing refineries are being planned with the likely investment costs running into many billions of Euros.

Scepticism is easy following big delays in previous natural grass processing, refining and petrochemical investments due to sanctions that limit financing and technology and skills transfer.

Doubts have also been raised over the level of investment in maintaining output from the oil fields that would supply this new refinery capacity.

In the case of the two crackers finally brought on-stream at Assaluyeh, the slow pace of growth in gas-processing means that they suffer operating rate cuts and even shutdowns during the winter.  

All the gas being processed during the winter months has to be diverted to domestic use because of a big shortfall in supply.

Honest and hardworking company officials on both sides of the political divide deserve solutions.

By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)

Talk of Reliance Industries acquiring LyondellBasell is once again gaining momentum. A report in today's Economic Times says that the company is close to announcing a major overseas acquisition with the target being part of the assets of LyondellBasell. The announcement is likely to be made on or before Reliance's annual general meeting on 17 November. Reliance shares rose 3.1% in morning trade.

Citing a banking industry source the report states that the transaction could be around $6bn, nearly double the estimate made by another media report in September.

One my industry sources says that something is brewing and Reliance is on a shortlist of companies that will be participating in LyondellBasell's reorganisation. The source was unable to give names of others on this shortlist.

Details about the proposed buy are still sketchy and today's media report, like the previous one, raises more questions than answers. In what form is Reliance likely to participate - will it be by acquiring an equity stake that LyondellBasell's creditors will soon get through the company's rights offer? Or will it be an outright purchase of some/all assets? Can it happen before LyondellBasell completes its reorganisation or will Reliance be participating in the reorganisation by buying assets/equity?

One analyst thinks that today's report of an imminent announcement is a little premature and a major development is likely only after LyondellBasell emerges from Chapter 11.

It is difficult to evaluate how beneficial the deal would be to Reliance without knowing much of the details. There are certainly parts of LyondellBasell that would be a good fit for Reliance - its PP assets, a global marketing and distribution network and the technology portfolio.

Reliance certainly has the cash for a big ticket acquisition. But the company is not known to be very aggressive when bidding for overseas assets and this is one of the reasons why it lost out on acquisition opportunities in the past. Will it be the same story this time?

Abu Dhabi ahead in the race?

Source of picture: www.gulftrackservices.com

By John Richardson

The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.

"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.

"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.

"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."

The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.

But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.

"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.

"But it is true that we have already seen transfer of very valuable polymer technologies."

SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.

The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.

These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.

But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."

IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.

It also has a 64% of Austria-based polyolefins group Borealis.

"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.

"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."

And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.

Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "

The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.

And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.

With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.

"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.

"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."

Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.

SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.

There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.

By John Richardson

ExxonMobil's purchase of XTO Energy for US$41bn seems to support the widely-held view that natural gas is the fuel for the future.

XTO specialises in the technology necessary to exploit shale gas and other hard-to-get-at unconventional gas reserves, including the large amounts of shale gas in the US - one of the reasons why the States has gone from natural gas feast to famine.

ExxonMobil will establish a separate division to manage production of both oil and gas from unconventional reserves.

This suggests, perhaps, that the focus and incentives created by setting up such a division will lead to XTO Energy and other breakthrough technologies being employed throughout the world.

Europe has unconventional reserves, which perhaps if successfully exploited could provide an alternative - a long with liquefied natural gas (LNG) - to sometimes politically-fraught pipeline reserves.

Easy-to-get-at gas in the Gulf Cooperation Council region of the Middle East is also becoming increasingly scarce, leading to evaluation of exploiting shale and tight gas.

The energy of the future argument rests both on concerns over Peak Oil and gas's lower carbon footprint.

The International Energy Authority (IEA), in its World Energy Outlook 2009 report launched last month, described natural gas as a "bridging fuel" until even greener alternatives become viable.

By Malini Hariharan

With start-up delays, commissioning issues and operating troubles becoming increasingly common across the Middle East and many parts of Asia, I have been asking industry players on what they think are the major issues that companies are facing.

At the top of the list is the shortage of skilled manpower. We have been hearing a lot about this for the last five years. The shortage during the engineering and construction phase of petrochemical projects during 2005-08 is well documented.

But starting-up huge cracker complexes with a number of derivative units (PE,PP, MEG etc) also requires experience and skills - both of which are in short supply. Given this, they say, the problems are inevitable.

"A start-up [of a cracker] is (always) a tricky situation. Almost everyone faces problems; you have to be lucky to cut-in feed and get on-spec product in 48-72 hours," said a source at a leading petrochemicals company.

"A few have achieved if basic engineering has been done well and the commissioning staff is good.

A second factor is lack of familiarity with some of the newer technologies.

A source at a regional polyolefins producer says design and construction issues have also affected operations.

"Many of the plants were built at a time when raw-material costs were at their peak and some compromises were probably made," he said.

"I have been hearing of vessels and pipes corroding within a few months of start-up while older plants have been running for years without any issues."

A source at an engineering company thinks this is very much possible.

"Compromises could have been made in projects that were awarded on a lump sum turnkey (LSTK) basis just prior to the economic boom period of 2005-07."

And there is yet another reason for start up delays.

"Contractors can achieve mechanical completion of a plant on time but the client has to be prepared for start-up," says the source from the engineering company.

"He has to arrange for utilities and raw materials. If the client is not prepared or inexperienced then delays happen."

Even after a plant has successfully been commissioned, there are other issues that often affect operations.

This second source cited difficulties in coordinating work between sub-contractors and cultural issues as more locals from the Middle East countries have entered the work force.

"Many of the locals do not have experience in operating plants; their culture is also different from expats who have traditionally managed plants," he added.

But companies are working hard to resolve problems. Experienced engineers are being recruited to run the plants.

Another source from a petrochemical company said that Indian engineers over the age of 50 were being offered jobs to manage petrochemical plants in the Middle East.

"Earlier, only engineers in the 30s used to go. Age is no longer a bar," he added

It may take a while but companies should eventually get it right. That's when we will see the full flow of material - an event the industry has been fearing for a long time

Source of picture: Dachangplastic.com

By John Richardson

WHAT a difference ten years have made in the plastics processing industry, according to a Southeast Asian converter who sees China's machinery=manufacturing prowess as an opportunity and threat.

"Ten years ago I considered buying a process machine from the US for $300,000 but it was just too expensive," said the processor.

"I recently purchased two machines from China - which are of better quality than the one I could have bought ten years ago -for only $100,000. This is great news for me.

"But I think the ease of availability of capital combined with the big improvements in China's capability to build processing machines for certain plastics processing sectors is contributing to the strong demand growth.

"It has been easy, particularly over the last year, to add processing capacity on the assumption that strong continued government stimulus will mean a sufficiently strong market."

So if the government withdraws stimulus in the wrong kind of ways as it tries to cool the economy down, the processing sector could be one more industry in China increasing its exports of surpluses. We are already seeing this in finished baxially oriented (BOPP) film.

Ben van Beurden of Shell Chemicals

Source of picture: Shell.com

By John Richardson

SINGAPORE looks set to soon make some further announcements on high-value investments downstream of the new Shell Eastern Petrochemical Co (SEPC) cracker.

The complex - which comprises an 800,000 tonne/year mixed-feed cracker and a 750,000 tonne/year OMEGA process monoethylene glycol (MEG) plant - was officially opened yesterday.

SEPC already has a contract in place to supply raffinate 1 and 2, after butadiene has been extracted, to Lanxess's 100,000 tonne/year butyl rubber project, said Ben van Beurden, executive vice president of Shell Chemicals, in an exclusive interview.

SEPC is a wholly-owned subsidiary of Shell Chemicals.

Lanxess, the German speciality chemicals major, is due to hold a groundbreaking ceremony for its project this month.

The start-up date for the planned facility was advanced to Q1 2013 in January this year, after being earlier delayed by the global economic crisis.

Butadiene sales from SEPC (it has a 155,000 tonne/year capacity) were a mixture of over-the-fence and exports, van Beurden added.

And he said: "We also have surplus propylene and ethylene (from the new cracker) and we are in advanced discussions on an array of options to make use of these feedstocks. Announcements will be made in the coming months."

He was unable to disclose any details.

My colleagues at ICIS pricing estimate that Shell has 150,000 tonne/year of ethylene for export at the moment with van Beurden adding that some surplus C2s are being sold to domestic customers.

Some of the propylene produced by the cracker (450,000 tonne/year) is being sold to the Shell Singapore-based styrene monomer/propylene oxide subsidiary, Seraya Chemicals, with exports also taking place, he added.

The cracker also has the capability to produce 230,000 tonne/year of benzene.

(Shell Chemicals' mixed-feed technology gives it the ability to cracker very light to very heavy feedstock, including hydrowax. The hydrowax is being supplied from a modified hydrocracker on Bukom Island in Singapore, where the cracker is located. Shell's MEG plant and the rest of Singapore's petrochemicals industry - and where the new investments will take place - is just across the water in neighbouring Jurong Island)

Van Beurden was keen to stress that SEPC's surplus products are all being sold on long-term contracts.

But Singapore is clearly looking to use the new complex as a basis for much greater and wider value-addition: The SEPC complex was expected to lead to a new wave of high-value downstream investments in Singapore, the country's Prime Minister Lee Hsien Loong said in a speech to mark the official opening.

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Deepwater disaster expected to impact shale gas 

Source of picture: Minnpost.com

By John Richardson

THE booming shale-gas industry could either benefit or suffer from the BP Gulf of Mexico oil-well disaster, with the end-result determined by the effect on energy prices of any long-term clampdown on deepwater and Arctic drilling.

Those for and against shale gas are lining-up to make their cases as to why the BP catastrophe will be a negative or a positive for what Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, says is "the most significant energy innovation so far this century".

An executive with a Houston-based oil and gas services company told the blog: "Shale gas may well enjoy an easier regulatory ride in the US in light of the fact that deepwater and Arctic drilling is going to be a lot more problematic.

"If you can't get your energy from far out at sea or under the Arctic and the US still wants to improve its energy security, then shale gas is the obvious solution as it is onshore and therefore easier to deal if there is an incident. It's also inherently safer than going offshore."

And he pointed out that politicians will surely decide to pursue the path of least resistance.

"Once Deepwater Horizon has faded in the public imagination - i.e. when it drops out of the 24-hour news cycle - the focus of voters will return to the cost and availability of energy.

"The White House will face the choice of either seeing energy costs rise or letting the development of the perfectly-safe shale gas process continue."

Last month, in a supplement on the natural-gas industry, the Financial Times quoted Scott Van Bergh, an energy expert at Bank of America Merrill Lynch, as saying that higher deepwater hurdles might make shale-gas exploration and production (E&P) easier.

Negative publicity towards shale gas looked as if it had slowed, he added.

But his comments came before two incidents at the Marcellus shale -gas field in Pennsylvania earlier this month. One involved a gas leak and the other an explosion which injured seven workers.

And the hydraulic fracturing or "fracking" process used to extract the gas from the shale remains under scrutiny because of emissions and groundwater pollution claims.

Congress has, as a result, asked the US Environmental Protection Agency to complete a comprehensive study into fracking.

The US-based Natural Resources Defense Council argues that the oversight and insufficient regulations that have occurred offshore are an equal concern onshore.

The outcome of this whole debate could have big implications for petrochemicals.

In the US, the big oversupply in US gas has helped to make ethane cracking a lot more advantageous.

The other factors behind the fall in US natural-gas pricing is liquefied natural gas (LNG) oversupply and the drop in gas demand resulting from the economic crisis.

To date, the benefits delivered to US petrochemicals by the rise in shale-gas production have been indirect through its contribution to the drop in overall gas prices.

Continued E&P is seen as crucial to fulfilling the current forecast that US total gas reserves will last a further 100 years. Before the shale-gas technology breakthroughs, reserves were only expected to last 30 years.

Plus, there may be opportunities for direct feedstock supply from shale gas via any fields which prove to be rich in natural-gas liquids (NGLs).

And overseas, there's huge interest with feasibility studies taking pace in countries such as China, the UK, Austria, Germany and Poland.

The studies in Poland have indicated that shale-gas reserves could raise total European natural-gas reserves by 50%. But questions have been raised about the accuracy of these estimates and how quickly and effectively Polish and other reserves can be developed.

Still, though, the shale-gas revolution - provided it is not stymied by regulations - could benefit petrochemicals outside the US through advantaged feedstock.

This possibility has arisen as the Middle East gas advantage erodes, raising the chance of new places to build super-competitive crackers.

In the end, energy costs and energy security seem certain to set the future of shale gas globally, as well as in the US.

The unfeasible alternative is a radical change in consumer behaviour and lifestyle expectations.

Will he back raising fuel prices to European levels?

Source of picture: sociologycompass.wordpress.com

By John Richardson

IN the midst of the continuing BP oil-spill saga, here's an important question for our American readers: Once the story is forgotten, meaning when it drops out of the 24-hour-news cycle, will you be willing to back tougher legislation that could lead to gasoline once again rising to above $4 a gallon?

Maybe I am reading the wrong reports, but I have yet to see a serious debate about the tough lifestyle choices the world's biggest energy consumer might need to make.

Sure, BP appears to have made lots of mistakes, but even with the best safety standards, pushing the technology envelope hard to extract oil from difficult, remote places may become uneconomic if the wrong kind of regulations are introduced.

Or, perhaps, the alternative is to go for much-tougher deep-sea and arctic drilling rules while providing hell-for-leather support for the US ethanol industry, without having to sacrifrice all those lovely SUVs? As this excellent article from my colleague at ICIS in Houston, William Lemos, points out the US ethanol is sorely in need of more support.

But what will happen if there are no commercial breakthroughs in second-generation technology and the food-versus-fuel debate rears its head again?

And/or as we wrote about earlier this week, the US has huge potential to add more natural gas to its energy mix, but there are environmental concerns over shale gas.

"Most of the risks in shale gas relate to what happens above ground - i.e. accidents in handling the acid used to extract the gas," a senior chemicals industry source told the blog this week.

Presumably, these risks should be fairly easy to mitigate, as indeed they probably have been, by a Responsible Care-style approach.

"What happens underground isn't a problem because the depth of these shale-gas wells is way deeper than aquifers and so the only problem for groundwater pollution would be if there was a rupture. Ruptures shouldn't happen if the right drilling procedures are used," he added.

The debate about the right energy choices needs to be serious, and informed by good science, along with the President of the US being brave enough to stand up and say: "I am going to raise taxes on fuel to the same levels as Europe."

Dream on.....

A Velozzi plug-in hybrid

Source of picture: www.zerauto.nl.blog

By John Richardson

Doom-mongers are claiming the end is nigh with the world heading for a double-dip recession.

This is happening at the same as the optimists are talking of the world entering a new sunny upland of sustained exceptionally strong emerging-market growth, which will more-than compensate for lingering problems in the West.

At ground level in the chemicals industry the view is equally divided with specific commodity polymer markets showing significant stress, such as a polyolefins in China where the reasons behind price corrections point to problems with the sustainable-boom story.

You can contrast this with strong year-on-year and, more significantly, sequential improvements in financial results, and bullish statements about the medium and long-term outlook from companies such as Dow Chemical.

The truth might be between the two extremes with the confusing picture in the West reflecting a shift in the sources of demand-growth now that economies can no longer be driven by the credit-fuelled consumerism of most of the last decade.

Innovation seems to be the key for chemicals companies to prosper in this changed environment.

As for the emerging world, short-term bubbles aside, it is becoming harder to argue why the rise of China etc will not continue, leading to far greater consumption of both commodity and higher-value chemicals and polymers.

Patrick Thomas, CEO of Bayer Material Science (BMS), in an interview last week, described the nuanced nature of the moderate recovery in the US when he said: "There are two parts to the stimulus programme - the first paying-down debt in the financial system and getting the financial system working again through quantitative easing etc; the second investment in energy efficiency.

"While fiscal stimulus might have to be withdrawn from the financial system, energy-efficiency initiatives continue, which include better-insulating 400,000 government buildings. This is an opportunity for our methyl di-p-phenylene isocyanate (MDI)-based polyurethanes (PU) going into rigid-foam applications for insulation."

He accepted that the collapse in home starts - and negative equity that's preventing people from moving house - were significant problems for toluene diisocyanate (TDI)-based PU used for flexible foams in mattresses, furniture and chairs etc.

"We have seen somewhat of a recovery, though, thanks to people who are not moving home upgrading their existing properties.

"This has helped boost the sales of, for example, composite wood panels - using BMS PU adhesives - which are used to help build home extensions.

"On the polycarbonate (PC) side, we have benefited from an increase in sales in office automation machines.

"These machines, which are replacing people, combine functions such as photocopying, faxing and emailing into one unit - and the casing for these units is made from BMS acrylontrile butadiene styrene (ABS)/PC composite."

But he added that "people who are unemployed staying unemployed" would obviously hinder the recovery.

BMS is also working with Velozzi, the US, California-based new technology car company, which is developing a plug-in hybrid SUV-sized vehicle.

"In the US, people like to drive their giant SUVs and so one challenge is to make big all-electric cars with energy efficiency boosted by increasing use of light-weight plastics. The fuel-efficiency theory, through the use of these light-weight plastics, also applies to gasoline and diesel vehicles.

"The Velozzi car will use our PC glazing material and our open-cell carbon fibres with a PU skin which is moulded into body-work components."

As for China, he repeated the well-known, but still startling, statistic that China produced more cars in 2009 than the US.

"In the future, most of the new cars China produces will stay there as domestic growth accelerates - and these autos are of great value.

"I was picked up from Shanghai airport in a really good family car recently, that didn't rattle or anything, costing just 8,000 Euros."

China's auto manufacturers face far fewer regulations than their European counterparts, who have to comply with a plethora of rules governing, for example, the geometry of vehicles and minimum amounts of illumination, he added.

Lack of red tape is encouraging greater substitution of natural materials by plastics in China.

"The Chinese industry is also much more open to replacing steel and glass with plastics and composites made from plastics because there isn't the legacy issue of existing capacity you get in the US and Europe.

"In the West, a bigger amount of auto components are steel and glass-based as the attitude is "we have the production so we might as well make use of it' ".

But he qualified this by saying that higher EU emissions standards were encouraging greater use of PC glazing.

In China, too, he sees a big opportunity for use for rigid PU foams in insulation, where office buildings tend to heat the outdoors in winter and cool it down in summer as employees either shiver or sweat inside.

As with the other chemicals majors focusing on innovation, Thomas talked of the big global trends driving future growth. These include ageing populations, food and water.

BMS has developed PU-based lubricious coatings for use in catheters and other medical products.

"Globally, 50% of all the food produced is wasted and so there is a huge opportunity for rigid foams used in insulation for refrigeration in food transportation, storage in shops and finally in refrigerators in homes," he added.

"Thirty per cent of water in old cities leaks because of faulty piping. We have a PU material which you can spray inside a ruptured ceramic or metal pipe without having to dig the pipe up. This forms a whole new pipe within the old one."

It seems clear that the growth story is not straightforward - and not one that can be told only by looking at key economic indicators and relating these back to chemicals.

New sources of value for the chemicals industry will continue to develop, requiring a great deal of R&D investment, talent - and failures as well as successes.

BMS spent Euro207m on R&D in 2009, not including joint development activities with customers. This was from sales of Euro7,520m.

"Forty per cent of our products didn't exist five years ago. Some of this involves minor modifications along with new products," said Thomas.

In the final analysis, and in a nutshell: Anybody without overwhelming feedstock-cost advantages - or support from non-profit motivated state ownership - has little choice but to go down this route.

Source of picture: www.sierraclubgreenhome.com

By John Richardson

WHEN the bisphenol-A (BPA) health scare erupted a couple of years ago I rushed out and changed all my baby boy's milk bottles to ones made from polypropylene (PP).

"Did you know that there are concerns now being expressed in Europe about the plasticisers used in your PP bottles?" a senior industry source informed me the other week.

Oops, or as we say in Britain (please re-watch that old movie, Notting Hill to hear this phrase in action), oops-a-daisy.

There are also claims that epoxy resins used to coat cans of baby milk-powder - which you will obviously need to use whether you have stuck to polycarbonate bottles made via BPA or have switched to PP - leach a fair amount of BPA.

Environmentalists once characterised chlorine as the "Devil's Molecule", partly over concerns about the dioxin levels released during incineration of PVC waste.

"Crematoria are a bigger source of dioxin emissions," claimed the same industry source and so perhaps we should all make a big push for more burials.

Death rates would have been a great deal higher in the developing world if it had not been for PVC pipes providing uncontaminated water.

There are many other arguments over the benefits outweighing the risks of chemicals and plastics.

One should obviously be sceptical for any positive claims that come from a company producing a particular chemical or polymer.

Nevertheless, as a journalist who used to work for the tabloid (sensationalist) national press in the UK , I am well-aware of how some reporters rarely let the facts get in the way of a good story. These are complicated, important and serious issues and worthy of a serious debate that's unlikely to take place when the focus is on a good headline or sound bite.

And talking about a serious debate, what about the BP (or if you are American, "British Petroleum") Gulf of Mexico disaster?

Once this story has dropped out of the 24-hour news cycle - as we've said before on the blog - will the public be willing to support much more stringent regulations on energy exploration and production if it means gasoline at more than $4 a gallon?

Source of picture: irantrip1wordpress.com

By John Richardson

IRAN'S ability to further develop its oil, gas and petrochemicals sectors has received further major blows from new rounds of United Nations and US sanctions.

One June 9, the UN approved a fourth round of sanctions on the country, including restrictions on financial transactions, a tighter arms embargo and authority to seize cargo suspected of being used for Iranian nuclear or missile programmes.

Then on the 24th of the same month Congress voted for yet-more sanctions, which according to this Economist article, will force "banks, insurers, energy firms and others to choose: trade with Iran and you will be barred from business with the United States."

Reliance Industries, Petronas, BP, Total and Lukoil have, according to the same article, already voted with their feet by stopping gasoline sales to Iran (the country, despite its big oil reserves, is forced to import 30-40% of its gasoline needs because of lack of development of refining).

The Economist and Bloomberg also point out that Dubai is reducing its links with Iran. The Emirate has been an important third-port route for getting Iranian goods, including polymers, into markets that would otherwise have been closed.

Tougher sanctions mean trade finance is even harder to obtain when dealing with Iran, forcing the country to seek more difficult and innovative ways to bypass the sanctions or demand cash upfront.

"It is getting an awful lot harder to justify doing any business with Iran," a senior executive with a major petrochemicals logistics provider told the blog earlier this week.

"If, say, I was to rent tank-storage space to an Iranian company and then a Western major also rented space off me, that Western company could face penalties because it had dealt with a third party that had done business with Iran."

So as trade dries up, Iran will have less money to fund oil, gas and petrochemicals growth. As we wrote last year, the previous sanctions regime was already making it extremely difficult for the country to get the technology and expertise it needed to better exploit its abundant resources.

Commenting on the Bloomberg article we linked to above, the New-York-based chemicals equity research firm Alembic Global Advisors said in a research note: "This is consistent with our view that we will see continued delays and lower utilisation rates from the Iranian crackers expected to come online during the next few years.

"As a reminder, consensus is forecasting that as much as 11% of all new capacity builds from 2010 through 2014 will be in Iran.

"Iran (has) had five large scale ethylene crackers start-ups since 2005, with an average delay of 18-24 months and average utilisation rates in the first two years of production of 50-60%."

This is good news for global supply and demand balances as the Iranian capacity wild card seems to have been removed from the pack.

But it is a crying shame for Iran and all the good people who work in its petrochemicals industry.

Jurgen Hambrecht

Source of picture: www.wiwo.de/unternehmen-maerkte

By John Richardson

BASF'S Jurgen Hambrecht has made highly critical and extremely high-profile comments about China's business environment, according to the Financial Times.

The CEO of the German chemicals giant is quoted as saying over the weekend - during a four-day visit to China by German chancellor, Angela Merkel - that foreign companies were being forced to transfer business and technological know-how to their Chinese counterparts in exchange for market excess.

"That does not exactly correspond to our views of a partnership," Hambrecht apparently told Chinese premier Wen Jiabao.

Wen is quoted as responding by telling Hambrecht to calm down, while dismissing allegations that China's investment climate had worsened.

Assuming Hambrecht has not been misquoted, these seem extraordinarily strong statements to make by the head of one of the major direct and indirect investors in China.

Directly, BASF's stake in includes the BASF-YPC Nanjing petrochemicals complex and indirectly, it supplies lots of the chemicals to Germany's booming engineering companies. These companies, boosted by a weaker Euro, have helped Germany post a strong export-led recovery.

The expansion of the Nanjing complex, a joint venture with Sinopec, interestingly includes some of BASF's high-value technologies. The ten new chemicals plants, due for start-up in 2011 and beyond, include a 60,000 tonne/year super-absorbent polymer (SAP) plant, a 2-propylheptanol unit, a non-ionic surfactants unit and an amines complex.

As my fellow blogger Paul Hodges points out in a post on this same subject, Hambrecht's apparent comments follow those of General Electric CEO Jeff Immelt, who was reported to have told an audience at a private dinner two weeks ago: "I really worry about China. I am not sure that in the end they want any of us to win, or any of us to be successful."

The next Doha round isn't going to happen anytime soon and so a great deal depends on strong bi-lateral trade relationships between countries with, of course, China at the centre of many bi-lateral initiatives.

So why rock the boat with the world's most-important growth market unless frustration got the better of Hambrecht (again if we was quoted accurately)?

Or is there a sub-text to these comments that we are not aware of - i.e. a calculated exertion of pressure in an effort to achieve results?

Will this year's K-Fair see some major announcements to take advantage of the relative fall in ethylene costs?

Source of picture; http://www.k-online.de/

By John Richardson

THE rise in the price of propylene relative to ethylene is exercising the minds of senior executives in the polypropylene (PP) industry.

As fellow blogger Paul Hodges highlighted earlier this month in a post on this subject, C3s have moved from being a disposal problems in the 1970s through heavy investment in PP technologies.

Ethylene and benzene were in tight supply, and therefore polyethylene (PE) and polystyrene (PS) more expensive, adding a further push to PP innovation. 

This investment led to demand growth for propylene at 1.2 times global GDP (gross domestic product) by the mid-2000s compared with 1.0 GDP for ethylene.

But just as we have seen with the shale-gas revolution in the US that has transformed the economics of the country's PE industry, tipping points can be reached and surpassed before you even know it.

So is the case with PP where greater consumption of the polymer, along with other propylene derivatives, and reduced refinery and liquids cracker operating rates have inverted traditional price relationships.

As Paul points out in his article, the solution to expensive C3s relative to ethylene could come from on-purpose propylene, but a senior Singapore-based source with a global poylolefins producer told the ACC blog yesterday:

"A problem with the propane dehydrogenation-to-PP process is that it is extremely difficult to operate and expensive because although propane and butane is supplied at a discount in Saudi Arabia, it is still a discount from a market price (Note from the blog: 28% off the prevailing CFR Japan naphtha price. This is unlike ethane which has been traditionally priced based only on the costs of separation and distribution as it has had no alternative value - although this is changing)

"Bio-based propylene production has yet to be proven and the Chinese government has also closed the door on coal-to-olefins projects (Note again from the blog: over-investment has led to restrictions on new projects. A tougher approvals process is also the result of lower oil prices and concerns over the environment).

"But PP is by far the biggest derivative of C3s and so this will limit the upside for propylene as PP is a pure commodity. Once prices reach a certain level, and we are already seeing this, PP will be replaced by high-density PE (HDPE)."

Right now of the three major grades of PE, HDPE is suffering the most from oversupply because of big new capacities, polyolefin traders tell the blog.

So perhaps we are about to see some major innovations in PE to take advantage of longer ethylene markets.

The blog has heard that big announcements on new PE technologies are expected at this year's K-Fair.

Petro Rabigh

Source of picture: arabianoilandgas.com

By John Richardson

Petro Rabigh's attempt to move further down the value chain raises interesting questions over exactly how successful the Saudi joint venture will be in attracting the necessary investment.

As my fellow blogger Malini Hariharan wrote earlier this week, plans for the second phase of Petro Rabigh include paraxylene (PX) to be consumed locally in downstream purified terephthalic acid (PTA) and polyethylene terephthalate (PET) plants.

Other proposed investments include a methyl tertiary butyl ether(MTBE)/isobutylene facility.

Another project in Saudi Arabia was also originally scheduled to include an MTBE/isobutylene plant as part of an integrated C4s derivatives complex. However, the prospective investor in the complex withdrew when it calculated a rate of return of below 10%, the blog was recently told.

"A leading management consultancy recently conducted a study which showed that rates of return decline progressively the further you move downstream from the cracker in all of the Gulf Co-operation Council (GCC) countries," an industry source told us yesterday.

"It still makes a lot of sense to build basic polyethylene (PE) and mono-ethylene glycol (MEG) facilities in the region, if - and this is a big IF - you can get access to attractively-priced ethane," he added.

GCC governments might be able to lavish generous investment incentives on companies in order to encourage the kind of downstream petrochemicals investment (all the way down to the processor level) that helps to alleviate high levels of unemployment.

But as we've mentioned before investment incentives are one thing and efficiency of operations are entirely another. Investors face the choice of building in the GCC or in Asia - which is much-closer to final consumption markets where labour costs are also a lot lower.

Iran's South Pars gas field

Source of picture: www.petropars.com

By John Richardson

THE ability of Iran to further exploit its huge natural gas reserves - and in so doing maintain ethylene exports at constant levels throughout the year - now appears to hinge on Chinese investment (Western companies have withdrawn from the Iranian energy sector due to the tougher sanctions regime).

As we wrote on Friday last week there are big doubts in the short term over the truth behind official claims that gas extraction and processing issues have already been resolved.

What happens every winter and summer is that ethylene exports from Iran dip as gas supply is diverted from crackers to power stations, in order to meet a rise in demand for electricity.

But in the longer term, China could transform the picture. In 2009, China National Petroleum Corp (CNPC) replaced Total in a contract to develop a major portion of Iran's giant South Pars gas field.

China National Offshore Oil Co (CNOOC) is also involved in developing the North Pars field and in building liquefaction facilities.

There are much bigger issues at stake here, though, than ethylene trade-flows - as this article from the Wall Street Journal, co-authored by a former Central Intelligence Agency officer, indicates.

If Obama has the mettle - along with taking on the Republican Party and those unusual people in the Tea Party movement - Chinese and Russian companies investing in Iran could face US sanctions (Russia has also stepped-up its involvement in the Iranian energy sector). 

China and Russia appear to have become the last-chance saloon for the Iranians as they seek to develop their natural gas and oil reserves - and also the under-invested refining sector: Sinopec is developing oil fields and upgrading refineries at Tabriz, Arak and Abadan.

In July, Iran's Oil Ministry announced it had reached a $40bn dollar deal with China to revitalise its refining industry.

Further - both Russian and Chinese companies are stepping in where Westerners fear to tread by exporting gasoline to Iran.

The Iranians, as we also reported in last week's post on the ethylene trade, have closed-down styrene capacity to divert benzene feedstock into gasoline blending (this resulted in the spike in ethylene exports last month as the C2s were not needed for styrene production).

A total of six petrochemicals plants have been shut, we have read - including also paraxylene (PX) facilities.

Whether the Chinese and Russians can now fill the gasoline import gap created by Western embargoes will be important to monitor - as it will determine whether these six petrochemical plants will be able to re-start.

Cloth nappies?....you have to be kidding

Source of picture: babygavin.com

By John Richardson

IT IS the biggest transformation that the global economy has probably ever undergone, resulting in numerous opportunities and challenges for the chemicals industry as emerging markets continue to boom.

The obvious opportunity is for those who can meet voracious demand growth. But where will the supply of affordable commodity chemicals and plastics come from to prevent this remarkable transformation from stalling?

Innovation will be the key at the higher end of the business, as resource constraints create the need for new technologies.

Breakthroughs will be needed, for example, to raise energy efficiency and provide clean and safe water for the tens of millions of people who every year are migrating to ever-more overcrowded cities.

But while the long-term upward trajectory seems assured as the developing world displaces the West as the main global economic driver, medium and short-term dangers abound; the most obvious one right now is a currency war.

"Look at India, China, Indonesia and Vietnam alone. Together they account for about 40% of the global population. At no previous point in history has such a large proportion of the world's population been entering the consumer economy," said a Singapore-based oil and gas consultant.

"Traditional spreadsheet-based methods of measuring growth are no longer good enough by themselves. Some amazing disruptions are taking place that you need to be aware of in order for your old models to be thrown out so you can start again."

Take India as a good example, where the local polyolefin industry is working on persuading India's railways to switch from using cotton or linen sheets and pillowcases in overnight sleeper carriages to bedding made from non-woven polypropylene (PP).

Arguments being used include reducing what must be the enormous laundry bill incurred by the state-owned Indian Railways. And as the non-woven PP sheets and pillowcases are disposed of after one use, passengers would be guaranteed a clean bed.

Furthermore, it makes it very economically viable to recycle PP-made bed clothes, as there is only one collection point: The train's terminus.

An estimated 6bn people travel in India by rail every year. Nobody has calculated how much extra PP demand this could amount to.

But it has been estimated that if India switched entirely from sacks made of jute, a natural material, to those made from raffia-grade PP, this would create the need for an extra 1m tonnes/year of the polymer.

End-users in India and other emerging markets are incredibly cost-sensitive, however.
And in many cases, these disruptive changes are not about sophisticated polymers, as in the case above with efforts to replace sacks made from jute.

The Gulf Cooperation Council (GCC) countries in the Middle East will not supply the huge new volumes required because of a shift in strategy and feedstock availability.

Producers in India, such as Reliance Industries Ltd (RIL), and those in China are in a great position to meet the demand. Sometimes they have both location and feedstock cost advantages.

In the case of RIL, it has a strong raw materials position thanks to its huge refinery capacity at Jamnagar, in India's Gujarat state.

As for China, "the focus has swung back from refinery-based petrochemicals to adding more coal-to-olefins and also coal-to-monoethylene glycol (MEG) capacity, due to the recovery in oil prices", according to a senior source with a US polyolefins major.

"We are spending a lot of time studying the economics of our coal-to-olefins process, while also evaluating the efficiency of competitors."

It might not be too far a stretch to suggest that the US might see expansions to meet the demand for commodity plastics, thanks to shale gas.

But 45-degree straight-line growth was never going to happen.

"In Singapore, Hong Kong and across Asia, the rich investors with money to spare have been pouring too much money into property and equities," continued the above source. "They have been followed by those who are now highly leveraged, who have borrowed at extremely low interest rates."

Property-market restrictions in Singapore and China have already slowed price rises, with some early signs of reductions in China.

Inflation, however, was still a big problem in Asia, the source added.

"Official inflation rates don't always reflect what's really happening because baskets of goods included in measures of inflation haven't been adapted to reflect changes in economies.

"Governments across Asia might have to raise interest rates and if they get the timing and scale of the rate rises wrong, this could cause investor panic. Other policy decisions are possible and these carry equal risk.

"The temptation may instead be to carry on with ultra-loose monetary policy in order to prevent currencies from rising too much, as everyone struggles to deal with the weak US dollar. This will cause bubbles to inflate even more.

"A full-scale currency war is my biggest fear, accompanied by increased trade protectionism - for instance, the recent US House of Representatives vote on the Yuan. This vote sends an important signal, even if it doesn't get past the Senate or a veto by the president."

The dreaded double-dip recession might be almost upon us, unless we are lucky enough to escape for now thanks to an exceptional amount of inter-governmental coordination and compromise.

Whatever the number and the extent of the dips in growth over the coming decades, though, the overall dynamics seem irreversible.

One Singapore-based PP sales executive put it very neatly when he said: "Once you've got used to using stuff made from chemicals and plastics, you are not going to turn back, no matter what your economic problems.

"If you have young children, why on earth would you want to switch back to using cloth diapers from disposal diapers?"

By John Richardson

THE potential returns from LG Chem's electric battery and electronic materials are tremendous and are leading to some bullish forecasts from analysts as to future earnings.

What will be interesting, though, is what will be the main driver of profitability for the South Korean major over the next few years - its newer businesses or good old-fashioned petrochemicals.

LG is now the biggest polyvinyl chloride (PVC) and acrylonitrile butadiene (ABS) player in China, and is set to raise its ABS capacity at its Ningbo site in China by 100,000 tonne/year.

"China has closed down a lot of its less efficient carbide-based PVC plants during a period when demand growth has remained exceptionally strong," an industry source told the blog today.

"The closures had been on the cards for a long time, but were delayed by at first vested local interests and then the economic crisis. But now they have happened, and with the economics of the carbide process always questionable, the ethylene-based producers have a big opportunity."

Adding further petrochemicals capacity might seem more of a sure-fire bet - especially given all the talk of a supercycle - compared to the constantly shifting world of electric batteries and IT-related materials.

And so it will be interesting to see how the company, which won our Top 100 award for 2009, will develop over the next few years. (The blog met with Peter Ban-suk Kim, LG Chem CEO and vice-chairman, last week to present the award).

Analysts at South Korean-based Shinhan Investment Corp take a positive view of the companies' prospects in all its business areas.

In an investment note released late last week, Shinhan wrote:  "LG Chem's operating profit is forecast to increase 6.5% YoY to W2.9548tr for 2011. The petrochemical division will continue to expand on favourable market conditions.

The information and electronic material business, which turned sluggish in 2H10, will regain momentum in 2011.

The IT industry is showing signs of bottoming out in 4Q10 and smart phone market growth will boost the demand for LG Chems' small-size rechargeable batteries.

High expectations for mid- and large-size rechargeable batteries LGChem is strengthening its position in the EV (electrical vehicle) battery market after a battery supply deal with Renault. Its guidance for 2015 sales of rechargeable batteries has been revised up from W2tr to upwards of W3tr.

The company is also making a push into the energy storage system (ESS) market by winning contracts from the U.S. utility industry. Rechargeable battery earnings growth will likely outpace the market's expectations.

Commercialization of LCD glass plates LG Chem's LCD glass circuit board business will soon begin to make earnings contributions. The company's No. 1 glass circuit plant is scheduled for completion in 2H11 and will begin commercial production within the year. LCD glass circuits will contribute more to earnings than mid- and large-sized rechargeable batteries.

LG Display, a captive customer, is expected to purchase W4tr worth of glass circuits in 2010. If 70% of

LG Display's glass circuit demand is supplied by LG Chem, similar to its polarizing film supply to LG Display, it alone generates W3tr in sales and W1.2tr in operating income with an operating profit margin of 40%."

Source of picture: alfin2100blogspot.com

By John Richardson

SINCE when has the truth mattered in the battle between environmentalists and the oil, gas and chemicals industries?

This is a game of perception on both sides as estimates of risk are heavily subject to data that is either biased in the way it is collected or how it is interpreted.

And so the environmental evidence being stacked-up to support further growth in US shale-gas production - crucial to the competitiveness of the country's petrochemicals industry - might not matter a jot of if a major pollution incident occurs.

According to energy industry-backed websites such as this - the "fracking" process has been practised without groundwater pollution in Texas for the past 60 years. The only pollution of drinking water that has occurred has been caused by the secondary recovery process, different from fracking, where water is injected into depleted oil and gas wells.

The energy industry also argues that the bulk of chemicals used in the fracking process in the giant Marcellus Shelf are very small in volume and of the type used in disinfectant, cosmetics and even pharmaceutical production.

Benzene, toluene, ethlybennzene, xylenes and naphthalene can also be used in fracking, but these much-more toxic chemicals are not as economic.

There is also environmental pressure, though, over the large amount of sometimes short-in-supply water used in the fracking processThe debate around shale gas seems sure to intensify now that reserves, production, and perhaps therefore the chance of an accident, are on the increase.

In its annual report released this month , the US Energy Information Authority (EIA) estimates that as of 1 January 2009, the US's technically recoverable shale-gas reserves had more than doubled compared with a year earlier.

Ethane production in the States is set to increase by 30% over the next two years to 850,000 bbl/day, according to industry estimates reported by our colleagues at ICIS news.

This implies that the feared lack of fractionation capacity will not hold the growth of ethane supply back, thanks to drill-to-earn provisions.

But, as we have said, the public mood towards shale gas could turn decidedly negative if there is an accident.

Attitudes towards the industry have recently improved, however, according to Sven Royall, Vice-President for Intermediates at Shell Chemicals.

"Four -to five months ago (after Deepwater Horizon) I would have said that the regulatory outlook looked a lot bleaker for shale gas, but it has since got better," Royall told the blog in a recent interview.

"Preventing groundwater pollution is about making sure that cementing and casing is right because the actual shale gas extraction takes place beneath aquifers."

His colleague Iain Lo, who is Shell Chemicals' Vice-President New Business Development and Ventures, said that he had no concerns about operating reliability when it came to the bigger, more experienced shale gas operators.

"There could be issues with the smaller players, however," he warned.

The other threat to projections of ever-improving economics for US ethane-based petrochemicals is an unexpected surge in natural-gas demand from other industries, such as power generation.

And as we have said before, talk of building a new ethane-based cracker in the US might well be premature given the state of the economy.

Current capacity would a first need to be maxed-out - although there could be further smaller opportunities to debottleneck and switch to lighter feedstocks.

Jim Galloghy, CEO of LyondellBasell, has said that it is too soon to talk about building a new cracker in the US. This is despite an initial economic assessment of doing so in the Appalachians.

But Royall interestingly added: "What you need is confidence about gas prices being at the right level for 25 years - the life of a project. This confidence is not quite there yet, but it is getting closer."

The other opportunity now emerging is the rising value of propylene versus ethylene as a result of the big switch to cracking ethane away from naphtha.

Dow Chemical CEO Andrew Liveris talks about pushing more propane into the US major's domestic feedstock mix in order to resolve the C3s shortage, in the same article we have just linked to immediately above.

The first option is to address the industry-wide propylene tightness would be to crack more propane in steam crackers,

Despite the technical difficulties that can beset the propane dehydrogenation-to-polypropylene (PP) proces - plus the need for guaranteed long-term low-cost propane supply - might we also see more of these units being proposed in the US?

By John Richardson

ONE of the many factors behind petrochemicals supply being less than expected during 2010 has been logistics problems in Saudi Arabia.

One trader we spoke to on the sidelines of last month's Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai told us that one particular complex was struggling to accurately complete documentation necessary for letters of credit.

"This is down to a lack of experienced staff - a major issue throughout the region," he said.

The trader is now helping the company concerned to complete paperwork in the right way.

An industry observer said that it takes an average of 17 days to clear a container from Saudi Arabia. This compares with an Organisation of Economic Co-operation and Development (OECD) average of ten days.

The container port at Jeddah. Source of picture - Saudi government website.

"Part of the problem is constantly changing rules and regulations leading to confusion over paperwork and lack of system integration for clearance," he added.

Port delays have resulted in on-site storage running out, forcing operators to stack resin in the desert, he added.

Bringing on-stream all the new capacities in the Middle East was always going to be challenge - because of the number and the size of the plants.

But what nobody predicted was the extent of technical problems that have held back production, along with an equally unexpected shortage of feedstock.

Logistics is a further wild card thrown into the pack, making the task of assessing likely volume-flows from the Middle East in 2011 even harder.

By John Richardson

INTELLECTUAL property right protection has long been a nightmare in China thanks to the ability of government research institutions to rapidly and very effectively copy technologies. Blueprints for these technologies have to be handed over to local authorities by foreign joint-venture partners.

The constant challenge is balancing this risk against the enormous opportunities.

And now a former Dow Chemical scientist, Lui Wen, has been found guilty of conspiring to steal company secrets and sell them to firms in China by a jury in Baton Rouge, Louisiana, the US.

Lui, who worked for the company from 1965 until he retired in 1992, also paid another company employee a $50,000 bribe to gain information about how the company made a polymer used in automotive hoses, jackets for electrical cables and vinyl siding. He worked with the polymer, Tyrin CPE.

A DuPont scientist is also reported to have been found guilty of stealing company secrets in order to pass them on to China.

This problem could get worse as China attempts to produce not only ever-greater volumes of commodity petrochemicals, but also the smarter stuff.

At least in the West, though, legal systems are usually pretty effective at enforcing intellectual property rights - as the Louisiana case illustrates.

What hope that China, too, might one day develop a similarly effective legal system?

By John Richardson

THE global growth outlook grows ever murkier as a result of credit tightening in China (or is the problem instead continued strong growth in lending?), inflation problems throughout Asia, possible monetary tightening in the West, the direction of oil prices and the Japanese tsunami-earthquake.

We feel that this is making the rest of 2011 and next year perilously hard to forecast.

What follows is a brief summary of these key challenges, which we will examine in more details over the coming days and weeks.

As always we are working closely with fellow blogger Paul Hodges in an attempt to provide valuable support to chemical industry planners.

We don't want to get above ourselves here - this particular blog is run by journalists. But we hope that what follows helps you to challenge any blithe comments you come across about guaranteed continued strong expansion of the world's economy.

Here goes:

1.) We have picked up anecdotal reports from polyolefin traders and producers that credit tightening in China is making it harder for small -and medium-sized businesses, including the plastic converters, to access working capital. But does China's shadow banking system mean that, in fact, credit continues to expand? How does one then explain what appears to be flat polyolefins demand in China right now? Is this just a temporary lull due to overstocking? If Beijing cannot control credit growth, and thereby inflation, what does this mean for the battle against inflation and the long-term health of the economy? If property values continue to increase because of easy lending what will this mean for social stability and the struggle to create a more equitable society?

2.) Inflation, mainly driven by higher wages and oil and food prices, is a problem across Asia. Central banks are being criticised for being too slow to lift interest rates and allow currencies to appreciate. A repeat of the 1997 Asian Financial Crisis seems unlikely because of big foreign currency reserves. But Richard Martin, the managing director of strategic consultancy IMA Asia, was recently quoted in this article in the Australian Financial Review as saying: "Everything you buy is increasing 20 per cent year-on-year - labour, materials. Margins are down. In the second quarter companies will need to lift prices that will lead to a significant shift to inflation. The pace will step up each quarter to 2012. At that point inflation pressures within the production system will be strong enough for central banks to lift rates for a mid-cycle slowdown." His comment on weaker margins is interesting and could well be one of the reasons why Asian cracker operators are struggling compared with their western competitors

3.) Inflation in the West is also an issue, though more muted than in Asia. The Fed may decide on no further major boost to liquidity - i.e. it will complete QE2 but there will be no QE3. There are also indications that US interest rates could be increased by the end of the year. The European Central Bank is talking about rate rises while maintaining funding support for banks. Austerity programmes across Europe represent another danger to growth

4.) Once there are definite indications that there will be no QE3 this will likely result in some unwinding of the oil price, provided problems in the Middle East do not escalate. Speculators have indulged in a one-way bet on the Fed maintaining exceptionally high levels of liquidity. This has helped drive the oil price up and the dollar down. The reverse could now occur. What should this danger mean for chemical company raw-material purchasing strategies?

5.) Paul Hodges' excellent posts on the effects of the Japanese tsunami-earthquake are well worth reading. We would add that in the short term rolling electricity blackouts, as a result of the nuclear crisis, will continue to disrupt chemicals and downstream production for the next few month. New suppliers may, as a result, be sought for some of the chemicals that Japan makes for high-end goods such as printed circuit boards. An estimated 70% of one particular grade of epoxy resins for all the world's circuit boards is made in Japan, for example, with around 90% of Japanese production reported to be down two weeks ago. It might not be, of course, that easy to replace highly specialised chemicals technology at such short notice, leading to economic problems that will linger and continue to spread beyond Japan. This could mean further disruption for the rest of this year, for instance, in auto production in the US and final assembly of electronic goods in China. In the longer term, will procurement managers seek to move away from such a heavy reliance on one Japanese supplier because of the risk, however statistically remote, of another major earthquake in the next 5-10 years?

By John Richardson

THE article of faith publicly expressed at last week's Asia Petrochemical Industry Conference (APIC) in Fukuoka, Japan, was that the current problems with demand in China and India were only temporary.

Discussions the blog held were packed with the conventional wisdom that not enough capacity would be built over the next few years. For example, one estimatewe heard was that there was the need for 35 crackers to be built to meet global ethylene equivalent demand growth over the next decade; so far only 24 had been announced.

But as we mentioned last week, Singapore-based PNB Parabis chemicals analyst Kunal Agrawal estimates that 11m tonne/year of yet-to-be-disclosed ethylene capacity could be built by 2015, based on available refinery feedstock. This could be on addition to the 16-17m tonne/year of capacity already announced fed by these same refineries.

One has to also worry about Sinopec's propensity to add capacity for self-sufficiency reasons, regardless of the economics.

A lot of talk at the conference was about China's potential to make use of coal for this purpose.

But the blog feels that because the environmental and economic problems of the coal-to-mono-ethylene glycol (MEG) and methanol-to-olefins (MTO) processes are so huge, the advent of a large amount of coal-based capacity will not happen during the next wave of overbuilding. If Sinopec announces firm new projects for start-up during the upcoming cycle, they will be based on refining.

We will discuss the environmental issue surrounding coal-to-chemicakls in more detail later on, but here is a rather worrying statistic: According to the consultancy Tecnon Orbichem it takes seven tonnes of coal and 2.5 tonnes of methanol to produce one tonne of olefins. When the blog asked a senior chemicals industry executive where all this carbon disappeared to, he pointed his finger upwards.

If we had $50 every time we heard mention of shale gas during the conference the blog would be very rich. Sadly we are not, which is why we have written this post.

Sufficient ethane would be available for an additional 8m tonne/year of ethylene capacity in the US over the next 20 years, according to IHS director Russell Heinen in a paper he gave during the event.

In an interview with the blog, two senior executives of Shell Chemicals said that their company was studying North American expansions based on low-cost ethane.

"We have 700,000 acres of shale gas assets in the US and Canada and so we feel we are in a good position," said Iain Lo, Shell's vice president, business development and ventures.

The focus would initially be on additions to existing plants in Louisiana and Texas, but Sven Royall, Shell's vice president for global intermediates, said that "everything was on the table" - when asked about the possibility of a greenfield cracker.

Mention of Canada was interesting. With all the focus on US shale gas the blog had missed the possibility that shale assets in Alberta might also be exploited for petrochemicals.

Shell's comments come after a raft of announcements over the last few months of studies into new crackers and debottleneckings of existing facilities by other US majors, such as Dow Chemical, ChevronPhillips Chemicals and LyondellBasell.

One of the ethylene derivatives anticipated to be in tight supply over the next few years is MEG, given feedstock shortages in the Middle East.

Saudi Arabia in particular has met most of the demand growth over the six or so years. Now, though, it seems unlikely that it would be allowed to add more capacity in the Kingdom for strategic reasons, even if it could get its hands on more gas allocations.

Returning to coal-to-chemicals in China, there has therefore been a lot of excitement over the syngas (made from coal) to oxalic acid and then on to MEG process, bypassing the need for ethylene.

It takes 4-5 tonnes of coal to make one tonne of MEG via this route, said an industry observer. While not as bad as MTO this is still pretty grim.

So the conventional ethylene route seems the likely means of meeting perceived future demand over the next 5-6 years.

Shell, in the same interview with the blog, disclosed plans to add two OMEGA process MEG plants in Qatar (each 750,000 tonne/year) by 2016-2017.

The industry observer also told us: "It makes sense to build MEG capacity in the US to serve the local purified terephthalic acid (PET) and textiles industries, which are mainly based in South and North Carolina.

"The US is a significant net importer of MEG and so this new capacity would be backing-out exports.

"As far as ethane supply goes, it is not rocket science to reverse the flow of pipelines that currently go from the south to the north. Ethane could be made to flow from the Marcellus shale-gas fields to new crackers that may be built in Texas and Louisiana. These facilities would then supply the MEG to the Carolinas."

This entire post has talked about capacity. We have not discussed why the industry believes in the doctrine of a continued global economic boom.

The reason for this is that we are journalists and so always endeavour to faithfully report what people tell us.

What APIC told us was that the delegates we spoke to, and listened to during presentations, were either unaware - or didn't want to publicly discuss - profound changes in the global economy.

These are detailed in our new e-book - 'Boom, Gloom and the New Normal: how Western BabyBoomers are changing global chemical demand patterns, again.'

Changes in demographics in the West - and a major shift in both demographics and government policy in China - need to at the very least be discussed openly by the industry.

There may be good reasons to discount what we argue in our book, but we have yet to hear them.

DOW Chemical is to sell its polypropylene (PP) business to Brazil's Braskem for $340m, according to our colleagues at ICIS news.

The blog is digging around for the implications for Dow in Asia.

For the time being, however, here are some initial thoughts....

Included in the sales are two plants in the US and two in Germany with a total capacity of more than 1m tonnes/year, according to a news release from Braskem.

Capacities include a 195,000 tonne/year facility in Cologne, Germany; a 250,000 tonne/year Schkopau unit in Germany; its 135,000 tonne/year Seadrift plant in Texas, US, and its 250,000 tonne/year Freeport, Texas, facility in the US.

Dow had classified PP as non-strategic because it felt that it had neither the scale nor the technology to compete with global giants such as LyondellBasell, the blog understands.

The sale to Braskem, however, does not include Dow's PP licensing and catalyst businesses. Will they now be sold separately?

A focus at Dow is on other propylene derivatives such as acrylics, propylene oxide (PO) and epichlorohydrin and acrylics. Dow is in the process of starting-up its first commercial propylene oxide-only plant in Thailand. The PO/styrene monomer route no longer makes sense for the US major as it sold its styrenics business to Bain Capital last year.

Andrew Liveris, Dow CEO, said that a benefit for exiting PP was that it would be able to move from a propylene deficit to a balanced position. Dow has well-advanced plans for propane dehydrogenation(PDH)-to-propylene facility at Freeport, Texas, due for start-up in 2015. It may build another PDH plant in the US, based on its proprietary propane route to C3s, by 2018.

US propylene markets look set to remain result of the switch to lighter cracker feeds and lower fluid catalytic cracker operating rates on weaker gasoline demand. Being in deficit in C3s, therefore, doesn't really add up.

In addition, the rise of shale gas supply in the US is resulting in increases in propane and ethane supply.

It will be interesting to observe what Dow does with its high-density polyethylene (HDPE), also viewed as non-core.

The future in PE for Dow seems to lie in low-density PE and in octene-grade linear low-density (LLDPE).

By John Richardson

"IF we build polymer capacity in India the demand will come," a very senior industry executive told the blog last year. He amplified this statement by explaining that greater availability of plastics would always stimulate strong demand growth for low-end packaging materials etc in emerging markets in general, as the poor became a little less poor.

Back in May 2010, when he made this statement, India, China and other developing countries such as Indonesia and Vietnam were enjoying soar-away growth. "Decoupling" from troubled Western economies was once again in fashion.

Confidence was high at last May's Asia Petrochemical Industry Conference (APIC) in Mumbai as many of the delegates talked about tight markets by 2014-15.

The search for new locations for new capacity was already on to serve this voracious emerging-market growth, given that Middle East ethane supply is so severely constrained.

The momentum continued into late 2010 as JP Morgan published its famous SuperCycle theory, claiming that it didn't matter what happened in the US and other Western markets. Incremental polyethylene (PE) demand growth would be so strong in China that a decline in US consumption wouldn't even matter on a global basis, the bank claimed.

Investors in commodities and equities etc quite often have very short-term perspectives and so don't really care whether theories, such as the one above, turn out to be true over a period of years. All that matters to these investors is that enough people believe a particular idea over a millisecond (in the case of the high-frequency traders), an hour, a day, a week, a month or a quarter.

But it is the job of senior chemicals industry planners to see through all of this.

Right up until this May's APIC, in Fukuoka, Japan, there was still talk of a peak in the cycle by 2014-15 and the need for lots of new polymer and other plants.

Denial continues in some quarters.

"Even though chemical and industrial stocks have been hammered, 2012 profit estimates still show 20%+ gains across the board for the group. Even second half 2011 estimates show double-digit earnings growth," said an industry observer yesterday.

Emerging markets cannot by themselves provide enough momentum to save the world from a new recession - and quite likely a new Great Depression.

As we highlighted on Wednesday, China faces a debt crisis that could destabilise its financial system and across the developing world, inflation threatens growth.

And as we also point out in Chapter 4 of our e-book, Boom Gloom and the New Normal, what it means to be "middle class" in China and India is radically different from the West.

Low-end packaging sales might benefit from the poor becoming slightly less poor in India and China and other emerging markets.

But average income levels are way below those in the West, meaning that "decoupling' was always a fallacy for manufacturers of mid-range and high-end consumer goods. It will take several decades for emerging-market average earnings to catch up with those in the US and Europe.

Even the alleviation of rural poverty is now under threat, putting into question the argument made by the senior executive we quoted at the beginning of this post - that if polymer capacity is built in countries such as India, demand will come.

The latest issue of the World Bank's Food Price Watch shows that global food prices in July were 33% higher than a year earlier.

Maize was up by 84%, wheat by 50% and live hog prices in China were 50% higher.

In India, the wholesale prices of rice and wheat were 9% higher in the first week of August from the same period last year, says the Australian Financial Review.

Food-price inflation is also a problem in Indonesia, Thailand and Malaysia.

In 2008, during the last big run-up in global food prices, the World Bank estimated that 105 million people were pushed into its definition of extreme poverty. A further 44 million people are now faced with being pushed into extreme poverty, it adds.

Fundamentals are thought to be mainly the cause of this latest rally in food prices, as opposed to the speculators who were blamed for what happened in 2008.

The fundamentals include poor harvests caused by bad weather - and changing diets in the developing world as the relatively small but super-rich upper-classes eat a lot more meat. This is taking land away from cereal production for food, as is the rise in the use of biofuels.

A further problem is that the supply of arable land in China has been reduced due to the surge in real-estate construction since 2008, enabled by the country's huge economic stimulus package.

In the longer-term, how does the world properly feed itself when you also take into account water shortages and climate change, if you believe that climate change is real?

Later chapters in the book will look at megatrends such as food and water. We will discuss the opportunities, as well as the challenges, that these megatrends represent for chemicals companies.

All the problems we now face are highly complex, global in nature and constantly evolving -and so this is very much work in constant and difficult progress.

But what is already crystal clear is that there is no going back to the old approach of simply building a plant on the assumption that demand will inevitably expand to consume its capacity.

By John Richardson

CAN China succeed in transforming its economy from one which is over-reliant on exports to one where domestic consumption is a much bigger driver of growth?

And how long will this process take and in the interim, can we expect a few years of lower GDP (gross domestic product) growth?

As delegates gather for this year's European Petrochemical Association (EPCA) annual meeting in Berlin, these are some of the questions that need to be under discussion.

China's government is not only trying to break the addiction to investment as a principal way to boost growth. It is also introducing a raft of policies designed to boost energy conservation and efficiency.

How should chemical companies position themselves to take advantage of this new direction for manufacturing industry?

The current Five-Year Plan (FYP) (2011-2015) seeks to set the direction of the economy for at least the next decade, not just the next five years.

Hu Jintao, China's president, in an early 2011 speech, talked about more "inclusive" growth, which is one of the slogans underpinning the current FYP.

This is supposed to mean a more rational balance between growth and sustainability, production and consumption and hard and soft infrastructure..

One of the key overall objectives is to raise consumption as a percentage of GDP, which at 35 per cent is less than other developing countries. For example, consumption in India accounts for more than 50 per cent of GDP.

This will involve an attempt to redistribute income.

The big state-owned enterprises (SOEs) have become extremely rich due to government subsidies, including cheap land, loans and energy supply.

While they have been getting rich, this has not been to the benefit of the average Chinese citizen: In the ten years from 1997, the share of workers' wages in national income fell dramatically, from 53% to just 40% of GDP, according to journalist and author Richard McGregor in his book, The Party.

One way of boosting rural incomes would be a more market-based system for setting agricultural product prices.

But if inflationary pressures persist, there could be strong resistance to any changes in how farm prices are set from the National Development and Reform Commission (NDRC).

Breaking the addiction to investment is also going to difficult, according to Chapter 6 of our free online e-book, Boom, Gloom and the New Normal, due to the fact that:

*Up to half of local government financing comes via lands sales to investors in real estate and other types of infrastructure. There are an estimated 45 million local government officials in China. Controlling what they do is a huge task.

*The success of these local officials has traditionally been measured by setting GDP growth targets. The easiest and quickest way to achieve growth is to invest in new real estate, factories, bridges, roads etc

*Big government projects provide tremendous opportunities for corrupt officials to "skim off the top", as the bigger the project the harder it is to keep control of the final cost.

Another aim of the 12th FYP is to move up the manufacturing value chain in the richer coastal and southern provinces.

Targeted industries include renewable energy as China tries to reduce the amount of energy it consumes to produce each unit of GDP.

The central government has lots of cash to spend on research and development and on acquiring overseas payments. But without an improvement in intellectual property rights enforcement will China be able to attract the foreign investment to fulfil its objectives?

And how will it deal with overseas perceptions over the poor quality of its manufacturing?

The July 2011 bullet train crashes at Wenzhou in China might well have damaged these perceptions, as government officials were widely reported to have buried train wreckage in order to impede an investigation into the cause of the accidents.

Only one-third of China's 700 million-strong workforce is skilled or highly skilled. Improving education is therefore yet another challenge.

There might also be political difficulties.

Hu Jintao and premier Wen Jaibao are due to give up their main Communist Party posts in late 2012 and their state posts in 2013. Vice president Xi Jinping is expected to replace Hu.

Most of the nine-member standing committee - the party's decision-making core, which includes Hu and Wen - are likely to step down.

This process could delay decision making as politicians jostle for power, the e-book adds.

Social unrest is a distinct possibility as the economy is retooled - for instance, as coastal low-end manufacturing factories are closed-down and replaced by higher-tech manufacturers.

China's new leaders might, as a result, want to tread the cautious middle path. This would avoid major social unrest and placate resistance from those who have done well from China's existing economic model, such as the SOEs.

"Turning the Chinese economy around is a bit like turning an oil tanker around - it is going to take a very-long time," commented a Singapore-based manager with a global chemicals logistics provider.

The full version of Chapter 6 of the e-book is published in late October. You can download  chapters all the chapters by clicking here.

MOST chemical companies now believe it is inevitable that China and India will reach developed economy status. Many even believe that their strong growth will mean "the end of economic cycles".

But as we discuss in Chapter 6 of 'Boom, Gloom and the New Normal', the new ICIS/ International eChem/ICIS eBook, there are three major risks to this rosy scenario, which are:

China's demographic timebomb. Its one-child policy was introduced in 1978 to counter fears of over-population and famine. By China's own accounting, about 400m births were prevented between 1979 and 2010.This has reduced today's 25-to-35-year-old age group by 75%. As demographer Kenneth Gronbach notes, "the 30-somethings will have to do the majority of China's production, consumption and taxpaying, and when you have a 75% reduction in the group that is chiefly responsible for those activities, you've got a real problem".

Lower incomes. China and India's "middle class" have incomes that are only a tenth of those in developed markets, as we discussed in Chapter 4. This has major implications for the nature of consumption in China and India - and for the type of products that companies will need to make to prosper.

The transition is not guaranteed. It takes 50 consecutive years of 7% annual growth for a country to boost per capita income from $500 to $20,000, says Nobel Prize-winning economist Michael Spence. China's per capita GDP was only $4382 at end-2010, and India's $1371, according to the International Monetary Fund. So both countries still have a long way to go.

Recent growth in China and India has also come at a price: Poor air quality, chronic water shortages and deforestation. Equally, China needs to rebalance its economy away from its over-reliance on exports.

India must improve its atrocious infrastructure, and reform the harmful government subsidies that are holding back the agricultural sector. It is also often forgotten that India is home to a third of the world's poor people, with 37% of its population (410 million) classified as poor by the World Bank. Its overall literacy rate is only 61% - and just 47.8% for women.

The new chapter therefore argues that China and India will require quite different products and services from those sold in the West. It also warns that their growth should not be taken for granted. Companies need to develop robust scenarios to manage the uncertainty this will create.

FREE DOWNLOAD OPTIONS FOR CHAPTER 6

Click here to download a two-page summary of the Chapter .

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By Malini Hariharan

The blog has been listening to some interesting presentations on the polyester chain at the Indian Petrochem - 2011 conference in Mumbai.

The global economic slowdown does not appear to have dampened prospects for polyester demand.

"Demand for polyester grew by 5.6m tonnes last year which was atypical; we all thought that growth in 2011 would be modest but we are again looking at a figure of over 4m tonnes," said Philip Gibbs, chairman of PCI Xylenes & Polyesters.

Global polyester production is likely to touch 60m tonnes this year and grow to around 80m in 2015, he estimated.

However, a rapid addition to capacity, especially in China, would drag down operating rates from around 80% to 70% during this period.

The industry will have to cope with oversupply for the next two to three years, he added.

Asia, led by China, India and Indonesia, will drive global growth.

Gibbs highlighted that Asia is moving away from the traditional polyester consumption pattern of relying on textile exports to the Americas and Europe for growth.

"Seventy five percent of what China produces stays within the country; the domestic market is a driver for polyester. China is only now getting going and has another five to eight years of growth. It still has to get the wider population buying polyester," he said.

Polyester is also expected to expand its share at the cost of cotton.

"Globally, fibre consumption is growing around 1.5times GDP; so if GDP expands by around 6% the world will need about 5m tonnes of additional fibre every year," estimated Rajen Udeshi, president of the polyester chain at Reliance Industries.

But cotton availability is unlikely to grow significantly as competing crops offered better value to farmers and also because food security is more critical for governments.

"So global cotton production is likely to remain in the 23-24m tonnes range and the incremental requirement will have to come from polyester. For this the world will need an additional 3.5m tonnes of purified terephthalic acid [PTA], almost 1.0-1.5m tonnes of paraxylene [PX] and 1.5m tonnes of monoethylene glycol [MEG] every year," he added.

However, an mentioned by the blog earlier what is worrying for players along this chain is the emerging imbalance as capacity additions in PX and MEG are lagging behind polyester and PTA.

PX availability is likely to be the biggest constraint.

"There are so many new PTA plants coming up in China; I have asked many of the companies if they are covered for PX and the normal answer is that everything is available for a price. But the answer is no as PX is sold on [long term] contractual basis," pointed out Udeshi.

What this means is that there is unlikely to be enough PX to run all the new PTA plants.

For MEG, all eyes are now on whether China's new coal-based projects based either on the methanol-to-olefins (MTO) or coal-oxalic acid-MEG routes are commercially successful.

By Malini Hariharan

After years of making money in basic petrochemicals the Middle East focus has firmly shifted to downstream chemicals, a topic that is being discussed in great detail at this year's GPCA forum being held in Dubai on 13-15 December.

As highlighted by the blog in previous posts a combination of factors including lack of ethane, the pressure from governments to diversify and add value are behind the drive to invest downstream.

Sadara, the joint venture between Saudi Aramco and Dow Chemical, is representative of the transformation that the region hopes to achieve. The $20bn project with 26 manufacturing units includes a wide range of value-added derivatives such glycol ethers and amines downstream of a cracker. But the project, which has been in the pipeline since 2007, also illustrates the difficulties in venturing downstream.

A partnership with Dow has given Aramco access to technology but for many other smaller companies this is likely to be a key hurdle.

In a report released at the forum consulting firm AT Kearney pointed out that specialty product technologies are controlled by a limited number of players, demanding dedicated marketing and licensing fees and specialist technical services.

One way to increase access for regional companies is to participate in JV partnerships although technology owners might be reluctant to enter joint ventures given the diminishing feedstock advantage in the Gulf Cooperation Council (GCC) countries.

Middle East players could instead look for potential acquisition of chemical companies with specialist knowledge and this might be an easier option as a weakening global company is likely to result in interesting opportunities.

But Paul Harnick, chief operating officer of KPMG's chemicals and performance technologies practice, pointed out that political issues may prevent transactions if governments decide technology ownership is sensitive.

Also the Middle East faces competition as companies from China and Brazil, which are seeking to build downstream chemicals industry.

"There is evidently a limited number of Western and Japanese partners so Middle East players need to make sure their proposition is more attractive."

Other challenges include marketing expertise, innovation capacity and investment, and logistics as much production will have to be exported in the medium term.

By Malini Hariharan

China's second coal-based monoethylene glycol (MEG) plant is due to start in the second half of 2012, reports ICIS news.

The plant, located in Hebi, Henan province, will have a capacity of 250,000 tonnes/year and will be operated by Wuhan Engineering, Haiso Technology, and Hebi Baoma Group.

The three companies successfully tested the technology at a 50,000 tonnes/year plant at the same site earlier this year.

Regular readers of the blog will remember an earlier post that had detailed the tremendous interest in China for this coal-based chemicals.

The first plant of 200,000 tonnes/year by Tongliao Jinmei Chemical started a while back but the blog understands that it is not yet running at full capacity. There have been quality issues which the company is attempting to resolve. A key problem is said to be in catalyst adsorption and coking when operating rate is raised.

The plant is now running at around 70%, up from below 50% in November, and cargoes have been shipped to East China.

While the Middle East ethane-based companies are the most cost-competitive MEG producers, Chinese coal-based players are likely to have a lower cost position than producers using naphtha as feedstock, says China International Capital Corp (CICC) in this report.

The cost of producing MEG from coal is likely to be around CNY4,500/tonne if plants operate at full capacity, says this report. That would result in a gross margin of more than 40% at a tax-excluded MEG price of nearly CNY8,000/tonne.

The cost for Chinese naphtha-based MEG producers is estimated at CNY6,000/tonne assuming WTI crude at $90/bbl but excluding credits from propylene and C4s.

This probably explains why Tongliao has started construction of a second MEG plant of 400,000 tonnes/year that is due to be completed in 2013.

There's certainly a huge local market available for Tongliao and other companies. China's MEG consumption is expected to hit 9m tonnes in 2011 with import dependency running at around 70%.

The blog is taking a break for the festive season (we will back on Thursday next week before, of course, closing-down again over the New Year period). 

We would like to wish all of our readers a very happy holiday season and successful 2012. 

Before we take our leave, here are a few thoughts concerning this year and the outlook for 2012 and beyond. The opportunities are tremendous, but it is not going to be easy....

By John Richardson

THERE will be no return to the Old Normal of easy credit and comfortable demographics where the Babyboomers supported the golden economic period of the early 2000s, is the inescapable conclusion of events this year.

So is the painful reality that the "European project", in its current format at least, is bust. Politicians remain a long way from finding a solution to the Eurozone crisis. If they fail, which seems a strong possibility, we are into a new global recession, quite possibly a Depression.

US politics is a mess. None of the leading candidates for the 2012 presidential election, including the President, get it.

The country doesn't need smaller government and more tax cuts for the rich. What is required is nothing short of a New Deal - heavy investment in infrastructure, energy research, education etc - all of which have been on the decline as a share of total spending since the Reagan administration, according to The Price of Civilisation by American economist, Jeffrey Sachs.

The US political agenda has been taken over since the 1980s by Big Oil, Wall Street and the corporate lobbyists, argues Sachs. And he points out, as we do in Chapter 3 of our e-book Boom, Gloom & the New Normal, that successive waves of financial deregulation, including decisions taken by the Clinton administration, set the groundwork for the 2008 financial crisis.

This year has also proven that the economic rise of China and India will not be steady and easy.

China faces a systemic debt crisis. The cynicism and general pessimism in India over politics and corruption, as the country also wrestles with inflation, suggests a return to the "Hindu rate of growth".

Chemicals companies might still be hoping that we will return to the Old Normal in 2012. Mild bouts of re-stocking are likely to occur, leading to a revival in prices for chemicals and in share prices.

But there will be no sustained recovery until politicians recognise and adequately respond to the scale of the problem, and companies adjust their strategies to cope with the evolving New Normal.

There are some tremendous opportunities for the chemical companies with the right approach, beyond cutting costs and lowering operating rates in the hope that "pent-up demand" - i.e. the Old Normal - will return.

We think companies need to focus their R&D efforts, and in adjusting existing manufacturing, on the following:

1.) The increase in the number of people who are over-55 in the West.
2.) Young people in the West struggling with much-worse employment and earnings opportunities than those enjoyed by their parents during the economic Golden Era of the early 2000s.
3.) The "relative" poverty of the rapidly expanding middle classes in the developing world. This will not be a sudden army of hundreds of millions of BMW-owning foreign-holiday goers, but will instead involve a sharp rise in demand for extremely cost-competitive low-end consumer goods.
4.) The megatrends such as carbon footprint, changing demographics and water and food scarcity.

Some chemical companies already get this and have been talking about megatrends for years. They are well set to prosper in the New Normal.

Other companies that focus mainly, or entirely, on quarterly profit growth and the value of their share price are going to struggle.

THE global economy is moving into a difficult period, as it transitions to the New Normal. Debt levels are high, and incomes are under pressure, particularly for the large numbers of people moving into retirement.

Cost must be the key criteria when examining the opportunities for new product development and research. Chapter 8 of our free 'Boom, Gloom and the New Normal' ebook examines the application of this philosophy to the four megatrends that we have identified as being key to the future of the chemical industry, which are:

• Improving water availability
• Improving food production
• Increasing life expectancy
• Reducing carbon footprint

It suggests that the key need is to be practical. Companies should focus:

• In the fields of water/food, on reducing the amount of waste, and the output that is lost when product is moving to market
• In developing new products and services for the over 55s, on core needs such as food, water, health, shelter and mobility
•In turn, this will enable them to 'do more with less'. Carbon footprint will be reduced, and products will be more affordable

This philosophy is quite different from that seen during the 1982 - 2007 economic SuperCycle. Then, companies competed for the middle ground, as we saw in chapter 7. They added features, and pursued the concept of adding value in order to boost profits. Over time, they focused more and more on the wealthier parts of the global population, and became increasingly disinterested in those outside this privileged group.

Today, however, it is no longer viable to focus in this way.

The Western BabyBoomers are joining the New Old generation of those aged 55+, and they face the prospect of much lower incomes as they transition from salaries to pensions.

Similarly, incomes in emerging economies are dramatically lower than those in the West. It is wishful thinking to imagine that these regions can therefore somehow replace the demand for added value products that is disappearing in the West.

Doing more with less is therefore our motto for future success. The chapter contains, as always, a wide range of practical examples to help stimulate ideas within your own business. We are convinced that those who accept its challenges will benefit for many years to come.

FREE DOWNLOAD OPTIONS FOR CHAPTER 8
Click here to download a two page summary of the Chapter
Click here to download the full Chapter
Click here to view a four minute video with co-author, Paul Hodges

By John Richardson

EXACTLY the same scenario is playing out in European polyolefin markets, as in Latin America and possibly the US, my ICIS colleague Linda Naylor reported last Friday.

High polyethylene (PE) and polypropylene (PP) prices in Europe have led to increased offers for re-exported material from China, according to Linda - our European ICIS pricing polyolefins editor.

"Yes, there are imports at present, but I don't think they will ruin the European market," said a European PE producer in the same article. "It won't be European prices falling, but Asian ones going up. Chinese PE producers can't survive at this level. They will have to cut production."

Reports from one chemicals analyst, of heavier naphtha purchases by Asian cracker operators during January, which we discussed last week, suggest more rather than less supply.

Perhaps the naphtha cracker players believed stories of a strong post-Lunar New Year Chinese rebound, and/or stronger butadiene and the prospect of stronger propylene and PP on resumed auto production in Thailand persuaded them to buy more naphtha.

Whatever the reasons, the extra naphtha cannot sit in tanks forever and so, if our analyst is correct, Asian cracker operating rates might be set to increase.

On paper, we noted last Thursday that the Middle East, despite market comments to the contrary, was not undergoing a heavy turnaround season.

Now we understand that a high number of outages in January and February helped support pricing, as this article from another of my ICIS colleagues, Ong Sheau Ling, illustrates. These technical problems have come to an end, removing that support.

Plus, as we again said last week, the start-up the ChevronPhillips joint venture high-density PE (HDPE) and polypropylene (PP) plants in Saudi Arabia are imminent. Distributors and end-users are also aware that around 1m tonnes/year of PE from the new ExxonMobil complex in Singapore is scheduled to hit the market at some point this year.

As supply lengthens, the China market is still showing no signs of the strong post-Lunar New Year rebound that so many people had predicted. ICIS assessed pricing as flat last Friday, other than low-density PE (LDPE) which declined by $20/tonne. Labour and credit shortages, and concerns over the global economy, continued to affect sentiment.

Meanwhile, margins came under further pressure, according to the ICIS pricing Weekly PE Margin Report. Integrated HDPE margins for the typical Asian naphtha cracker in our model fell by $73/tonne for the week ending 17 February, on flat HDPE pricing and a rise in naphtha costs.

Eventually, perhaps, the European PE producer might be proved right once the Asian cracker operators have used-up their extra naphtha supplies. They might then make deep reductions in operating rates to bring the market into better balance.

But even during Q4 last year, when markets were exceptionally bad, Northeast Asian rates were only lowered rates to around 85 percent compared to 70-75 percent in Europe.

The Northeast Asians have a long history of chasing market share rather than keeping a tight lid on production during periods of market weakness - and in China, producers there tend to run for social as much as economic reasons. We have picked up no indications that this has changed.

The $64,000 question right now is whether European and US prices might be dragged down by Asia, rather than the other way around.

By John Richardson

Access to cheap feedstock, access to cheap feedstock and access to cheap feedstock might seem like the three most-important elements to any petrochemicals strategy.

Thus, for many in the US, adding capacity based on abundant and therefore low-cost ethane, thanks to the shale-gas revolution, adds up. US ethylene capacity could be increased by as much as 29 percent by 2017.

But, assuming that a fairly high percentage of ethylene derivatives capacity will have to be exported, another equally important consideration, next to low-cost raw material, has to be whether overseas markets will be able to absorb these volumes.

Petrochemicals capacity in emerging countries can be added for strategic and nation-building reasons, rather than for profit, and so proposed new US capacity has to also be evaluated on this basis.

Coal-to-chemicals is strategic in China, as it will boost the country's energy independence, even though the process is expensive and causes significant damage to the environment. Thus, many of the China coal-based projects detailed here, in this article from ICIS Chemical Business, could still go ahead even though they may not stack-up in terms of dollars and cents. Sinopec, the state-owned energy, refining and chemicals major, is now also involved in coal-to-chemicals, which suggests an acceleration in investment.

Further, we believe that the global economy, in its transition to the New Normal, is undergoing major changes. The type of growth we saw during the early 1990s to 2007 "golden era" can no longer be re-assured.

And turning our focus to the US economy, a multi-year plan is needed to revive US manufacturing in order to create the domestic demand sufficient to absorb all of these new local crackers and downstream plants.

But, as Jeffrey Sachs, in his excellent book, The Price of Civilisation, points out, the US is in the midst of a 30-year revolt against taxes and government. There is a great deal of pressure for lower taxes, especially for the rich, and for less government spending - in the belief that these measures will, by themselves, by sufficient to bring the budget deficit under control.

Where, however, are the jobs going to come from for America's working and middle classes - the 99 percent represented by the Occupy Wall Street movement - without more government involvement in the economy?

Manufacturing industry need to be reconfigured to supply "the products of the future" for the following three customer groups:

*The increasing size of the New Old 55+ generation in the West.
*The number of young Westerners struggling with higher unemployment.
*The increasing number of people moving out of poverty in the developing world.

Peter Spitz, who founded the consultancy ChemSystems, and who worked in the chemicals industry in research and engineering roles, warns, in this excellent blog post, that the US is falling behind on innovation.

Apart from shale gas and shale oil technologies, which have created a significant number of new jobs, Spitz warns that there are "no comparable 'breakthroughs' in other areas of domestic manufacture, as far as I can tell, and a lot of concern continues to be expressed about the loss of manufacturing jobs to countries in the developing world."

He uses as an example from history, where US innovation helped to create jobs, when he writes:

"Innovations in the application of car paints and finishes were made in the US, as well as in Europe, in response to the need to reduce or eliminate the smog-producing solvents used for spraying paint resins on cars.

This led to the development of powder coatings that could be applied electro-statically and then cured under heat to form a 'skin' that is tougher than conventional paint.

This technology is now used worldwide, undoubtedly including the manufacture of Buicks by General Motors in China and by VW in Mexico. But Honda, BMW, Volkswagen, Toyota and other 'foreign' firms are also using it to build cars in the U.S. That's how the system works."

Spitz stresses that the US still has huge potential in manufacturing because of its history of innovation and good intellectual property-right protection.

These are all themes we explore in more detail in chapter 8 of our e-book, Boom, Gloom & The New Normal, and the forthcoming chapters 9 and 10.

US petrochemical companies, as they eye all that abundant shale-gas based ethane, might well have a long-term outlook for US employment prospects that puts some of these doubts to rest. It would be fascinating to hear the details.....

By John Richardson

CHINA's coal reserves will last only another 38 years at their present rate of extraction, according to Kai Pflug, CEO of Shanghai-based consultancy, Management Consulting - Chemicals, in this article from ICIS Chemical Business.

This suggests that the current enthusiasm for coal-based chemicals, as coal supplies become constrained, might wane among China's policymakers.

He also suggests that many of the numerous coal-to-chemicals projects being planned in China, including Sinopec's first foray into the sector, may not go ahead because of technology issues.

But for the time being at least, his scepticism isn't denting enthusiasm for investment in the sector. This includes not only the now more conventional coal-to-methanol-to-olefins process, but also the coal-to-monoethylene glycol (MEG) process - via dimethyl oxalate produced from syngas. One coal-to-MEG project is already on-stream in China, with a second due to start-up in the second half of 2012.

Interestingly, also, PetroChina claims to have developed a technology to make paraxylene (PX) via coal, with plans to commission a 600,000 tonne/year plant somewhere in east China in 2016.

From an overseas importer's perspective, this is very probably of only minor relevance over the long term. What matters more is assessing China's appetite for raising petrochemicals self-sufficiency. If the commitment is there, targets will be met - whether it is mainly via coal, oil, or perhaps eventually even via shale gas-derived feedstock.

By John Richardson

A NEW report by the World Bank on China, summarised on the slide below, supports what we argued in chapter 6 our e-book, Boom, Gloom & The New Normal: That without the success of efforts to reform the economy, the country risks a significant slowdown.

Those reform efforts, detailed in the 12th Five-Year-Plan (2011-2015), involve tackling vested interests, such as local government officials and executives of the state-owned enterprises (SOEs), who could fight tooth and nail to keep the current system in place.

A further problem is that as global economic problems jolt China, the temptation is to revert to the tried-and-tested method of guaranteeing social stability in the short term, which is state-funded investment in infrastructure and in new industrial investment, which we saw on an enormous scale in 2009-2010. The problem is that this worsens China's imbalances by widening the gap between those with access to capital during these stimulus packages - the SOEs and the speculators who drive-up assets prices - and those without access: The 96 percent of Chinese who are forced to live on 20 dollars a day.

Pouring money at the problem also places more strain on the banking system, due to misallocation of capital as political connections can be more important in lending decisions than proper due diligence.

The World Bank also cites the need to foster greater commercialism and entrepreneurship in China, which would involve reducing the influence of the SOEs.

These are some of the themes chapter 10 of our e-book, published in March. The chapter also looks at government policy challenges in the West, as well as China.

Part of the 12th Five-Year-Plan is raising minimum wages while making huge investments in "higher-value" industries, such as electric battery-driven cars.

The aim is to justify these higher wages, and thus avoid the "middle-income track" mentioned by the World Bank, in the way that South Korea has managed.

But can this be achieved through central-planning alone in the case of China? Or is more openness required? Is a bigger role for private industry needed at the expense of the SOEs?

South Korea's history suggests that the answer to all of these questions is "yes".

China, however, has to date been hugely successful thanks to an economic model that is often compared favourably with that of the US. In the US, lack of government involvement in developing new industries is part of the problem.

The New Normal involves three major transformations in the nature of consumer markets, which are:

• The increasing size of the New Old 55+ age group in the West.

• Too many young people struggling with higher unemployment.

• Large number of people moving out of poverty in the developing world.

These are the great opportunities for future growth, if our economy can be adapted to serve their needs. Chapter 9 of our new 'Boom, Gloom and the New Normal' e-book looks at the implications for chemical manufacturing.

Today, and in the future, we need to focus on the megatrends which will drive future demand growth.

In the fields of water and food, we should focus on reducing the amount of waste, and the output that is lost when product is moving to market.

In developing new products and services for the over 55s, we should focus on core needs, such as food, water, health, shelter and mobility.

This will enable us to 'do more with less'. We will reduce carbon footprint, and enable output to be afforded by the maximum number of people.

These changes in market drivers will have a profound impact on how, and where, products are manufactured.

Manufacturing processes will need to change in many companies as we transition to the New Normal. Quality will matter more and more as we move away from the 'throwaway society' of the past couple of decades.

So will approaches such as Process Intensification. This involves reducing the size of chemical and plant equipment, and can often enable companies to lower capital and operating costs whilst reducing waste.

The chemical industry has long been an enthusiastic champion of the importance of Quality management. It was one of the first to appreciate the importance of the concept of the 'learning organisation' that was originally brought to the West from Japan.

But in the early 2000s, the Quality movement seemed to stall. Many of the people who had launched this revolution retired. More worryingly, some companies began to forget that Quality was a process, and had to be reinforced by senior management at every possible opportunity.

Now, we need to relearn that having the right corporate philosophy is the critical starting point. This includes a focus on benefiting wider society, good leadership, and on rooting out inefficiencies through getting everybody involved in processes and problem solving.

Chapter 9 will hopefully help companies to ensure that manufacturing delivers the competitive advantage that is required as we transition to the New Normal.

FREE DOWNLOAD OPTIONS FOR CHAPTER 9

Click here to download a 2 page summary of the Chapter.

Click here to download the full Chapter.

Click here to view the 6 minute video with Paul Hodges.

By Malini Hariharan

Work on commercialising a green route to paraxylene (PX) purified terphthalic acid (PTA) and other aromatics is speeding up.

US companies are at the forefront of recent developments. Virent is looking to produce a sugar-based ­aromatics stream containing benzene, toluene and xylenes using traditional chemical ­catalytic processing, writes fellow blogger Doris de Guzman in the latest issue of ICIS Chemical Business.

The company expects to have its first ­commercial-scale bio-PX plant on line by 2015.

Gevo plans to produce bio-based PX by converting fermentation-derived isobutanol to PX and is targeting commercial production by 2014. The company has already tied-up with Coca-Cola and Toray Industries, which claimed in November last year that it was able to develop the world's first 100% bio-PET fiber in a laboratory scale using Gevo's bio-PX.

Another US company, Avantium, is developing a new sugar-based monomer called furan dicarboxylic acid (FDCA), which can be reacted with monoethylene glycol (MEG) to make polyethylene furanoate (PEF), an alternative to PET resin.

Even SABIC is not ignoring the green wave, and has filed a patent claiming PX production via use of terpenes such as limonene found in citrus fruits.

However, the new routes come with many disadvantages and work still needs to be done on oensuring commercial viability.

Eric Bober of Nexant ChemSystems points out that capital expenditures for the initial commercial plants will be high, as these are first-of-a-kind plants as opposed to the 'nth' plant status of petrochemical facilities. A world-scale conventional PX plant is now 1m tonnes/year and likely four times as large as a bio-PX line.

Bio-derived products will likely locate near the available renewable feedstocks, which could increase logistics costs relative to the conventional supply chain.

Despite these issues, the enthusiasm for these new routes is still strong given the support from consumer product companies that are willing to pay a premium for these 'green' products. But will this continue in the changing economic climate where the focus is clearly on cutting costs?

By John Richardson

The remarkable rollercoaster that is butadiene, and its derivatives, continues.

Although the synthetic rubber market for tyres in China appears to be strengthening, acrylonitrile butadiene styrene (ABS) remains under pressure.

And, in a reflection of what is a structurally extremely tight market for butadiene, LG Chem is talking about further reducing operating rates at its Daesan synthetic rubber plant in South Korea.

The pricing chart below illustrates the extraordinary volatility in butadiene prices.

This is likely to continue for a few more years, at least. In circumstances like these, buyers tend to frequently panic and overstock in anticipation of further price rises and then operate inventory for longer than would be normal, leading to repeated cycles of sharp price increases and declines.

In China, confusion over the strength of auto markets cannot be helping. While, of course, replacing tyres represents a much-bigger volume business these days thanks to the surge in auto sales in 2009-10, sales of new autos are slowing down.

Can the petrochemicals industry fix the problem of not enough butadiene? A fascinating debate on this subject took place at last month's 7th ICIS World Olefins Conference in Brussels.

The story of butadiene also serves to illustrate how, in this business, sheer luck plays a huge role in success.

Ten billion dollars in earnings before interest, taxes, depreciation and amortisation (EBITDA) were transferred from the world's butadiene consumers to its suppliers during 2011, estimated Rafael Cayuela, butadiene commercial manager for Styron, the global plastics, latex and rubber producer, during the conference.

"This was exactly the same product, the same customers and the same suppliers - nothing had changed except, of course, the supply and demand fundamentals," he added.

By John Richardson

Wen Jiabao has been at it again. His extraordinarily strong comments on Tuesday follow those he made last month about the risks of a return to the economic chaos of the Cultural Revolution.

On this latest occasion, he has taken aim at the state-owned banks. China's premier, who is to relinquish power later this year, believes the banks make money "far too easily", and that their monopoly control of lending is starving private enterprise of financing.

We saw this last year as small and medium-sized enterprises (SMEs), which make up the bulk of chemicals and polymer buyers, struggled to obtain official lending. They were forced to increasingly turn to the "shadow bank system," thus paying exorbitantly high interest rates, as the central government reduced the amount of money the state-owned banks could lend in order to tackle inflation.

A tight rein on official bank lending has continued into 2012. This is one of the main reasons why chemicals and polymer buying continues to be "hand to mouth".

Wen's comments follow the announcement in March of a trial scheme in Wenzhou. Private investors in the eastern city will be encouraged to buy into local banks and to set up financial institutions, such as loan companies and rural community banks, said the State Council.

But resistance to further reforms is inevitable because of strong "vested interests", which we discuss in chapters 6 and 10 of our e-book, Boom Gloom & The New Normal.

The misappropriation of funds flowing from the state-owned banks to the state-owned enterprises (SOEs) has made some individuals very, very rich. Between 16,000-18,000 government officials and executives from the SOEs stole $123bn of public funds between the mid-1990s and 2008, says The Economist, quoting data from the People's Bank of China.

Successful financial-sector reforms are essential if China is to escape the "middle income trap".

SOEs need to be made to work harder to obtain financing. No longer should they be allowed to add industrial capacity, easily funded through their cosy relationships with the state-owned banks, that fails to add sufficient value to the economy.

Private companies must also have greater access to finance. It is this sector of the economy that has the potential to be the main driver of the innovation necessary for China to escape the middle income trap.

But can any of this realistically happen given that politics in China, like everywhere else, is the art of the possible?

And even if China's new leaders are as reform-minded as Wen has attempted to be during his decade in office, they will take time to settle in. They might need several years to build-up the confidence, and the political muscle, to take on the vested interests.

Can China afford to wait that long? 

By John Richardson

THE shale gas advantage, along with the revival of the US economy, made for a euphoric atmosphere at last week's International Petrochemicals Conference (IPC)* in San Antonio, Texas.

China was only a blip on the corner of the radar screen because the talk was so domestic-focused.

The only doubts expressed were over whether regulatory restrictions over permitting for fracking, and the risk that the US will become a major exporter of liquefied Natural Gas (LNG) thereby reducing feedstock supply for petrochemicals, might spoil the party. There was obviously a political sub-text here with the US presidential elections just around the corner.

Contrast this with a discussion the blog had in Singapore recently with a senior polyolefin industry executive, who said: "All the projects being planned in the US and elsewhere will not go ahead.

"There are too many uncertainties over China, and over the global economy in general, for every company to take the risk. If all of them do commit to their planned investments, by 2016-17 we are going to see a big oversupply problem.

"The US will not be able to export all the surplus volumes that are being planned. They are already facing tougher competition in Latin America from displaced Middle East and South Korean volumes from China, and this is going to get worse.

The traditional approach has been "if we have the feedstock advantage let's build, and let's build big as demand will take care of itself".

Most US chemicals companies laid-off their in-house economists during the 1990s and early 2000s because growth seemed so assured, we were told by a US management consultant.

"They just had to take growth estimates from the International Monetary Fund, or another official body, and could rightly assume that the numbers would be roughly right," he said.

"It would certainly be the case that the general direction would be right of these estimates from official bodies - i.e. upwards."

But we argue in our e-book, Boom, Gloom & The New Normal, that we have entered a period of great economic uncertainty.

China is an excellent example of this. Few people predicted the weakness in its petrochemicals markets over the last 12 months.

And who can say with any degree of certainty that the US economy, which will have to soak-up most of this extra petrochemicals volume, will enjoy a strong and sustained recovery?

Pause for thought, at least.

*The IPC was organised by the American Fuel and Petrochemical Manufacturers (AFPM).

By John Richardson

THE nature of demand in China is changing, despite the belief among some chemicals analysts, and companies, that everything will soon return to normal.

Here is a summary of our key arguments. Please print off and pin to your office, or boardroom, wall for discussion - and let us know if you disagree:

*THE late 1990s and first decade of this century were remarkably straightforward for measuring chemicals and polymer demand growth in China. As China became the workshop of the world, and as the West enjoyed a credit-fuelled economic boom, one could reliably predict constant double-digit annual growth rates for all chemicals and polymers. Everyone was a winner, even the higher-cost producers, as China's appetite for all kinds of raw materials seemed insatiable.

*Then came the 2008 economic crisis, which brought the credit boom in the West to an end. Europe and the US is still coping with the aftermath of the end of that boom, making future demand for China's finished-goods exports very uncertain.

*Temporarily, though, in 2009-2010, when the Chinese government threw money at the problem of high unemployment among factory workers in export processing zones, all seemed right again. Chinese demand for chemicals soared, in response to the economic stimulus.

*But from April 2011, the country's chemicals markets have struggled as the stimulus has been withdrawn in an effort to tackle inflation and growing income inequality.

*A further complication is government efforts to re-focus the economy away from an over-dependence on exports towards greater domestic consumption. As early as mid last year, petrochemical industry executives were seeing the effects of these efforts. In the south and east, the government had started to actively starve "low-value" plastic processors of credit in order to force them to either relocate inland or move overseas. Increasing wage, energy and environmental-compliance costs also began to squeeze the margins of these processors in the south and the east - the developed regions of China. This process of re-balancing continues, eating into chemicals and polymer demand - confounding predictions of a strong 2012 recovery.

*The other big uncertainty is politics. As China faces perhaps its biggest political crisis since 1989, in the short-term, policy options to deal with any worsening of the external environment could be limited. Longer term, the economic reforms might fail.

By John Richardson

FIVE years ago everybody had written-off the US petrochemicals industry, but now the industry is incredibly gung-ho, thanks to shale gas - even if the issue of demand is somewhat more problematic.

In five years time, might the world once again look a very different place as a result of shale gas in China?

China's main motive for exploiting shale-gas reserves would be for power generation, and perhaps even for gassifying its transportation system. But the resulting natural-gas liquids could also feed big new petrochemical capacities.

Some experts believe it will be well beyond 2017 before we see a shale-gas revolution in China because of the issues we discussed last month.

Others constraints, according to this article in the Financial Times, include:

*Shale deposits in China that contain more clay than the brittle "marine" shales of the US, making them harder to frack and less productive.

*A lack of the infrastructure that has made the shale revolution possible in the US, including an extensive gas pipeline network and oil workers trained in fracking.

But never underestimate the role of the central government in China to make things happen faster than most people expect.

Shell's Chief Financial Officer Simon Henry concedes that geology is harder in China than in the US.

But he adds that the government could overcome these geological difficulties to bring the cost of producing shale gas in China down to $2-6 per million British thermal units.

This would be well below the current cost of importing liquefied natural gas (LNG) - $16 per million British thermal units.

Another option could be to, perhaps, wait for the world to be flooded by new LNG production, pushing prices well below $16 a thermal unit. This may happen if the US becomes a major exporter of LNG as a result of its shale-gas revolution.

However, for China, energy security is the main priority.

Several countries in Western Europe, along with the US, have big shale-gas reserves. This is likely to give them more geopolitical influence as they become less dependent on the Middle East, and on Russia, for energy supplies. 

Why would China want to see its geopolitical influence diminish in this new world order?

China has a fifth of global shale resources, and has the world's largest technically recoverable shale gas resources, according to the US Energy Information Administration (EIA).

Thus it has the potential to greatly improve its energy independence - and, as a result, increase its global influence.

In the past, China has been very good at learning from foreign expertise, which, in the initial stages of development, has involved inviting-in foreign investors.

We have seen this in petrochemicals where some overseas companies have been allowed to build one joint-venture cracker complex and one joint venture only. The Chinese can now build their own crackers and downstream plants, have their own petrochemical technologies and have the necessary sales and marketing skills.

The pattern is being repeated in shale gas.

"China's drive to develop shale gas has also helped fund shale projects around the world," says Leslie Hook in the same Financial Times article we linked to above. 

"As Chinese companies seek to master the techniques of extracting gas from sources, such as shale gas and coal bed methane, they have invested billions in unconventional oil and gas projects overseas, particularly in the US."

He adds that China has made shale a cornerstone of its energy policy, resulting in incentives which include liberalising investment rules to allow private investment and plans to remove government controls on gas prices.

The Ministry of Land and Resources is also, reportedly, drafting rules that would allow it to seize blocks from companies that fail to invest at least 30,000 yuan ($4,758) per square kilometre annually. This would be three times the minimum per-kilometre investment floor set for crude oil.

Failure to read the direction of Chinese government policy has been a big mistake in estimating 2012 demand growth.

It would be unwise to repeat the same mistake when it comes to shale gas.

The new chapter of our free 'Boom, Gloom and the New Normal' ebook sets out a road map to success for companies in the New Normal. It also identifies 5 key areas where major change is already underway.

Demand-driven. Markets have essentially been supply-driven in recent decades, with growth being forecast on the basis of ratios to expected GDP growth. Companies have focused on increasing their efficiency via a 'one size fits all' business model. As we transition to the New Normal, they will need to refocus on being effective. Innovative strategies, flexible implementation planning, plus a commitment to local techno-commercial support and long-term R&D will be required

Market focus. New worldscale plants will still be needed during the transition. But companies operating in the West will also need to reposition their businesses to focus on the needs of the ageing 55+ New Old generation, if they wish to drive future growth. Those operating in the emerging countries will need to develop mechanisms to sustain growth in the domestic economy, particularly in the rural areas.

Affordability. Consumers have less money to spend, and so the highly profitable middle ground of the past couple of decades is disappearing. Instead, the focus will be on the megatrends of food, water, shelter, mobility and health. These products must be affordable, as they must meet basic 'needs' rather than supplying mere 'wants'.

Shared Value. Consumer values are changing quite dramatically, away from the materialism of the recent past. Concerns about sustainability and carbon footprint are rising up the agenda. Social stability is also becoming an important concern for governments. Companies who continue to operate on purely financial metrics will find the environment ever-harder to understand.

The VUCA environment. The transition to the New Normal is a sea-change for the global economy. Its full impact will take years, if not decades, to become clear. Meanwhile, the world will face much greater uncertainty, as conflicting views of the world play out on a day-to-day basis. Companies therefore need to plan for a VUCA environment: Volatility, Uncertainty, Complexity and Ambiguity will be the order of the day.

This VUCA landscape is creating winners and losers. No longer will the rising tide of affluent Boomers provide an effortless route to increased sales and revenues. Instead, companies need to create their own VUCA as they develop strategies and implementation plans. Vision, Understanding, Clarity and Agility will be their road map to success.

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By John Richardson

FEEDSTOCK advantages in the US and the continued economic rise of Asia were some of the themes of last week's Asia Petrochemical Industry Conference (APIC) in Kuala Lumpur, Malaysia.

Steam crackers are being planned in abundance in the US. As much as 7.65m tonne/year of new ethane-based ethylene capacity could be on-stream in the States by 2017.

Old technologies are also being brushed-off and updated to take advantage of the shale-gas boom. For example, West Virginia-based Aither Chemicals is re-developing a 1980s Union Carbide technology for reacting ethane in the presence of oxygen, over a catalyst, to produce ethylene and acetic acid, the conference heard.

Several companies were also said to be working on commercialisation of technologies to make aromatics from methane.

The inexorable economic rise of Asia was said to revolve around increases in urbanisation and per capita incomes.

The China slowdown and the Eurozone crisis were also discussed.

But both in public, and privately, delegates said that we would soon return to strong overall economic conditions, thanks to Asia replacing lost growth in the West. 

On feedstock advantages, there is of course no doubt that the landscape has changed quite radically.

The US has enormous opportunities to become the United States of Gas, thus boosting both petrochemicals and downstream manufacturing industries, as it also benefits from a shift in relative labour costs.

But for us, demand remains a concern - both in the short and long-term. We worry that there are no guarantees that we will easily move beyond the problems in China and the Eurozone. 

By John Richardson

SOME commodity chemicals companies still assume that, if they build new supply, demand will always eventually catch up with supply.

The risks of not building new capacities, at times of easy financing and feedstock availability, are also viewed as too great. These include deteriorating economies of scale and loss of market share.

Thus in the US, for instance, the American Chemistry Council estimates that around $25bn (€20bn) is being invested in about 30 expanded or new US production facilities.

Companies are often also at the mercy of events because of their failure to predict major shifts in supply and demand dynamics. For instance, the current global tightness in butadiene appears to have caught producers by surprise.

A lot of money can be made or lost through sheer luck, therefore. To again use butadiene as an example, $10bn in earnings before interest, taxes, depreciation and amortisation (EBITDA) were transferred from the world's butadiene consumers to its suppliers during 2011, estimates Rafael Cayuela, butadiene commercial manager for Styron, the global plastics, latex and rubber producer.

Because the industry has always been run in this way and because, as the example above illustrates, this reactive approach can deliver outstanding profitability, the risk of inertia is substantial.

Speciality chemicals companies such as BASF and Bayer Material Science (BMS) are very different. For several years, they have been developing new processes and products to serve what they predict will be the major demand drivers over the next 30 years or more.

These new demand drivers are the megatrends: ensuring there is enough food and water to sustain global growth, the impact on economies and societies of changing demographics, such as ageing populations in the West and the impact of China's one-child policy, and the need to reduce carbon footprints.

Commodity chemicals companies argue that this only applies to the likes of BASF and BMS because they are "innovation" companies and so must constantly develop new products for new markets.

BASF and BMS also benefit from the somewhat more patient and longer-term approach of European investors compared with those in the US.

Further, neither of these two European majors have access to low-cost feedstock. Basic commodities, therefore, make no strategic sense for them and for other speciality players in a similar position.

And unlike the constant innovation that is taking place in specialities, the last commodity polymer to be invented was linear low-density PE (LLDPE) in the late 1950s (LLDPE didn't gain widespread commercial acceptance until the early 1980s). Old, well-established products encourage adherence to old and well-established ways of running businesses.

But the megatrends are reshaping the global economy and so have huge implications for chemicals companies in both the commodity and speciality sectors.

For example, 272m Westerners are now over 55 years (29 percent of the population), according to UN population data. Further GDP growth will be limited by reduced spending as people save for their retirements.

And the one-child policy in China will result in the ratio of workers to retirees (presuming workers continue to retire at 60) dropping from roughly 5:1 today to just 2:1 over the next 20 years, says Wang Feng, director of the Brookings-Tsinghua Center for Public Policy in Beijing. Between 15-25 percent of the country's 1980-2010 GDP growth was the result of a favourable age structure, he adds.

Commodity chemicals companies need to accept that building capacity on the assumption that demand will always catch up with supply no longer works.

In our Monday blog post we will discuss these megatrends further and provide examples of how companies can proactively develop new markets using polymers that were invented many decades ago. New applications do not necessarily require new products.

Instead of being reactive to market fluctuations in demand beyond their control, companies will thus be able to create and virtually dictate levels of demand.

Source of picture: BBC

By John Richardson

By 2050, the world's 10 biggest river basins by population are expected to produce a quarter of global GDP, according to a report commissioned by HSBC, which was released in June.

The figure is greater than the combined future economies of the US, Japan and Germany - and would a be sharp increase from a current contribution of a tenth,

Seven in 10 of these river basins face significant or severe water scarcity by 2050 without a considerable improvement in water resource management, the reports adds.

Respondents to the World Economic Forum's latest Global Risks Survey consider a water supply crisis to be the most likely and most severe societal risk for the next ten years. Governments are increasingly acknowledging that unsustainable water usage constrains economic growth.

And In China, the World Bank estimates that water-related inefficiencies may already be curtailing GDP growth by over 2 percent.

As we discussed on Friday, guaranteeing sufficient water supply to maintain the health of the global economy is just one of several megatrends that present an opportunity, as well as a threat, for the chemicals industry.

The other megatrends are ensuring sufficient supply of food to maintain growth, the impact on economies and societies of changing demographics, such as ageing populations in the West and the impact of China's one-child policy, and the need to reduce carbon footprints.

Commodity as well as speciality chemicals companies have an opportunity to tap into these megatrends and thus virtually dictate demand growth.

The alternative is to sit back and hope in vain for the world economy to return to where it was before the Babyboomers started to retire in record number, and before the growth in emerging markets, such as China, became a great deal more uncertain.

The companies need to also proactively develop new markets, often using chemicals and polymers that were invented many decades ago. New applications do not necessarily require new products.

In the case of water, cotton production alone accounts for more than 3 percent of all agricultural water use. Traditional cultivation processes such as field flooding are obvious targets for reducing water use.

This challenge has led to the development of a programme organised by the Better Cotton Initiative and including companies such as Levi Strauss, to provide technical know-how to Indian farmers.

Over three years, this has enabled a 32 percent drop in the use of water and pesticides. The farmers' profits are 20 percent higher as a result, thus also helping to stimulate economic development.

The key is to use drip irrigation systems, essentially plastic veins that can direct water to each plant's root system.

This not only spreads water and fertilisers more evenly than traditional pumping, but also means less water is available to encourage weed growth around the plants.

In addition, electricity consumption is reduced, as drip irrigation requires less pumping.

These plastic pipes, the demand for which could be huge, are made out of good old fashioned polyethylene (PE).

Source of graph: http://thinkprogress.org/ 

By John Richardson

DANIEL Yergin's superb book, The Prize, describes how the history of the 20th century was shaped by oil and gas.

Now we are entering a new era.

Some 600,000 jobs have already been created by the US shale and oil gas revolutions, leading to hopes of a much more broad-based US manufacturing revival, including in petrochemicals.

In 2008, the US imported 60 percent of its oil for vehicles and industry. Imports have since fallen to 45 percent, largely because of the shale oil boom, according to this excellent article in The Australian newspaper.

Oil production has increased by 1.3 million barrels a day in three years, more than double that of Russia.

And an even bigger prize is being eyed, to add to the abundance of hydrocarbons emerging from shale gas fields such as the Marcellus in West Virginia, New York State and Pennsylvania and the Bakken shale oil formation in North Dakota, continues The Australian.

This is the "Green River Formation" which stretches across Colorado, Utah and Wyoming and represents the world's biggest shale oil formation.

About half the deposit could be extracted - 1.5 trillion barrels of oil - according to the US-based research group, the Rand Corporation, which was quoted in the same article in The Australian.

This is equivalent to the world's entire proven oil reserves, creating discussion that the US might become energy independent in 15 to 20 years.

"In collaboration with Canada and Mexico, the US could - and should - forge a broad pro-development, pro-export policy to realise the benefits of our hydrocarbon resources," writes Mark Mills from the American think tank, the Manhattan Institute.

Greater access to energy might lead to an overall US economic recovery. It could also reshape geopolitics through reducing the US dependence on the Middle East, including a change in its relationship to Saudi Arabia, which, as Daniel Yergin pointed out in The Prize, helped shape 20th Century history and politics.

But the US might easily squander its energy bonanza through failing to use cheaper oil and gas as the basis for a wider manufacturing revival (the "Dutch Disease"). We discuss some of the policy challenges confronting the US in chapter 10 of our free e-book, Boom, Gloom & The New Normal.

A parallel with what might happen in the US is already happening in Australia through its government policy, or lack of policy, regarding its natural-gas reserves.

Dow Chemical Australia and New Zealand managing director, Craig Arnold, highlights some of the problems facing Australia and natural gas in this article.

This blog post cannot, of course, come close to covering every potential outcome of the new energy revolution.

But here are four more thoughts:

*Other countries have big shale gas reserves, including Europe and most notably China. BASF said last week that subtantial development of European shale gas reserves could be as long as a decade away. But China has the capability of surprising everyone by pressing ahead with exploiting its shale gas reserves, if it feels its economic and geopolitical position is under threat. Prospects for shale oil outside the US are the greatest in again, China, Russia and Argentina.

*Overcoming technological challenges will play a pivotal role. In the US, for example, the Green River Formation confronts the difficulty that the bulk of material being extracted from its wells is kerogen. This requires expensive heating treatment to yield small amounts of commercially useful oil and gas. In China, Peter Voser, CEO of Shell, highlighted in June that much of China's shale-gas reserves are geologically challenging.

*Access to technology will therefore be crucial and could become a highly sensitive political issue with broader implications for international trade relations. Politicians might come to believe that avoiding"Dutch Disease" involves barriers to technology transfer.

*The environmental challenges surrounding fracking will continue. But we think that money and jobs will always overcome most environmental objections.

Graph prepared by the http://www.thegatesnotes.com/Personal/2012-Annual-Letter

By John Richardson

RISING food prices resulting from adverse weather conditions in the US, South America and Russia represent yet another threat to global economic growth.

Grain prices could, for instance, increase by as much as 25 percent this year, warns Danske Bank.

Dry weather in the US has hit corn and soybean crops, and the drought has been particularly bad in the mid-west corn belt.

La Nina has reduced South American harvests.

Simultaneously, dry weather in the Black Sea region has raised fears of a repeat of the 2010 wildfires that destroyed large parts of the Russian wheat crop.

The good news is that wheat and rice harvests in China look set to be good.

But a problem, of course, is that agricultural commodity prices are set globally.

Extreme volatility in food prices, driven to some extent by speculators in futures market, will also remain a permanent feature of the global economy.

The speculators are also to blame for the dysfunctional nature of crude-oil markets.

For the chemicals industry food represents an opportunity, as well as a threat, as we outline in our e-book, Boom Gloom & The New Normal.

The industry has the opportunity to apply existing products, and to develop new products, which can meet the challenge of providing enough food to sustain healthy global growth - one of the four megatrends.

The threat comes from, as we have described, the damage to growth caused by sudden increases in the cost of food, particularly in developing countries, as the chart above illustrates.

The vast majority of people in developing countries are very poor by Western standards and so spend a big proportion of their incomes on food.

Every time food prices increase, this damages chemicals demand growth. The reason is that millions of low-income earners are forced to reduce their spending on the basic consumer goods that they can just about afford to buy in the best of economic times.

This year's surge in the cost of food further illustrates that we live in a VUCA world in which investment in innovation is crucial for chemicals companies. They can thus help dictate their own patterns of demand.

Source: ICIS

By John Richardson

Reliance Industries is going boldly (no split infinitives here) where nobody has gone before: It is to build a cracker, which could eventually produce 1.6m tonne/year of ethylene, based entirely on off-gas feedstock supplied by its 1.24m tonne/year of refinery capacity at Jamnagar, Gujarat, India.

Nobody has attempted anything on this scale before as the biggest previously-built cracker that ran entirely on off-gases had a capacity of only some 100,000 tonne/year, the blog understands.

But Reliance has a reputation of getting it right and so this seems very likely to be a major success. A recent Goldman Sachs report, as fellow blogger Malini Hariharan points out in this article, said that the cracker's ethylene costs of production would be competitive against Middle East producers, and would be cheaper than US shale gas-based projects.

The cracker's capacity will comprise ethylene generated by cracking refinery off-gases, which contain around 1.1m tonnes/year of ethane, and the recovery of 400,000 tonnes/year of ethylene from the off-gases, adds Hariharan.

She also describes how there will be a neat integration between a new petcoke gasification plant and the cracker complex, both of which will be located at Jamnagar.

The petcoke unit will create syngas fuel for the refinery and the new petrochemicals complex, replacing the liquefied natural gas (LNG) and refinery off-gases currently being used, she writes.

The petcoke unit might also eventually supply carbon monoxide to an acetyls unit.

"It is our target that this [petcoke project] will add 30 to 40 percent to the integrated Jamnagar complex margins within the next three years," said Reliance chairman Mukesh Ambani in June.

Reliance has already confirmed derivatives investments downstream of the new cracker, including polyethylene (PE) and mono-ethylene glycol (MEG) (see above table).

The cracker will also produce 150,000-160,000 tonnes/year of propylene, part of which will be utilised to produce polypropylene (PP) co-polymer at the existing PP plants at Jamnagar.

Reliance is to also expand paraxylene (PX), purified terephthalic acid (PTA) and polyester capacities at Jamnagar and other sites in India, which will bring its total new investments in petrochemicals to $12bn.

Most of the new capacities should be absorbed by the domestic market, provided economic problems don't get an awful lot worse.

Wen Jiabao - stepping down

Source of picture: KeystoneUSA-ZUMA/Rex Features 

In the last of our series of posts on China's leadership handover, which begins today as the 18th Party Congress meets, we look at intellectua property rights protection.  

By John Richardson

WHY bother innovating in China when a state-owned, or state-backed, company is able to steal your innovative technologies and set up next door with access to low-cost finance and friendly judges who will keep the law on their side?

This is the question being asked by a growing number of private-sector entrepreneurs in China, who, according to a chemicals industry executive, are "voting with their feet by leaving China with their money and their families".

This is one of the reasons, why, according to the New York Times, the middle classes are leaving China in record numbers.

"In 2010, the last year for which complete statistics are available, 508,000 Chinese left for the 34 developed countries that make up the Organization for Economic Cooperation and Development. That is a 45% increase over 2000," writes the newspaper.

For foreign investors, the long-standing issue of poor intellectual property rights protection was perhaps less of a concern when China was moving in a clear economic direction. OK, you might, as speciality chemicals producer, lose the odd process or product that might be about to move off-patent anyway, but if growth was roaring ahead, you would benefit overall.

But now, with China entering an extended period of what we believe will be 5-7%, or even lower, GDP growth per year, the risk/reward ratio has shifted.

Plus, as China tries to escape the "middle-income trap", the desire of state-owned enterprises (SOEs) to acquire overseas expertise has surely increased. Both the EU Chamber of Commerce and the American Chamber of Commerce recently released reports that complain about intellectual property theft and inadequate market access.

Will the new leadership be willing or able to reform the legal system?

And will they be willing or able to tackle the other problems we have outlined this week, and many other difficulties that we haven't addressed, including environmental degradation - the result of over-investment in industrial capacity and infrastructure?

Pollution is another factor behind the migration of the middle classes, according to the NYT article we linked to above.

The risk of failure has to be built into every range of estimates for chemicals demand growth over the next decade when the new leaders are in office, and into every company's strategic options.

As the consultancy, Stratfor, warns - and this goes to the very heart of the matter: "China's new leaders will inherit a political system that is, in many ways, structurally incapable of changing itself."

By John Richardson

ALL of yesterday's excitement about the US overtaking Saudi Arabia and Russia by 2017 to become the world's biggest oil producer - and exceeding Russia to become the world's biggest gas producer by 2015 - needs to be taken with a very large pinch of salt.

The release of the International Energy Agency (IEA) report, which made the above predictions, made fantastic headlines. But, as Fatih Birhol, the IEA's chief economist concedes, the geology of shale and tight oil and gas in the US is "poorly known".

Further, the American Petroleum Institute is careful to talk about the "opportunity" that hydraulic fracturing represents for America, rather that it being a sure thing.

Perception is crucial and so science can sometimes not matter. So, even if there is no significant risk to aquifers from the fracking process, as gas-industry experts have assured the blog, fears about pollution could still lead to regulation that holds-back production.

The large volumes of water consumed in the process might also lead to restrictions, even though, as we have also been assured, the problem can be resolved through investment in water purification and recycling.

Another unknown is how other energy producers might respond to the possible loss of their market influence.

Russia, if it can get its act together, has the reserves to prevent the US from becoming the world's biggest gas producer.

Saudi Arabia might also (but this is as big a stretch as Russia tackling its corruption issues) find a solution to its electricity-generation conundrum. Exports of crude are forecast to decline on the increasing demand for fuel oil for power stations.

Cheap electricity is crucial for social stability in the Kingdom, hence soaring demand, poor conservation and therefore the predictions of declining crude shipments.

But Saudi Arabia has plenty of non-associated inland gas fields, and Saudi Aramco is heavily focused at the moment on raising gas production for power plants - although these gas reserves are sour and, as a result, will be expensive to process.

Perhaps Saudi Arabia could also end up importing liquefied natural gas (LNG), from countries including the US, given that supply is forecast to be abundant.

The Middle East, and many other regins of the world, might also successfully exploit their own shale-gas reserves. 

To return to the issue of shale gas in the US, it has turned out to be a giant Ponzi scheme, as we discussed earlier this month 

As Birhol said, the geology is unknown, leading to higher-than-anticipated production costs.

But as production costs have soared, so has output from the shale-gas fields, leading to US gas prices falling to a record low - thanks to the investment frenzy.

There is sure to be a consolidation in the US shale-gas industry, driving up long-term prices.

The US petrochemicals industry, despite all of these uncertainties, is surging ahead with new cracker investments. US-based vinyls producer Georgia Gulf is the latest producer to express interest in adding ethylene capacity.

The biggest other uncertainty is the health of the global economy. Where exactly, will all this new US resin and mono-ethylene glycol (MEG) be sold?

The IEA, in the same report that was released yesterday, made a confident prediction over one of the global economic uncertainties - China's economic future.

"The report assumes a huge expansion in the Chinese economy, which it saw overtaking the US in purchasing power parity soon after 2015 and by 2020 using market exchange rates," writes Reuters.

"Chinese real gross domestic product is expected to increase by 5.7% annually between 2011 and 2035."

This assumption needs to be rigorously challenged in the scenario-planning process.

Picture: US shale gas worker

Source: Image Broker/Rex Features

By John Richardson

SHALE-GAS exploration in northern Saudi Arabia shows tremendous promise, said an industry observer on the sidelines of last week's seventh Gulf Petrochemicals and Chemicals Association (GPCA) conference in Dubai.

"The main purpose of the Saudi Aramco project is to generate methane for power generation that would reduce the need to use fuel-oil for electricity production," the source added.

"However, it is possible that the project could also yield additional ethane supply for petrochemicals."

Bloomberg reported in early November that SABIC was planning to invest in shale-gas technology in the US and elsewhere.

"SABIC'S venture capital arm is looking for opportunities in the US, Europe and China to buy stakes in start-up companies that can turn shale gas into petrochemicals, according to Ernesto Occhiello, SABIC Ventures' executive vice president for technology and innovation," wrote the wire service.

The industry observer added that with 80% of Saudi Aramco's capital expenditure on hydrocarbons exploration in the Kingdom devoted to gas exploration, the future will not necessarily remain the same as the present: Constrained ethane supply that is limiting SABIC and its competitors from further expanding basic petrochemicals capacity in Saudi Arabia.

SABIC, however, isn't expected to add ethylene capacity at home for at least the next five years because of the shortage of ethane.

And, even if more ethane does become available, projects would still have to involve more than just basic petrochemicals production in order to obtain an allocation, the source added.

"In return for being given ethane to make hugely profitable downstream polyethylene (PE) and mono-ethylene glycol (MEG), any project would have to also include substantially less profitable 'value added' derivatives,' " he said.

As we discussed last week, this is part of Saudi's job-creation agenda.

The shale-gas revolution took the petrochemicals industry by surprise and so the question foremost in the mind of the blog as it visited the GPCA event last week was, "What might be the next game changers?"

Could one such game changer be a return to ample ethane supply Saudi Arabia in the longer term?

What would this mean for, perhaps, an overconfident US petrochemicals industry? It seems to have become convinced that, thanks to its own abundant and very cheap feedstock ethane supply, it has the field pretty much to itself.

And, as we continue to argue, demand is the thing that everyone needs to worry about.

A lot more than just the standard Model T.,,,

Source of picture: cCSU Archv/Everett/Rex Features

By John Richardson

THE question on my exam paper this Monday morning is what this outstanding article by the author, Charles Fishman, in The Atlantic magazine, means for the petrochemical industry.

We have all become used to the idea of the constant "hollowing out" of manufacturing in the Western world - a theme that the blog has discussed on many occasions during ICIS training's Petrochemicals I - An In-depth Introduction course.

Our slides are being adapted. What's clear from Fishman's article, and from plenty of earlier evidence about the recovery in US manufacturing, is that the old outsourcing model is changing.

Innovation in finished products will enable US companies to re-discover the lost skills of constantly improving the design of products made impossible by the tyranny of geographic distance - a big fault with outsourcing.

It will also become much easier to create niche products to serve ever-smaller groups of customers, as a result of the absence of long supply chains and the advent of 3D manufacturing.

For components suppliers, such as plastic processors, this will require an equal amount of innovation.

They, too, will take increasing advantage of 3D manufacturing to help with constantly improving the design of products, and to make much-smaller batches of products to suit niche groups of customers.

If the mass-manufacturing model for plastic processing is now under threat, what does this mean for petrochemical producers in the US?

Will they also need to also re-consider the current model of building huge million tonne-plus petrochemical complexes to serve homogenous "plain villa" manufacturing industries?

The enticement for all the cracker projects in the US - which is also helping to drive the overall recovery in the country's manufacturing industry - is of course the shale-gas boom.

But will building big, based on cheap feedstock, be of less importance in this new environment than providing speciality grades of polymers in order to serve constant innovation in manufacturing? By their nature, the profitability of such grades is driven as much, if not more, by technology rather than feedstock advantage.

Or are we oversimplifying this? Perhaps we shouldn't get too carried away into thinking that the revival of US manufacturing signals an end to the whole outsourcing model.

Low-value manufactured goods will likely continue to be made in the developing world, increasingly maybe in South America, even if China has become too expensive. The US manufacturing revival will probably only be in mid and high-level products where labour costs are less of an important element of overall costs.

Thus, there could be plenty of room for lots of feedstock-advantaged new US crackers that can export their surpluses of basic polyethylene (PE) around the world, while making a few speciality grades to serve local markets.

But what about the total demand picture? We still worry about demographics and what this means for the US, and many other economies. We are concerned that there will simply not be enough demand to absorb all of these new crackers.

And further - the Chinese might build a lot more capacity than some people think, in order to boost their self-sufficiency in petrochemicals, and take advantage of their own cheap feedstocks. The Middle East could also find a great deal more ethane.

Where will the US place of all it surplus perrochemicals? 

Let's finish on a really positive note, though: The return to innovation in local manufacturing in the US could help make all the products that don't even exist today, that will be needed by the Babyboomers as they get older.

This should also provide lots of meaningful work for young people in manufacturing industry.

Please let us know our grade for our answer to this morning's exam question.

By John Richardson

AT LEAST one global polyolefins producer is rumoured to be shipping increased volumes of resin from the US to Europe in response to the shale gas-derived shift in competitiveness.

"Dow Chemical CEO Andrew Liveris is making a call on the global economy - one of multi-year slow growth - and adjusting the company's approach to maximise competitiveness in this environment," wrote my colleague Joseph Chang in this article.

"But with six world-scale crackers scheduled to come on line in the US in the 2016-2017 timeframe, the economy better grow out of its funk by then.

"Liveris expects global GDP growth of around 2.5% in 2013, with China growing at a 6-7% clip and the US at about 2.2%. All figures are below historical norms.

"It is still years away, but the prospect of massive amounts of US ethylene and derivatives capacity coming on in a slow-growth global environment is not something to be relished. Much of that derivatives production will be targeted for exports."

Dow is pushing ahead with heavy investments in the US, while also announcing the closure of 29 plants - many in Europe. This involves an 8% reduction in its workforce.

Ethylene contract margins, however, still remain in positive territory, as the chart below shows from the latest ICIS pricing European Weekly Ethylene Margin Report.

But it seems logical to us that there will be increasing pressure from downstream industries in Europe for more discounts. Europe is in the midst of a multi-year economic crisis, the resolution of which rests on policymakers recognising that demographics drive demand. Mark Garrett, COE of Borealis, has said that Europe has entered a "ten-year stagnation period". 

How much longer can Europe carry on running its crackers at what blogger Paul Hodges describes as recession level operating rates? As the second chart below shows, Q3 rates remained at 80%. 

It seems reasonable, therefore, to assume that more boardroom discussions are taking place about restructuring the European industry.

Unless, that is, European producers are betting on a substantial reduction in the US feedstock advantage.

........Significant Commercial Production "At least Ten Years Away"

By John Richardson

A US-China Shale Gas Training Programme has been launched by the independent White House agency, the US Trade & Development Agency (USTDA).

An initial $378,000 will be invested to enable the US industry to travel to China and "help introduce Chinese energy sector officials and project sponsors to US shale gas best practices, policies and technologies," said the USTDA.

This all part of a US-China Shale Gas Resource Initiative that dates back to March 2009, following a meeting between President Obama and China's former President, Hu Jintao.

So what does this mean?

The blog's first thoughts were that there could be something geopolitical here - for example, helping to make China more energy independent, thus lessening its needs to seek energy resources overseas, backed up by greater spending on defence. This would put a strain on the US as it, perhaps, tries to reduce its own defence spending as part of balancing the budget.

But before we get too carried away, this might be purely commercial, as the following interview with a gas consultant suggests.

US support is sorely needed, by the sound of it, because of challenges of developing China's huge shale-gas resources, which we have discussed before.

China's shale-gas industry, and with it any wet gas feedstock for petrochemicals, seems to be at least a decade away from significant commercial production.

The consultant told us: "There are a lot of government-to-government connections between the US and China over shale gas, but I don't think this is geopolitical.

"This is being driven by collaboration between, say, a university in the US, one France and one in China to develop new shale-gas techniques that will be commercialised and, hopefully make money for companies in all three countries, while solving China's shale-gas problem.

"One of China's shale-gas problem is that its shale has a high clay content, and so in the worst-case scenario, you would be pumping chemicals and water in order to produce nothing more than a frothy, blancmange-style mess that has no commercial value.

"The US is a much more fortunate position as its shale is impermeable, very hard, and so it is much easier to frack.

"Thus, solving China's problem will quite possibly require new fracking techniques, new drills and new fracking fluids.

"The objective of the Chinese is to develop these technologies for domestic applications, with the eventual aim to sell them overseas.

"There has been a lot of talk about China being on the fast-track in terms of shale-gas development, but it doesn't look much look like a fast track to me.

"There have been two auctions so far, the first one of which was closed to all but a few Chinese companies with the second widened-out to more Chinese companies. But neither auction has allowed in foreigners and they need the foreigners for the technology.

"And so, a Chinese company has to first of all win an auction, and then find a foreign partner, which slows the whole process down.

"China's Ministry of Land has come out with a very ambitious target of producing 80-90 billion cubic metres a year of shale gas by 2020.

"From first identification through to significant commercial production of any gas resource normally takes ten years. China shale is likely to take more than ten years because of all these impediments."

A March 2012 Barclays Capital report said that China had set itself a target of producing 6.5 billion cubic metres per year of gas by 2015, accelerating to 600-100 billion cubic metres a year by 2020. This suggests that China is banking on some major technological breakthroughs. 

Picture: HAP/Quirky China News/Rex Features

By John Richardson

THE toxic smog that enveloped Beijing over the weekend is another example of why China's new leaders simply have to change the economic growth model.

At its worst point on Saturday night, the level of harmful particulates in the air reached as much as 36 times that which is recommended as safe by the World Health Organisation.

"China has strict environmental and emission laws, but also has the worst environmental pollution on earth thanks to lack of enforcement and subordination of environmental concerns to the imperative for officials to register economic growth," wrote the Financial Times, in this article.

At one hospital on the edge of Beijing, a nurse told the FT that a respiratory ward was overflowing at the weekend, even though the unit was doubled in size last year.

Some 300,000 people die every year from outdoor pollution alone in China.

China's environmental protection ministry published a report in November 2010 which showed that about a third of 113 cities surveyed failed to meet national air standards last year.

According to the World Bank 16 of the world's 20 cities with the worst air are in China. According to Chinese government sources, about a fifth of urban Chinese breath heavily polluted air. Only a third of the 340 Chinese cities that are monitored meet China's own pollution standards.

Government policy towards environmental problems in general has been to suppress public dissent, while seeking to cover up the extent of the damage caused by China's economic growth model, claim many criticis.

For example, in July 2009, as the New York Times points out, a Chinese Foreign Ministry official told US diplomats to halt a Twitter feed from the US embassy in Beijing, which highlighted the atrocious air quality.

The official told US diplomats that the Twitter feed was "not only confusing but also insulting," according to a State Department cable obtained by WikiLeaks.

But the good news is that the Chinese government now includes fine particles called PM2.5, considered to be especially harmful to human health, in its measurements of pollution. Further, the recording of air quality 36 times worse than the WHO limit was made by the government.

State newspapers have also run highly critical articles saying more needs to be done to tackle the problem at its source, said The Guardian newspaper.

"How can we get out of this suffocating siege of pollution?" the People's Daily, the official Communist party newspaper, asked in a front-page editorial.

"Let us clearly view managing environmental pollution with a sense of urgency."

China's new Politburo, as we discussed yesterday, have made it clear that the old growth model - where the focus was entirely on growth rather than the quality of growth - has to change.

In the case of the environment, if there is no change:

*The number and the intensity of public protests could escalate to the point where they become socially and politically destabilising.

*Healthcare costs, already rising because of the one-child policy, may become unsustainable.

*Expat workers, especially those with young children, will increasingly refuse to be relocated to China's big cities, slowing down the technology and expertise-transfer process as China attempts to escape the middle-income trap.

The great news is that China's new leaders recognise the problem by allowing state-run media to join the debate in favour of reform.

And for the chemicals industry, the opportunity is huge to help China clean up its environment.

By John Richardson

LAST week we highlighted how a Boston Consulting Group study has reached many of the same conclusions as our e-book, Boom, Gloom & The New Normal, on the fault lines in the global economy.

Similarly, many of the ten solutions suggested in the study are in line with what we think needs to be done.

The problem is short-termism from companies which are only concerned about the next few quarterly financial reports.

Politicians are in a similar dilemma as Jean-Claude Juncker, prime minister of Luxembourg and president of the Euro Group highlighted in November, when he said: "We all know what to do, we just don't know how to get re-elected after we have done it."

But as we go over the edge of the demographic cliff, a new consensus must emerge if we are to avoid a repeat of the 1930s social and political environment in Europe.

Right, now, though we are in limbo because of increased policy uncertainty, illustrated by the above BCG slide. Uncertainty over policy reflects a wider uncertainty among all of us over whether we are on the right path to recovery, which feeds through to greater volatility in oil and petrochemicals pricing.

The BCG study recommends that we need to:

1. Deal with the debt overhang. The critical starting point is to accept the fact that many of today's debts will never be repaid and to embrace debt restructuring and defaults. Current policies, designed to avoid that outcome, only postpone the ultimate resolution of the crisis and will result in even bigger losses down the road. Better to move quickly and act now, despite the likelihood of considerable near-term pain.

2. Reduce unfunded liabilities. Once debt restructuring is under way and the broader public sees that wealthy owners of financial assets are contributing to the necessary cleanup, it should be easier for politicians to take another painful step: addressing openly and directly the trillions in unfunded liabilities, including OECD pensions, that are weighing down budgets and balance sheets across the developed world. It will require a combination of several measures to bring these unfunded liabilities under control. This will require raising the retirement age, reducing social-insurance payments and making healthcare provision more efficient.

3. Increase the efficiency of government. A smaller government sector does not necessarily mean a weaker government. By defining the right "rules of the road" for society and business, governments can set the tone and priorities for development in a more effective as well as a more efficient way.

4. Prepare for labour scarcity. People will have to work longer, the elderly will need to become a bigger component of the labour force, participation of women in the workforce will have to increase and birth rates in developed economies must be increased.

5. Develop smart immigration policy. With the oldest native population and an immigrant population close to zero, Japan faces the most severe challenge. But Germany also struggles to attract well-educated immigrants because of the language barrier. US immigration policy has become far more regressive post 9/11, but there is now a growing consensus that reform is needed.

6. Invest in education. Education has to play a significant role in the future growth potential of the developed economies. Quality education will be the decisive factor in protecting and increasing GDP per capita. It is also the foundation of social mobility and a precondition to fully utilising the innovative capabilities and entrepreneurial talent of a society's members. For both reasons, it needs to be another key target of social investment.

7. Reinvest in the asset base. For more than a decade, the developed economies have reduced investments in public infrastructure and productive assets. World-class infrastructure is an important precondition for economic development and national competitiveness. Over the past few decades, Western multinationals have used their free cash flow mainly to invest in developing economies. Now that these investments are paying off, it is time for them to reinvest in the efficiency of production sites in their home markets and work off the investment backlog. Governments need to encourage private investment.

8. Increase raw-material efficiency. Pursue alternative-energy technologies. Although almost half of new power capacity added worldwide in 2011 was in renewables, fossil fuels still contribute around 80% to the total power generated.55 And with the discovery of new techniques for exploiting fossil fuels--take, for example, the shale-gas boom, which may turn the US into a net exporter of energy--it will be tempting to slow the transition to renewables. But such solutions will only be temporary.

9. Cooperate on a global basis. There is a risk of descending into vicious circle of beggar-thy-neighbour economic policies leading to much lower growth and slower improvement of living conditions worldwide.

This will involve supporting economic restructuring in the developed world. The creditors have to help the debtors pay back their debts. This will require the deficit countries to run a trade surplus and the former surplus countries to run a deficit. The emerging economies need to adjust their business model, focusing less on export-based growth and more on domestic consumption. These countries might also support economic adjustment in the developed economies by participating in efforts to reduce the debt overhang in an orderly way through restructurings and redemption funds.

10. Boost innovation. It must be made easier for a growing and highly productive workforce and for engineers and technologists to innovate, and for entrepreneurs to start new businesses.

A woman wearing a mask looks across the Pudong on 16 January this year

Source of picure: Zuma/Rex Features

By John Richardson

A DISPUTE between state-owned refiners Sinopec and PetroChina and environmental regulators serves as a good example of the difficulties China faces in reforming its growth model.

The debate about the environment is at the top of the political and economic agenda as a result of Beijing's smog crisis.

China's new leaders have to get this right.

"Heavily regulated fuel prices have discouraged Chinese refiners from producing cleaner diesel, as the higher costs can't be passed on to consumers," writes the Wall Street Journal.

"Meanwhile, trucks account for almost one quarter of China's vehicles but contribute a disproportionate share, almost 80%, of vehicle particulate matter.

"In one example, the Finance Ministry and Chinese refiners are deadlocked in negotiations over subsidies to help offset the higher costs of upgrading and operating refineries that produce cleaner diesel fuel, according to Gong Huiming, transportation director at the Energy Foundation, a nonprofit that focuses on U.S.-China energy issues."

If fuel prices were completely liberalised, thus motivating Sinopec and PetroChina to produce cleaner diesel, any reduction in public anger over the environment could be wiped out by increasing protests over more expensive fuel.

The majority of Chinese citizens earn less than $10 a day and when you are poor, you spend a higher proportion of your income on fuel and food then when you are rich.

And so, while China might make its middle class netizens a great deal happier if it tackles environmental problems, it could anger its much bigger constituency of low income earners if fuel costs increase.

Also, can Beijing successfully force the state-owned enterprises (SOEs) in general to clean up their environmental act? (it is unfair to just single out the refiners. They strong argue, by the way, that they have spent a lot of money upgrading their refineries to meet higher fuel standards.)

The SOEs are powerful political constituency because of their overarching role in the economy.

Thus, what they say will continue to count and they are likely to strongly resist implementation of better environmental standards.

"Handling China's state-owned companies big and small will be a challenge to any effort by the new Chinese leadership under Xi Jinping to reform the economy," continues the Wall Street Journal.

"While they compete for capital and resources with the private sector, they are also major employers with politically connected leaders and often function as an instrument of Beijing's policy goals, giving them tremendous political sway."

By John Richardson

The end of the eight-week long bull-run in China's purified terephthalic acid (PTA) pricing might well indicate a wider problem about to beset other petrochemicals: Reality undermining the positive sentiment of the early part of this year.

"PTA prices surged by 10% from early November to early January, mainly led by a strong uptrend in PTA futures (futures contracts on China's Zhengzhou Commodity Exchange)," wrote Becky Zhang, senior ICIS pricing PTA and mono-ethylene (MEG) editor for Asia, in her 18 January report.

"The downward correction in PTA futures that began on 8 January has dampened market sentiment and discussion prices in the physical market," added Becky.

One of the reasons for the dip in the market is buyers retreating to the sidelines ahead of the Chinese New Year, which falls on 10 February.

But the recovery in PTA, in petrochemicals prices in general, in oil prices and in stock markets, has largely been driven by historic economic data: Better purchasing managers' indices, exports and GDP growth etc for China and the US for December and Q4 2012.

The retreat to the sidelines in PTA could, therefore, also reflect:

*Concerns about tighter labour supply and higher wages post-CNY that might well further squeeze the margins of China's textiles and garments manufacturers, resulting in more factory closures.

*Higher environmental compliance costs, and again factory closures, as China's new leaders respond to rising anger over pollution.

*Worries over the strength of textile and garment exports to the West, as a result of economic problems in the US and the Euorozone.

*A problem specific to the polyester chain: Greater substiution of cotton for polyester due to cheaper cotton. Cotton prices fell by 20% in 2012, but have recently recovered as a result of the mini commodities bull run. However, the recovery is not expected to last because of record-high stockpiles.

*The imminent start-up of large amounts of new PTA capacity in China, which was built on the assumption that the future would largely be the same as the past. "Asia's PTA capacity is expected to increase by 12m tonnes/year in 2013, which will outstrip expected polyester expansion of around 8.7m tonnes/year," added Becky, in this ICB article. "Overall PTA operating rates are likely to fall further to 69% in 2013 with the 24% increase of capacity, despite 8% demand growth from the polyester sector. China will see five projects and 10m tonne/year of PTA capacity addition in 2013, increasing its total capacity to 38m tonnes/year by the end of 2013."

In the past, the Chinese government prioritised job creation in low-value manufacturing plants in the country's southern and eastern provinces. This was absolutely essential for social stability because of the demographic dividend of a rapidly increasing working population.

But now the working population is in decline because of the one-child policy.

Tight labour markets mean that the government doesn't have to worry if low-value factories close down because displaced migrant workers will easily find jobs elsewhere, often back home in the countryside.( As part of the effort to narrow the gap between the rich and poor, more government money is being on rural communities.)

China's priority is, instead, to promote higher-value manufacturing as it tries to escape the middle-income trap.

The focus is therefore on energy efficient, environmentally compliant manufacturers making, for example, higher-value technical textiles and fashion garments, rather than producers of cheap shirts and blouses etc.

Even if lost demand for PTA and polyester in China eventually re-appears in inland China, and in other countries such as Vietnam and Bangladesh, where labour costs are lower, sales will decline in the short term.

Sorry for the corny headline; we couldn't resist it.

By John Richardson

THE argument that the switch to natural gas from coal and oil is good for the environment has been further undermined by reports earlier this week of the big increase in the amount of gas-flaring in the US.

When the blog visited the World Gas Conference in Kuala Lumpur, Malaysia, last June it felt very suspicious of the "isn't gas wonderful for reducing global warming" hype that dominated the event. We raised the concern over the rise in fugitive methane emissions as natural gas production continued to climb.

The focus has now switched specifically to the US and the 50% increase in flaring at the giant Bakken field North Dakota that occurred last year compared with 2011.

"Flaring in North Dakota increases by about 20% the greenhouse gas emissions resulting from the state's oil production, refining and transport compared with the US average," said the Financial Times in this article.

The volume of gas flared in the US as a whole has tripled in just five years and is now the fifth highest in the world, behind Russia, Nigeria, Iran and Iraq, according to World Bank estimates.

The photo at the top of this post, taken by NASA's Suomi NPP satellite, shows the glow being emitted from hundreds of flares at the Bakken formation.

The picture compares the Bakken glow from space with those from Chicago and the twin cities of Minneapolis-St Paul.

(Apologies for the blurriness of the picture. Anybody reading the post in Bakken is likely to find the image even more blurry than the rest of us, as the smoke could well be in their eyes.) 

The reason for increased flaring at Bakken and other fields is the shale gas Ponzi scheme, which has reduced gas prices to record lows.

Because gas is so cheap, producers are being forced to waste hydrocarbons.

From a national perspective this seems an almost criminal waste of resources.

"Oil companies at the heart of the US shale oil boom are burning off enough gas to power all the homes in Chicago and Washington," adds the FT. 

As long as gas prices remain where they are now, investment in extra storage and pipelines needed to reduce flaring is unlikely to occur.

What does this mean for the petrochemicals business?

Longer term, gas prices seem likely to go up as the financially under pressure US shale gas industry consolidates.

The glas flaring row could more immediately exert further environmental pressure on gas producers and petrochemicals companies.

Ultimately though, milllions more jobs will be created by the US energy boom, provided it is combined with education and immigration reform, and investment in better roads, rail and other infrastructure

Another key element for the success of re-shoring will be manufacturing new types of finished goods, and adapting existing products, for an ageing population.

We therefore think that the US general public is likely to accept the overall environmental cost of the shift towards energy independence.

Wall Street rounding up investors?

Source of picture: Rex Features

In a guest blog post, Joseph Chang, the global editor of our magazine, ICIS Chemical Business, echoes our own concerns that it is getting very frothy out there. The "this time it will be different" school of thought sems to be controlling the sentiment of the US petrochemicals industry.

By Joseph Chang

US petrochemical companies and Wall Street analysts are getting more bullish on the outlook for the US petrochemical sector.

Buffeted by widening margins on low natural gas liquids (NGLs) feedstock costs as a result of the shale gas boom, and a tightening market, Dow Chemical CEO Andrew Liveris sees a "double peak" in the cycle before the flood of capacity in the form of new worldscale crackers comes on in 2016-2017.

This is not the traditional meaning of a double peak consisting of a peak followed by a dip and then another peak - rather a doubly good peak!

And "supercycle" is once again entering the Wall Street lexicon, as Morgan Stanley analyst Vincent Andrews sees the "potential for an ethylene supercycle in the 2014-2016 timeframe".

This would benefit large ethylene players in the US such as Dow, LyondellBasell and Westlake.

Few would disagree that US shale gas is a game changer, [perhaps not?] and it looks like there could be more upside in these stock prices.

But especially in a cyclical business, beware "game changers and paradigm shifts". Too many players shifting in one direction can lead to extreme swings.

By John Richardson

THE US petrochemicals industry is battling hard to block an explosion in liquefied natural gas (LNG) investments that they fear would result in a rise in ethane, propane and butane feedstock costs.

Andrew Liveris, CEO of Dow Chemical, raised this issue in December, but the pressure from the industry on legislators responsible for approving LNG projects now appears to have been stepped up. Peter Huntsman, CEO of Huntsman, has now joined the fray.

Overall gas markets could tighten if a substantial number of US LNG projects go ahead, thus pushing up the cost of raw materials for steam cracking, the petrochemical industry argues.

In addition, LNG exporters might find value in leaving ethane in shipments in order to increase calorific values. Some customers, such as those in Japan, have a preference for "wet" LNG, which contains a small percentage of ethane.

Petrochemical companies are very concerned about protecting margins that have soared thanks to the shale-gas dividend.

For instance, Dow Chemical has reported a $413m (€306m) decrease in purchased energy and feedstock costs in Q4 last year, compared with the same quarter in2011, thanks to the shale-gas boom.

ExxonMobil saw a 76% increase in Q4 2012 chemicals profits, largely thanks to higher margins on cheaper raw materials.

LyondellBasell's Q4 profits were 68% higher for the same reason.

But how likely is it the US will see a flood of LNG investments that will tighten the gas market?

Some 246m tonnes/year of LNG capacity is being planned in the US, 152.8m tonnes/year of which have firm start-up dates, according to ICIS data.

Peter Voser, CEO of Shell, thinks that only around 50m tonnes/year of  LNG capacity is likely to built in the States. 

And Toledo Ohio-based Teo Consultancy, in this article in the Oil & Gas Journal, contends that the viability of many of the LNG projects is very much up in the air.
The above chart rates several of the US projects based on structural and financial advantages or disadvantages.

And the consultancy also writes: "The projected financial performance of proposed US LNG export plants supports the building and commissioning of at least a few of them. The proposed plants, however, face large risks. Potential supply-demand shifts in both the US and destination markets could result in price shifts much greater than the 10% used in this article's sensitivity analysis.

"Competitors can also act to damage the financial viability of proposed US LNG plants by, for instance, changing their pricing approach so that US exports will no longer be attractive. The success of such defensive strategies will depend in part on growth in global demand for natural gas in comparison with growth in supply outside the US.

"The extent to which China and India shift from coal towards natural gas will play a large role in determining the future supply-demand balance. China depends on coal for about 70% of its energy requirements, and India on coal for more than 50% of its. In contrast, natural gas only meets about "4% of China's energy requirements and 11% of India's, according to the International Energy Agency's 2012 World Energy Outlook.

"Neither country is likely to implement energy policies that will put economic growth at risk, making a shift away from coal towards natural gas likely only once an adequate supply of gas is economically available. Any major shift from coal towards natural gas therefore will be a reaction to, not a driver of, the supply-demand balance.

"Proposed US LNG plants also face currency-driven risks. A major appreciation of the US dollar would damage prospects for the proposed plants, especially with respect to the other major countries in the Organization for Economic Cooperation and Development (OECD). Europe's ongoing financial crisis increases the likelihood the euro will depreciate against the US dollar.

"Japan would prefer the yen also depreciate against the dollar, given the structural challenges that country faces in light of an ageing and shrinking population (our italics and emphasis) and continued dependence on exports. By contrast, however, the US dollar will likely depreciate against the major non-OECD currencies, including the Chinese yuan, as these economies continue to develop."

And what goes for LNG projects goes to what we fear could be a headlong rush into an excessive amount of petrochemical investments in the US: The global economic consequences an ageing and shrinking population.

By John Richardson

XI Jinping, who formally became China's president last week during the National People's Congress meeting, faces enormous challenges.

Life is, for example, pretty grim for hundreds of millions of people in China.

Many have lost out on the country's "economic miracle" because a hugely disproportionate share of the country's wealth has ended up in the hands of a poor, often corrupt, elite at the top of Chinese society.

Thus, supported by demographics that have swung in their favour, factory workers are no longer prepared to accept poor wages and bad working conditions. They are now much more willing to down tools.

As for the middle class, life, whilst economically a lot better, is blighted by food and air pollution (and, of course, this applies to the poor as well!).

Just imagine bringing up your kids in a world where you worry every day that they might be breathing in noxious air and eating contaminated food. OK, your apartment might have tripled in value since the early 2000s, but what's the point of money when you cannot guarantee the safety of your children?

As countries get richer it always happens that the quality of life becomes as important as material wealth.

What is different in China is the size of its middle class, or more accurately the middle income proportion of its population, and the presence of the Internet. The Internet enables public dissent to spread far more quickly than in the past.

Maybe the biggest of all of China's problems is the end of the demographic dividend, which we have already referred to above.

The slide at the top of this post neatly summarises the economically dangerous consequences of China's one-child policy. As you can see, China falls into the same category as only one other country, Russia, in being both poor and old at the same time.

The great news is that Xi shows every sign of recognising all the difficulties. We wish him, and his colleagues, every success.

China has done it before - i.e. the economic transformation achieved by Deng Xiaoping, which lifted hundreds of millions of people out of poverty. This was a colossal achievement.

Let's hope it can do it again.

Source: ICIS Chemical Business

By John Richardson

SEVEN grassroots crackers are now being planned in the US, along with numerous ethylene derivatives facilities (see the above table).

The mood at last month's the 38th American Fuel & Petrochemical Manufacturers (AFPM) International Petrochemical meeting (IPC) in San Antonio, Texas, was incredibly buoyant on record current margins for ethylene derivatives and the prospect of sustained strong profitability.

To quote Ronald Reagan, it might seem as if it is once again "Morning in America", as abundant domestic energy supply could also prompt a wider manufacturing recovery.

Returning to petrochemicals, a UK-based chemicals company, in dismissing claims to the contrary, said: "The ethane and propane supply is there in abundance and the economics will work to get it out of the ground. I am convinced."

Such is the confidence that overseas companies are queuing up to get in on the US feedstock act, as my ICIS colleague Joseph Chang reports.

For instance:

*Japan-based Idemitsu and Mitsui Chemicals have already signed an ethylene offtake agreement with US-based Dow Chemical as Dow builds its 1.5m tonne/year cracker in Freeport, Texas, by 2017.

*Idemitsu and Mitsui will build a linear alpha olefins (LAO) plant and take ethylene from Dow's new cracker. In turn, Dow will buy some of the LAO for use in its performance plastics business.

* South Africa-based Sasol is building a $5bn-7bn (€3.9bn-5.5bn) cracker complex in Lake Charles, Louisiana, next to its existing operations. Downstream from its 1.5m tonne/year cracker, the company just announced plans to build a 420,000 tonne/year low density polyethylene (LDPE) plant by late 2016.

The implications of the US shale-gas boom are also extending beyond the shores of the US, as another of my ICIS colleagues, Will Beacham, points out in this article.

He writes: The 15-year deal by INEOS to export ethane from the US east coast to Europe is the possible start of a global market for ethane, believes Booz and Company principal Jayant Gotpagar.

As an Indian aromatics trader told the blog, "One wonders how Asian petrochemical companies, which are based on naphtha, are going to compete."

Hence, there is also talk about US ethane being moved all the way to Asia.

But still we worry that investment manias, such as the great US railways mania, have a somewhat chequered history, and this has the feel of an investment mania where euphoria and crowd pyschology can impair judgement.

The crucial issue here is demand. Keep your fingers crossed and hope doesn't seem to be the best of strategies. 

Source of picture: Wikispaces.

By John Richardson

CHINA has as many as 400 "cancer villages", with many of the cancer clusters being blamed on the chemicals industry.

Much of the nation's countryside - the source of China's food supply - is contaminated with toxic chemicals, it is claimed.

Experts estimate that there has been an 80% increase in cancer rates compared with 30 years ago, when the country's economic reforms began.

People are becoming ever-more angry about pollution, as we discussed during our recent trip to China.

The anger we focused on was over contaminated food, water and air in Beijing and Shanghai.

But there is plenty of evidence that the anger also extends into the countryside where incomes are also on the rise, as China tries to narrow the gap between its wealthier urban and poorer rural areas.

The old bargain of "we will give you jobs and lift you out of poverty, and so accept a bad environment as the price that needs to be paid" no longer seems to be working across many regions of China.

Hence, Li Keqiang, in his first speech as prime minister, said on 17 March that he was "depressed" by the noxious pollution shrouding Beijing.

Amazingly, (can you really imagine any Chinese leader saying this ten year or even five years ago?) he encouraged the news media and the public to hold him accountable should his government fail to clean up China's contaminated water and food supply.

"Poverty and backwardness in the midst of clear waters and verdant mountains is no good," he said, "nor is it [good] to have prosperity and wealth while the environment deteriorates."

And in February, the environment ministry for the first time admitted the existence of cancer villages.

The ministry said that widespread production and consumption of harmful chemicals forbidden in many developed nations were still found in China, according to the BBC. 

"The toxic chemicals have caused many environmental emergencies linked to water and air pollution," the ministry was quoted saying in a report.

The ministry went on to acknowledge that such chemicals could pose a long-term risk to human health, making a direct link to the so-called cancer villages.

"There are even some serious cases of health and social problems like the emergence of cancer villages in individual regions," the report continued.

An accountant friend of the blog says that environmental balance sheets are not a real concept, just a nice woolly theory.

Maybe they should become a firm concept, bolted into law, for domestic chemicals companies and overseas chemicals companies that export to China.

Pro-actively accepting responsibility now, rather than waiting for Beijing to legislate companies out of chemicals markets in China, is surely the right approach.

And, as we have discussed before, chemicals companies have a huge opportunity to be part of the solution, rather than the problem, by helping China clean up its water, food and air.

By John Richardson

CHINA might well be in the midst of deflation caused by overcapacity in some chemicals, and in many other industries as well, but the longer-term strategic direction of reducing dependence on imports doesn't appear to have changed.

An indication of this was this story from my colleague Lilian Hua at ICIS. She writes that eight propane dehydrogenation (PDH) facilities with a total propylene production capacity of 5.36m tonnes/year are being built across the country (see the above table).

Assuming all the projects start-up as scheduled, China's propylene output will be able to cover 75% of its domestic requirement, industry sources said.

Nine further PDH projects, which will be able to produce 4.74m tonnes of propylene, are also reportedly being planned.

Staggering - and, of course, this doesn't take into account the effect on import volumes of propylene derivatives, most importantly, polypropylene (PP). The blog will investigate what this could mean for PP and will report back in a later post.

It is potentially a similar story for butadiene, which we will also cover in a later post.
Projects on paper, however, often don't materialise, as everyone knows.

Supporters of overseas investments , which have been partly justified on continued big deficits in China, will also argue that even if most of the PDH plants are built, they might not run. People will no doubt ask: How will the economics of importing propane into China compare with local propane supplies into the many PDH facilities being planned in the US?

But we only have to look at the great uncertainty surrounding coal-to-olefins projects to realise that making complacent assumptions is extremely risky.

Many coal-to-olefins projects don't make environmental or economic sense in the Western context. That was the consensus view of delegates attending the ICIS Olefins Conference in Amsterdam in February.

However, on our recent trip to Shanghai we heard another view. It was that:

*The environment doesn't matter as much in Western China, where most of the coal-to-olefins projects are located. This is provided, of course, that enough water can be found for these water-intensive investments. Thus, even though China's new leaders are paying more heed to environmental concerns, the priority out West may remain economic development.

*Beijing stipulates that 50% of the coal output of the Western provinces has to be converted into value-added derivatives before it can be sold elsewhere in China. Thus, making the coal into ultimately polyethylene (PE) and PP fulfils this criterion.

China will continue to do what suits China, and not what suits overseas petrochemicals companies.