Asian Chemical Connections

Paul Cherry of Basell gave an excellent paper at the recent ICIS Olefins Conference - Download file
Paul offers some hints on how to survive the next downturn, and provides some sobering predictions on operating rates.
I bet that after 2009-10, or whenever the next downturn arrives, South Korea, Taiwan and Japan will further restructure. And what about Thailand? Is it building too much capacity based on the mistaken belief that it can become a major finished-goods manufacturing hub?
And as for China, its dominance will grow and returning a profit from China will not become any easier.

A huge amount of petrochemical capacity - some $12bn worth - is being built in Thailand, way in excess of the quantity added before the Asian financial crisis.
This is all predicated on Thailand becoming a manufacturing hub for Southeast Asia with, for example, huge ambitions to grow auto production.
But can Thailand attract the FDI it needs for this industrial growth, given lack of confidence in the government? If it fails to attract this FDI, then most of its new petrochemical capacity could end up flooding overseas markets, just as in 1997-98.
The latest blow to the credibility of the government is the potential collapse of a Thai-Japan Free Trade Agreement due to pressure from environmentalists.

The collective sigh of relief was almost audible late last week when the Fed cut its discount rate - the rate banks charge each other for lending.

Action from other central banks, including the European Central Bank, could follow this week. Analysts also rate the likelihood of the Fed cutting its formal interest rate at its meeting next month at 50 per cent or more. This is the rate charged to companies and other non-bank borrowers.

But still, this credit crisis is not going to away that easily. See more detailed analysis below, but in short here, the implications could be:

*A weaker Chinese economy. Roughly one-third of China's GDP is dependent on exports and if the US goes into recession, this is serious. Many overseas chemical projects have been justified by estimates of persistently strong demand from China for imported chemicals that will be re-exported as finished goods. Sales of locally made chemicals would, of course, also suffer

*Unfunded projects backed by smaller private companies being shelved.

But a lot of capacity in the Middle East and China is too far advanced to be cancelled. In the Middle East, many of the projects already under construction might come on stream bang on time because the producers there can make money in any market conditions. Projects under construction in China start up on schedule because the government wants to gain greater independence from imports.

Let's hope this crisis goes away, but if it doesn't why on earth didn't the supposedly smart people who run the global financial system realise the dangers? Joseph Stiglitz, a genuinely smart guy, has been warning for years about the risks, which he outlines in this excellent article

I sincerely hope not, but all the signs are there because of:

*A financial crisis which nobody again saw coming, this time with global implications

*What could prove to be too much spending on new equipment and capacity. This time high equity prices have paid for these investments rather than US dollar-denominated bank loans, as was the case in 1997.

The fundamentals are still strong, as today's article from ICIS news on share-price collapses points out. Asian demand is at much higher levels now than 11 years ago.

But the power of sentiment should not be underestimated.

It's too early to read the long-term effect on petrochemical pricing. More volatility seems certain with sentiment driving shifts in pricing on every piece of negative or positive economic and stock market news.

Lower feedstock costs on cheaper oil will also play a role, but as the extended article below points out, the impact on the real economy will take time to assess. It is this impact that will set the long-term direction and determine whether we the downturn has, finally, arrived.

As oil prices keep on falling, it might be tempting to forget the big picture. I had another frustrating conversation yesterday with a contact who believes that there's nothing to worry about on crude (it was all downs to speculators, he said) and so we could carry on as normal once the economic crisis is over.

Nonsense. If his views are prevalent in his company, his company will eventually be out of business.

Just as an example of how the nature of demand could change, see this article from the Economist about green buildings.

Formaldehyde demand could fall as could demand for the chemicals used in sealants ad adhesives.

But opportunities for increased sales of plastics could exist in "vacuum" windows.

A sustained spell of low oil prices might damage the push towards a sensible energy future.

The crisis will also make it harder to find the money for research and development of new products to provide for this future.

The old saying "there's no such thing as a free lunch" has at last been proved true with the virtual collapse of the global financial system - and with it, quite possibly, the world's economy.

But for the last decade or more, the chemicals industry, like every other industry, gorged itself on an easy credit-fuelled property boom that's swept the globe.

In Singapore until very recently, real estate was red hot. Surprise, surprise, oversupply beckons, the market is flat and a pricing collapse cannot be ruled out.

Property bubbles come and go and so cyclical downturns were inevitable in Singapore, Thailand, India, China and Australia.

But perhaps the long-term fallout of the crisis - a much more prudently managed banking sector - might have negative implications for chemical demand-growth multiples over GDP.

As the problem rests mainly with US lenders, though, it's hard to say whether credit will also become much harder to obtain for good in Asia and other emerging markets.

But the appetite to lend money to average and below-average earners at high multiples of annual incomes - and with incredibly low "teaser" interest rates - will at the very least take a few years to recover.

Mohamed El-Erian, co-CEO and co-chief investment officer for Pimco, analyses the implications of this tighter credit climate in today's Financial Times.

It is worth asking your friendly neighbourhood consultant or in-house researcher whether any of their growth scenarios take into account the possibility of much tighter lending conditions for many years to come.

As the American Chemistry Council points out, $16,000 of chemicals are consumed when an average home is built in the states.

On a global basis, this alone means an awful lot of demand without counting consumption by real estate in other countries.

"Nobody can see until the end of the month - never mind into the third quarter," commented an olefins trader recently.

"The reason is that very senior managers are too busy micro-managing everything, from getting involved in trying to track commodity chemical price direction to insisting on signing off every expenditure over a few hundred dollars.

"The problem with these senior guys when they track markets is that they are so out-of-the-loop - assuming that they have ever actually been in the loop - that they don't know what they are doing."

I heard of one big company where the CEO has even insisted on signing off travel authorisation to next week's APIC conference in South Korea.

In these days of tight credit and collapsed sales, it's understandable that much tighter control on spending is essential.

And during the boom years, can we all honestly say that every single trip we made was entirely commercially justified - and that we were always sufficiently foused on the bottom line to get maximum value out of each trip? Look back at your old expenses forms and count up the number of genuine "drinks with Mr Kim" entries.

It will be interesting to see how the lessons being learnt today will be remembered when the economy has fully recovered.

But from a HR perspective, a tough sign-off regime needs to be well-communicated.

So does the senior guys tracking shifts in chemicals pricing - whether competently or incompetently - otherwise the workers on the ground are likely to become demoralised.

They are unlikely to be able to leave in this current climate, but will surely perform far worse if they feel their opinions are being ignored for no good and well-explained reasons.

Off-the-record, of course, how does your company measure up?

And did you fiddle your expenses during the good times?

....what do these environmental issues mean for Thailand as an investment destination?

The Map Ta Phut refinery-petrochemicals complex

Source of picture: Pattaya News

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

Here's yet another unexpected project delay that could prop up markets in the fourth quarter.

The Thai Central Administrative Court decided to halt construction of 76 projects at Map Ta Phut on environmental grounds last week.

The long list of projects includes new crackers and derivative projects by PTT and Siam Cement/Dow Chemical.

PTT was due to have started commissioning a new 1m tonne/year cracker complex in the fourth quarter, while Siam Cement and Dow Chemical's 900,000 tonne/year cracker and downstream plants were scheduled to commence operations next year.

Both of the Thai companies have issued statements that the projects are likely to be delayed, and PTT has even decided to delay a maintenance shutdown at one of its crackers from October to January 2010.

Thailand is already a net exporter of PE and PP and the new projects would have increased the country's export burden.

One local newspaper report said that projects could be delayed by a year, although the two companies have not yet declared revised start-up dates for their projects.

PTT issued a statement that it was working closely with government authorities to resolve the crisis and that it had submitted a petition to a higher court. The prime minister has already asked the industry ministry to appeal against the ruling.

The Bangkok Post reported that the appeal would be made in two parts.

The first section would ask for court permission to allow industrial projects that have no impact on the environment to continue, while the second would seek a temporary halt to projects that had problems with environmental impact assessment (EIA) studies. 

The story did not identify projects that had EIA problems.

There is no doubt that the government will have to act fast. But it faces a tough task of balancing public opinion and expectations while protecting the interests of local and foreign investors.

Public opinion - seen in some of the comments that the Bangkok Post report has drawn - will be difficult to ignore.

It might be even harder to address growing concerns about Map Ta Phut as an investment destination in Southeast Asia.

This latest crisis in Thailand is also a fresh reminder of the growing power of the people in many parts of Asia to influence chemical-project activity.

Protests against construction of mega projects on environmental grounds are getting louder and louder.

"Take it from me, peripheral vision isn't all it's cracked up to be, especially if you want to get a decent annual bonus...."

Source of picture: www.whipnspurs.co.nz

Here's a rant for Tuesday - with thanks to Paul Hodges for informing some of the thinking (I'd like to lay credit to certain parts of this...)

Purchasing managers are professionally required to wear blinkers. All they care about is making sure that they are ahead of the game because of the way their performances are measured.

So up until Q4 2008 they ignored headlines such as "US auto demand slumps on surging gasoline costs and slowing economy" and "western house prices plummet on sub-prime mortgage crisis."

Oil prices seemed to be on the forever-up and liquidity was abundant. The result was purchasing in big volumes ahead of anticipated further price rises until the great unravelling post-Lehman Brothers.

Senior strategists - whose job it was to worry about the big picture - were also wearing blinkers, deluded in the belief that 2006-07 demand levels would go on forever.

Cracker operating rates were going to remain comfortably above 80% during the coming down cycle, was the consensus view in the first half of last year.

Now the industry is going to have to live with global averages of between 60-70% over the next few years.

The chemicals industry has lost three years of demand growth as global production is now back to early 2006 levels. It is unlikely to budge much in a favourable direction until at least 2011.

The reason is that real western growth, minus all the froth of commodity and equity markets, is going to remain weak on unemployment and high personal debt problems.

Another concern is unwinding government subsidies.

Too many people might have been misled by Chinese imports over the last 7-8 months.

The strength of these imports wasn't sustainable and was due to temporary factors that have now come to an end.

Banking on China as the leader of a global recovery is utter nonsense when you look at the country's low per capita chemicals consumption and its heavy export dependency.

Any Northeast or Southeast Asian producer high on the cost curve is likely to find it harder to penetrate western markets in 2010.

How can these producers - when they import crude oil - export, say, PE to Europe at fair market prices in the face of much-stronger Middle East competition?

Trade lawyers should do very well from anti-dumping cases in 2010.

This is a protracted supply-driven U-shaped downturn, and we are only just getting towards the bottom of the U.

Lots of Middle East capacity has been delayed - and the next big wave of Chinese start-ups is only just beginning.

Studying the tone of Q3 results statements will be a good indication to what extent senior execs have taken on board this new reality (actually it's not that new - we've been waffling on about this on this blog for months).

I have been digging a little deeper into the Map Ta Phut issue and it looks like expectations of major delays to projects at the site were a little premature.

Construction has not stopped despite a ruling by Thailand's Central Administrative Court to stop work on 76 projects at the site. The ruling was directed at the government which has so far not asked companies to halt work as all the projects have received environmental clearance. The government has now appealed to the Supreme Court and Thai companies are also planning to approach the court.

Although work is ongoing companies may not receive permission to commission their projects if the issue is not resolved quickly. The first of the major projects due at Map Ta Phut is PTT Chem's 1m tonnes/year cracker. The company is still hoping to commission this at the end of the year though it is unlikely to run at full capacity until a new gas processing facility is brought onstream in first quarter of 2010. PTT Chem's plan is carry out a maintenance shutdown at one of its smaller crackers to divert feedstock to the new cracker during the commissioning period.

Pic source: Wikimedia Commons

Nobody is very clear on how quickly the government will be able to sort out the Map Ta Phut problem. I was told by one Thai analyst that anyone giving dates is surely bluffing. But he believed that it is likely to take months rather than years to work out a compromise.

The government is certainly under a great deal of pressure - investment, employment and GDP will be hit if projects at Map Ta Phut get delayed but at the same time it cannot afford to ignore the demands of the local people.

And what the people want is full implementation of Section 67 of Thailand's 2007 constitution. This guarantees Thai people the right to participate with the State in preserving the environment and stop any project or activity which may damage the environment unless it has been evaluated and approved by an independent body made up of representatives from private environmental and health organisations.

But the government has yet to form an independent body or pass a law that companies can follow while seeking environmental clearance for their projects.

It will certainly do so now which means that companies will need to carry out a Health Impact Assessment (HIA) study besides the Environmental Impact Assessment study (HIA). And this, in the words of the analyst, will not only take more time but will also be a tougher hurdle to clear.

As this updated table from my colleagues at CBI in China illustrates, cracker-complex delays in China have the potential to further stagger the arrival of new volumes into the market.

Chinanewcapacitytable.doc

This follows the widespread problems in starting up new capacity in the Middle East.

The 800,000 tonne/year Fujian Petrochemical/ExxonMobil/Saudi Aramco cracker is on-stream, but there have been operating issues with downstream PE.

The 1m tonne/year Sinopec/SABIC Tianjin cracker will undergo trial runs from 28 December and so commercial production won't be until H1 2010.

But the Dunshanzi complex, centred on a 1m tonne/year, was commissioned on schedule in September. The operating rate is reported to be 85% with product being sold across China.

2.56m tonne/year of capacity is due to start-up this year compared with the original 3.56m tonnne/year.

In Thailand, the new  400,000 tonne/year PTT linear-low density polyethylene (LLDPE) plant is due to start next week, but the 1m tonne/year cracker won't be on-stream until the end of the year/Q1 2010.

A new 300,000 tonne/year low-density polyethylene (LDPE) project is not due to be commissioned until Q3 next year, according to ICIS Plants and Projects.  

The start-up is being fed by ethylene from existing crackers, but it's not clear whether this will be sufficient to quickly achieve optimal rates

Further out, there appears to be some more good news for existing producers from China.

The 800,000 tonne/year Fushun cracker, originally scheduled for 2011, has been delayed to 2102. An associated refinery has already started up, but only preliminary work has taken place on the petrochemicals complex.

Wuhan - a Sinopec and SK Energy joint venture - has been pushed back from 2011 to 2012-13, as has the PetroChina-owned Daqing project.

There are also unconfirmed reports of operating problems at several Middle East complexes brought on-stream this year.

"I think an on-going problem in the Gulf Co-operation Council (GCC) region is going to be the shortage of natural-gas supply," said an industry source.

"Every summer, until this problem is resolved, you are going to see a big pull of gas into the power sector at the expense of petrochemicals."

He suggested that there might also be issues with stabilising production at several new gas-phased polyethylene (PE)  plants due to their scale.

Existing crackers in Iran are expected to continue to experience deep rate cuts in winter as gas is diverted for domestic and power-generation consumption. Iran has plenty of natural-gas reserves, but political difficulties have slowed down investment in extraction.

A Famous Ditherer

Source of picture: sarafinewordpress.com

Chasing higher oil prices and/or a response to the now long-running recovery in Chinese demand that's become sustainable?

Not wanting to sound too much like the start of a famous Shakespeare soliloquy, these are the questions that should be wracking everyone's brains as they try to figure out price rises, which continued last week.

Ethylene rose again and low-density polyethylene (LDPE) was up by $50 a tonne to $1,235-1,300 tonne CFR China, according to ICIS pricing.

The polyolefin was at $1,130-1,180/tonne CFR China four week. Click here for a graph showing the price history for all the PE grades since January last year - Olefin-PEprices.ppt.

But interestingly, while the sentiment in the China market was described as bullish due to stronger crude and second and third tier traders and distributors were stocking up, actual end-user demand was characterised by market players contacted by ICIS as weak.

This suggests stocking up ahead of the assumption that oil prices will go higher, even though the outlook for the next few weeks is mixed given recent negative reports over the US economy. 

It then comes down to the sustainability of the eight-month long rebound in demand from China. Head-scratching continues as to where all this stuff is going, more of which later this week.

Asian cracker operators, according to my colleague Peh Soo Hwee, ICIS pricing's ethylene editor in Asia, seem to believe its worth running hard for the time being at least.

"Some of the cracker operators, notably in Japan, had reduced production to below 90% in September-October, partly due to turnarounds at derivative plants," she said in a recent note to one of our customers.

"Most of them now expect to increase rates to close to 100% next month (November)."

"So far, with the exception of a few crackers in the region running at lower rates - Chandra Asri in Indonesia at 75% and South Korea's YNCC at 90% - the bulk of producers aim to keep ethylene production at 90-100% in November."

Supporting these decisions were improvements in margins last week. Ethylene margins rose for the second week in a row as a result of the pace of C2 price increases outpacing those for naphtha, according to the ICIS weekly Asian Ethylene Margin Report.

But still, October ended up as the worst month for ethylene margins since June.

PE margins also rose on a better spread between C2s and the polymer and improved co-product credits, according to our Asian PE Marging Report - also weekly. 

Again, though, overall margins were down in October over the previous month. Stand-alone players did better than integrated operators.

Plan cutbacks and/or sell November stocks early and you miss the potential of better returns. Some polyolefin producers sold October volumes earlier than they should have done because they expected prices to fall.

The flipside of the risk is being left holding overpriced inventory as oil prices fall and more new polyolefin capacities hit the market.

Nothing new in having to make these decisions, of course; the difference is the absence of any consistent and reliable patterns from all the data to support planning.

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

China's immense appetite this year for all petrochemicals has been puzzling many of us. This blog has been regularly asking questions and some answeres for the polyester and PTA markets were provided by YJ Kim of PCI Xylenes & Polyesters at the Indian Petrochem 2009 conference earlier this week.

Kim pointed out that preparatory work for the Shanghai Expo in May 2010 was a major demand driver. The budget for the Expo is twice that of the Beijing Olympics in 2008.

The Olympics is estimated to have created nearly 1m tonnes of polyester demand. So if you double the budget then surely polyester demand would be way above 1m tonnes.

If this is true for polyester I think it is also safe to assume that the Expo is also a major driver for polymer consumption.

Kim also observed that the a fall in transaction volumes at the Shaoxing textile market should not be interpreted as a decline in overall business as six more wholesale markets have sprung up in China, and there is even one in Xinjiang. The average daily trading volume at Shaoxing has fallen to 4-5m metres this year from a peak of 6m metres.

Here are a few other highlights from Kim's very good presentation.

• China's 2nd 10-Year West Development Plan will create another polyester boom. Production growth is likely to be around 7% for the next three years but will swing to double digit post 2011 once demand explodes in western China. Polyester production forecast for 2009 is 21.8m tonnes.
• Global PTA inventories are very low and the industry needs to build up stocks. In China, 18-21 days is the normal PTA stock level. But the market is currently living on less than two weeks inventory. If China rebuilds stocks by 500,000 tonnes over the next six months it could swing global operating rates by 2%.
• Firm PTA prices this year have been driven by a recovery in demand and involuntary production cuts due to shortage of paraxylene. PTA margins have been exceptionally strong this year
• China is likely to import nearly 6.5m tonnes of PTA in 2009 and would need to import around 6m tonnes annually for the next three years. The trade grid for PTA could change once China complete its antidumping investigation into PTA exports by South Korea and Thailand. A review has been completed but it appears that Korean and Thai producers are individually negotiating with the Chinese commerce ministry. If Korea is hit by antidumping duties it will be forced to look for new markets. India, the Middle East and Europe would be the likely targets. The Korea-EU free trade agreement is due to start from July 2010 which would allow for zero duty imports.

Reliance Industries has made an offer for LyondellBasell says an official statement released yesterday on the LyondellBasell website:

"LyondellBasell has received a preliminary non-binding offer from Reliance Industries Limited to acquire for cash a controlling interest in the company contemporaneously with the company's emergence from Chapter 11 reorganization.

"This offer is in addition to the previous non-binding equity financing proposals received by the company and represents a potential alternative to the initial plan of reorganization previously filed by the company."

This confirms months of rumours to this effect. According to an unnamed merchant banker quoted by the Times of India, Reliance would have to pay at least $12bn - double an earlier estimate by the Economic Times.

India could be playing a major role in the shift of basis chemicals ownership from West to East - along with the Middle East

After failing in its efforts to capture Innovene and then Dow Chemical's commodity petchems unit, this is Reliance's fresh attempt to move into the global top league. The ICIS top 100 places LyondellBasell at the No 4 slot of top chemical companies globally.

A marriage of the two companies would result in a formidable giant with an annual turnover in excess of $75bn, including Reliance's earnings from its growing oil, gas and refining portfolio. It would also create the largest PP producer and also a top player in PE and give Reliance access to LyondellBasell's profitable technology portfolio.

Reliance's offer is subject to due diligence and sufficient credit support. The company issued a very cautious statement: "This review is ongoing and there can be assurance of the outcome with respect to any of the opportunities under review."

Reliance, it appears, is evaluating other opportunities too in its core businesses.

LyondellBasell's statement confirms that Reliance had earlier placed non-binding equity financial proposals and the latest offer represented was a 'potential alternative to the initial plan of reorganization'.

LyondellBasell was the first petrochemical giant to stumble at the start of the crisis last year. And it looks like it could well be the first big ticket M&A deal in what promises to be a busy season ahead.

We have already heard of IPIC on the prowl for European and US chemical assets and then Mitsubishi Chemical confirmed that it is looking to acquire Mitsubishi Rayon for $2.5bn.

An investment banker said last week that it was only in the last few months that he has seen an interest in boards and ceos. Capital market conditions have improved substantially and money will not be a deterrent, especially for companies like Reliance which are already sitting on huge piles of cash.

Relaince's biggest problem in the past has been its conservative valuations which have seen the company lose out to other global bidders, except in a few instances (Trevira and Hualon). There are already reports of rival bids emerging for LyondellBasell from Chinese companies and private equity investors. And ICIS news reported last week that analysts believe that LyondellBasell would also be a good fit for IPIC.

So will Reliance change its mindset and be bolder this time?

The Thai Supreme Court's decision to uphold a September injunction halting development of $12bn of petrochemical and power projects could affect the on-schedule start-up of capacities of a large amount of petrochemicals capacity.

Note the word could because, despite the court ruling supporting claims by environmentalists about the impact of pollution at the site, PTT claims that most of its 25 petrochemicals projects will be unaffected by the verdict. The reason it gives is that the projects were granted environmental clearance before 2007 - when constitutional changes altered health and environmental rules.

Further - media reports say that former prime minister Anand Panyarachun will review the court ruling and make recommendations in the first quarter of next year.

In all, according to the reports, only 11 out of 76 projects at the site have been given the go-ahead by The Supreme Court.

The petchem start-ups that might be affected are as follows:

*PTT Polyethylene's 1m tonne/year ethane gas cracker, which was due onstream by the end of this year, according to a Thai industry contact who spoke to this blog. Downstream of the cracker will be 400,000 tonne/year of linear-low density polyethylene (LLDPE), 300,000 tonne/year of low-density polyethylene (LDPE) and 400,000 tonne/year of high-density polyethylene (HDPE), according to ICIS Plants & Projects

*The new Siam Cement/Dow Chemical complex centred on a cracker that will produce 900,000 tonne/year of ethylene and 450,000 tonne/year of propylene (the cracker will also produce 200,000 tonne/year of benzene). Also at the site will be a big new metathesis unit downstream of which will be a PP unit (currently checking the capacity). In addition, there will be a propylene oxide (PO) unit with a capacity of 390,000 tonne/year using Dow's proprietary hydrogen peroxide route to PO. This will be the first plant of its kind in the world and will not produce any styrene co-product. Start-up of the cracker, metathesis and PP units is due in Q2 next year and the PO unit in 2011, says ICIS Plants & Projects

*The PTT and LyondellBassel joint venture, HMC Polymer, which comprises a 310,000 tonne/year propane dehydrogenation (PDH) unit and a 300,000 tonne/year polypropylene (PP) plant. This plant had been due to start-up by August this year, the blog was told.

*The PTT/Asahi Kasei Chemicals joint-venture 250,000 tonne/year acrylonitrile project, due on-stream in Q4 next year, according to ICIS Plants & Projects. This will involve Asahi Kasei's propane route to PP. This would be the first commercial plant in the world to use propane rather than propylene as feedstock

News reports list chlor-alkali and vnyl chloride monomer (VCM) projects by Vinythai and a polyvinyl chloride (PVC) project by Thail Plastic & Chemicals as also being delayed. We are checking the details.  

According to The Nation newspaper, these are the 11 projects which were given permission to continue by the Supreme Court:

. Clean energy and product quality enhancement/Rayong Refinery
2. Gas recycling enhancement/HMC Polymers
3. Clean energy, oil vapour controlling unit installation/Star Petroleum Refining
4. Oil vapour controlling unit installation/PTT Aromatics and Refining
5. Air pollution improvement/Indorama Petroleum
6. Wastewater treatment improvement/PTT
7. Chlorine vaporiser and wet scrubber installation/Aditya Berla Chemicals (Thailand)
8. Tank relocation/Map t Tank Terminal
9. LPG/Brutene Depot-Wharf/PTT Chemical
10. Loading Arm Installation/Star Petroleum Refining
11. Petrochemical Depot-Wharf/Map Ta Phut Tank Terminal

A real head scratcher......

Source of picture: www/http://blogs.miaminewtimes.com

By John Richardson

Confused? Sorry, but so far we cannot be of much help bringing any precision to what the implications of Thailand's Supreme Court ruling will mean for the timing of petrochemical start-ups.

If you remember, last Friday we wrote about how the Supreme Court had backed the verdict of a lower court which had halted development of $12bn of petrochemical and power projects at the Map Ta Phut site (or should it be Mab Ta Phut?).

Note the word could because, despite the court ruling supporting claims by environmentalists about the impact of pollution at the site, PTT claimed that most of its 25 petrochemicals projects would be unaffected by the verdict.

The reason it gave was that the projects were granted environmental clearance before 2007 - when constitutional changes altered health and environmental rules.

Media reports said that former prime minister Anand Panyarachun would review the court ruling and make recommendations in the first quarter of next year.

That seemed clear as watered-down mud can be.

But then later the same day - last Friday again - PTT provided us with a list of 65 projects formally under suspension.

These include more projects than we had earlier listed - for example, bisphenol-A (BPA),  and polycarbonate (PC) expansions by PTT and Bayer respectively and polyvinyl chloride (PVC) and vinyl chloride monomer (VCM) expansions by Thai Plastic and Chemicals.

What remained unanswered was whether progress on the Siam Cement/Dow Chemical complex had been halted.

The complex includes 900,000 tonne/year of ethylene and 450,000 tonne/year of propylene (the cracker will also produce 200,000 tonne/year of benzene).

Also at the site will be a big new metathesis unit downstream of which will be a polypropylene (PP) unit (currently checking the capacity).

In addition, there will be a propylene oxide (PO) unit with a capacity of 390,000 tonne/year using Dow's proprietary hydrogen peroxide route to PO. This will be the first plant of its kind in the world and will not produce any styrene co-product. Start-up of the cracker, metathesis and PP units is due in Q2 next year and the PO unit in 2011, says ICIS Plants & Projects.

So we asked Dow to put the record straight.

Sadly, this was their statement today: "We are currently assessing the impact of the Court's decision. We are in full compliance with existing regulatory requirements and remain highly committed to ensuring that all of our projects fully comply with government regulations."

Perhaps nobody knows, in which case I am sure everyone would welcome a great deal more clarity.

By Malini Hariharan

I have been trying to get some clarity on what is happening at Map Ta Phut and what companies are planning to do.

Construction activity has not yet stopped despite the Supreme Court ruling last week which suspended 65 projects, says a PTT source. The government has yet to issue a notice to the companies. So it looks like prime minister Abhisit Vejjajiva has not acted on his plan to inform companies about the court order.

The situation is complicated. Most of the projects have received EIA approval and complied with all existing rules and regulations. Article 67 of the constitution asks for a health impact assessment (HIA) study to be evaluated by an independent body but that body has yet to be formed. A government panel, led by former Thai prime minister Anand Panyarachun, has been given the task of drafting new regulations and set up an independent body. The panel is now trying to accelerate the process and is likely to complete its task by the beginning of next year.

PTT's biggest concern is its No6 gas separation project which would provide feedstock to PTT Chem's new cracker. The cracker is not on the list of affected projects and can start at the end of the year. PTT Chem's plan is to carry out a turnaround at an existing cracker to divert feedstock to the new plant. PTT is also working on a plan to supply ethane from its No2 and No3 gas recovery plants where the company is due to complete a modification project by the end of the year. This project is not the list of 65 projects.

But the new cracker is unlikely to run at 100% until the No6 gas separation plant is commissioned.

PTT is also busy working out a strategy to ensure commissioning of this project in Q1 2010. One alternative being evaluated is asking the Central Administrative Court for a waiver as the project had already received EIA approval. This appeal could well be rejected as HIA is now needed. So PTT has also started preparing a HIA report which can be put up for approval once an independent body has been set up.

I was also told that another alternative under preliminary evaluation by PTT and Siam Cement is suing the government agency responsible for sanctioning their projects. "That is because the companies have done everything to comply with the rules; they have not done anything wrong," says the source.

By Malini Hariharan

Companies executing projects at Map Ta Phut in Thailand have finally received a notice from the government to stop construction work. The notice comes after the Thai Supreme court's ruling in early December to suspend 65 projects on environmental concerns.

Mitsubishi Rayon has confirmed it has stopped work at its 90,000 tonnes/year methyl methacrylate (MMA) joint venture project with the Siam Cement Group. A company source says the plant is almost 'built up' and they are still hoping for start up to take place as scheduled in the second quarter of 2010. But he admitted that there was no information on when work can restart.

PTT says that construction work at its No6 gas separation plant is nearly over and it is still discussing with government agencies on whether this project can be exempted.

The Thai prime minister Abhisit Vejjajiva reiterated yesterday that he would like to have new environmental rules by the end of the year. The deputy prime minister has also been assigned to work with the four-party panel, headed by former Thai prime minister Anand Panyarachun, in speeding up the resolution of complex legal issues.

The Bangkok Post reports that the panel has been asked to prepare its recommendations this week and forward them to the cabinet for consideration next week.

But not everyone is convinced in the government's ability to find a quick solution.

Chainoi Puankosoom, ceo and president of PTT Aromatics and Refining is reported to have expressed concern that "legal clarity will not be seen within the next twelve months due to the lengthy process involved". He would instead like a special framework that would allow affected companies to proceed with their projects

He said construction of most of the 65 suspended projects was 50-100% complete and also pointed out that suspension of construction work would not ease the pollution problem.

"It is going to take a lot more time to solve than people think," says a Bangkok-based industry analyst.

But how much more time is still not clear.

Meanwhile, I heard that the head of the four-party panel was confronted with an unpleasant smell on his recent visit to the Map Ta Phut industrial estate. He is now fully sympathetic to the plight of local residents.

The implementation of a zero-tariff regime in Asean from 1 Jauary 2010 has raised concerns among polymer producers in Indonesia and the Philippines about intense competition from Singapore and Thailand leading to a erosion in market shares.

Producers from these two countries are lobbying to defer or block implementation of zero tariffs. But a trade lawyer says the going will be difficult.

"I have heard that Indonesia is pushing for a postponement of the new duty structure. Even if the government agrees the customs department is not prepared as [new] forms are not ready," says one Singapore-based exporter.

But Edmund Sim, partner with Appleton Luff, points out that it would be difficult for Indonesia to renegotiate as the agreement has already been ratified. "It is pretty much impossible," he says.

Pic source: Fotopedia

"What is allowed under the free trade agreement (FTA) terms is for a country to suspend tariff concessions if it can be determined that increased imports have caused injury or economic damage to local companies. But in the history of FTAs this has very rarely been implemented. And even if this is put place it would be a temporary measure - say for a period of 3-5 years," says Sim.

The second option is to go for antidumping action.

"If the industry is worried about a flood of imports they can go in for this option by proving that pricing was unfair and that the local industry suffered material injury. This type of action is possible and can be extended for an indefinite period," says Sim.

But this is an expensive option because of high legal fees and it takes time to enforce. Companies also have to wait for a few months before they can initiate action.

"You have to build a record. You cannot say on 2nd January that there is dumping. You need time to build the case; usually 6-8 months is enough to get data to make a claim," he points out.

"The simple option [of raising import duties] ended when the FTA was signed. Now they have the safeguard option, which is untested, or antidumping, he adds.

Besides the Asean FTA, Indonesian media has reported that companies are also asking for a delay in the implementation of the Asean-China FTA, which comes into force from 1 January 2010.

There is a provision in the Asean-China FTA for a temporary delay in tariff reduction by reclassifying goods as 'sensitive' and 'highly sensitive' products. The duty elimination could then be delayed to 1 January 2015.

But the problem for Indonesia is that there are limits on the number of 'sensitive' and 'highly sensitive' products and the deadline for classifying goods was back in 2004, points out Sim.

It is also uncertain whether China and other Asean countries will allow Indonesia to deviate from the FTA.

"Either way, for Indonesia to delay tariff elimination will require some agreement by the other Asean members and China [in the case of the China-Asean FTA] otherwise Indonesia will be in breach of its legal obligations," says Sim.

By Malini Hariharan

There is some good news for chemical companies affected by the Map Ta Phut crisis. The Thai cabinet will ask the Administrative Court to remove 19 projects from the list of 65 projects that had been ordered to stop work.

PTT's No 6 gas separation project and PTT Chemical's phenol and polyethylene projects are among the lucky 19. A full list is available here.

In another major development yesterday, the Central Administrative Court has allowed construction to resume on a steel plant as the environmental impact assessment report for this project had been approved before the 2007 Thai constitution came into effect on 24 August 2007. It had also received an operating license prior to this date.

Abhisit Vejjajiva, the Thai prime minister, has said that five or six more may be given the go ahead as they fall in the same category. And he has also reiterated the government's commitment to find an early solution.

But Map Ta Phut is just the start of a bigger movement.

In this blog report, Srisuwan Janya, a lawyer fighting on behalf of Map Ta Phut residents, disclosed that he was investigating as many 181 projects all over Thailand.

Pic source: Nation Multimedia

"The whole country will have to change," he said. "From now on, industry will have to worry about the environment and take care of the people. The government will have to also be much stricter about this."

By Malini Hariharan

There is no light yet for companies whose projects have been suspended at Map Ta Phut. Last Friday, Thailand's Central Administrative Court rejected 30 petitions submitted by companies looking to resume work as their projects had received environmental clearance and would not create pollution.

"The outlook is not promising," says a Bangkok-based analyst. He is also not surprised by last week's court ruling. "Nothing has changed for the court to change its mind. All the petitions had information already seen by the court. The court wants companies to follow the constitution," he adds.

And article 67 of the Thai constitution requires health impact assessment studies to be conducted and approved by an independent committee.

The government is still struggling to put together the regulation to implement article 67 and also an independent committee.

Earlier this month, a four-party panel, headed by the country's former prime minister Anand Panyarachun, prepared and submitted a new regulation which was approved by the cabinet. And a 19-member coordinating committee was also appointed to advise the government on approval of projects at Map Ta Phut.

But an environmental group, Stop Global Warming Association, is now seeking to block implementation of the regulation and has filed a petition with the administrative court. The NGO says that no public hearings were held while drafting the regulation despite the fact that it would affect a large number of people and organisations.

Pic Source: Pattaya Daily News

Affected companies are still trying out all options to resume work at Map Ta Phut. Siam Cement said in a statement today that it has already started to comply with the new regulations invoked by the state in accordance with article 67. The compliance process is expected to take between 8-12 months, it said.

And Siam Cement is also trying to "expedite a conclusion through consultation and coordination with official agencies concerned as well as investors to find solutions."

Eighteen projects run by both Siam Cement subsidiaries and its joint-venture companies are among the 64 projects affected by the Supreme Court's order to halt construction. The investment cost of these 18 projects is worth over Baht57.5bn ($1.74bn).

Siam Cement did not identify the 18 projects but according to one industry source the company's joint-venture cracker, hdPE and PP projects are not on the list but a lldPE project is stuck. The blog has not yet been able to confirm this with the company.

Meanwhile, PTT Chem has started its new 1m tonnes/year cracker and expects to achieve on-spec production by the end of this month, reports ICIS news. But sustaining full operations at the new cracker would depend on when parent company, PTT, is allowed to commission its No6 gas separation project at Map Ta Phut.

A PTT source says that the project was 99.8% complete at the end of last year and that construction work is almost over. But after last week's court ruling the company is not able to provide any clarity on when work can resume at the project.

PTT, says the source, plans to work with government agencies and ask them to file a fresh petition in the Administrative court. It is also evaluating approaching the Supreme Court directly. And it also working on a health impact assessment study which should be ready for evaluation by April.

"In the worst case we are looking at a one year delay in the commissioning of the gas plant," says the source.

To keep the new cracker running, maintenance shutdowns will be carried out at PTT Chem's two existing crackers. A 460,000 tonnes/year cracker is due to be shut in mid-February for 35 days while a 515,000 tonnes/year cracker will be shut for 30 days in June.

Extra ethane (around 600,000 tonnes/year) would also be available once PTT completes revamping two of its existing gas separation plants. The revamp project is not the list of affected projects and test runs are due in February.

But even these arrangements may not provide sufficient ethane to the new cracker. "We believe we cannot run it at 100%. We have to wait and see when we finish commissioning of the gas separation plant," says the source.

The delay in the new gas separation plant has implications that go beyond petrochemicals as Thailand will have to import huge volumes of LPG.

"It will be around 100,000 tonnes/month and the government will have to subsidise this. They [the government] are under a lot of pressure. International prices of LPG are in the $700-800 range while the local price is around $330. The government subsidy would be around $1.5bn every month," says the source.

But this is something that the government has known since September last year when the administrative court made its first ruling on Map Ta Phut, points out the analyst.

The Map Ta Phut mess is just one of the many problems that the beleaguered government is facing. The stock market has fallen to a seven-week low on concerns about political uncertainty.

Investors appear to be increasingly worried about an impending collapse of the current coalition government. The Bangkok Post also reports about discontent in the armed forces and rumours of a coup which have spooked the business community.

By John Richardson

Polyolefin shipments have been held up in ports by lack of awareness among customs officers at some ports in Southeast Asia over how to implement new free-trade deals, an industry source told us.

It seems highly likely that the same applies to other chemicals and polymer cargoes.

The Association of Southeast Asian Nations Free Trade Area or AFTA agreement came into force on 1 January, as did the China-ASEAN deal or ACFTA deal.

They involve zero import tariffs on shipments of most goods between ASEAN's founding members - Indonesia, Thailand, Singapore, Malaysia the Philippines and Brunei, and between these same six countries and China.

"Lots of containers of polyolefins have been stuck in ports because customs officials are not aware of how the new trade agreements work," claimed the industry source.

"The muddle over how the new trade-agreements are supposed to work does, on the face of it, seem extraordinary when you are consider that they have been many years in the making. For example, the terms of the ACTFA were agreed eight years ago.

But a well-informed source told us: "What is needed is more well-trained staff to help with the implementation, but the budget for the ASEAN Jakarta-based secretariat is only $15m a year.

"The reason it's so low is that contributions are pegged for each country at what can be afforded the poorest members, such as Laos and Cambodia."

Equally strange seems to be the complaints from Indonesia's polymer producers and from the country's manufacturers in general over the impact of the agreements.

"The industrial sectors in Indonesia and the Philippines, and to a lesser extent Malaysia, vehemently objected to greater market access and greater competition - not when the agreements were being negotiated but during the waning days of 2009," wrote Edmund Sim, a Singapore-based trade lawyer, in a recent article.

In an interview, Sim - partner with the Singapore branch of international law firm Appleton Luff - added: "The delays were partly because all the details of the deals are easily available on the internet.

"Government officials therefore assumed that industry executives would be fully across the implications.

"This wasn't the case until the actual effects of the FTAs became more apparent as the implementation date drew near.

"Another problem in Indonesia was that people were distracted by the presidential and legislative elections, which took place last year."

Sim had told us before that those who are complaining will pretty much have to, as we say in Britain, "like it or lump it", because the likelihood of these deals being renegotiated is very low.

And so, as he explains in this ICIS news article from yesterday , we can expect more antidumping cases in 2010 from disadvantaged countries such as Indonesia and the Philippines.

By Malini Hariharan

PTT Chem is likely to miss its revenue growth target of 20% this year because of the Map Ta Phut crisis.

The company had set a 2010 revenue target of about Baht100bn (US$3bn), up from Baht80bn in 2009, reports the Bangkok Post.

As reported by this blog last month, suspension of parent company PTT's sixth gas separation plant would result in lower operating rates at PTT Chemical's new 1m tonnes/year cracker.

The company's president and ceo Veerasak Kositpaisal has said the cracker would run at 60-70% initially.

He also said that the cracker would supply 400,000 tonnes to a new lldPE plant, and 300,000 tons would be supplied to ldPE plant. Commerical operations at these two plants have been scheduled in the second quarter.

The rest of the ethylene from the new cracker would be supplied to a new hdPE plant which is on the list of suspended projects, said Kositpaisal.

ICIS news had reported last week that PTT may delay the startup of the new ldPE plant from end-February/early March because of a shortage of ethylene. The extent of delay was not specified.

The shortage has probably been aggravated by an unexpected shutdown of two older crackers last week because of a power outage in Map Ta Phut. The I-4 No 1 and I-4 No 2 crackers, which have nameplate ethylene capacities of 515,000 tonnes/year and 400,000 tonnes/year, are due to restart this week.

Meanwhile, the Office of the Attorney General has petitioned the Thai Administrative Court to allow 12 projects at Map Ta Phut to resume construction. The operators of these projects would carry out health and environmental impact assessment studies through the construction period. The argument being put forward is that there would be no pollution during the construction phase.

Most of the projects are linked to the Siam Cement Group and include Thai Polyethylene, Thai MMA and BST Elastomers.

By Malini Hariharan

Just when Asian propylene prices started easing comes news of disruptions in production and price hikes in the West.

Propylene availability in Europe was hit after a strike by Total's refinery workers early in the week resulted in the closure of 36% of France's C3 capacity. This forced Total to declare force majeure on propylene supplies. Then Shell Chemicals declared force majeure on ethylene and propylene supplies from its Moerdijk cracker in the Netherlands due to reduced operating rates.

The strike at Total has been called off and production at the refineries will be restarting soon but the developments helped tighten an already short European market and supported an increase in the March propylene contract price, reports ICIS news.

The US too is expected to see increases in propylene prices with one producer nominating a $110 increase for March.

Asian propylene prices have yet to react strongly to these developments although sellers are trying to raise prices. They will of course be supported in this endeavour by upcoming cracker turnarounds.

"Some traders are also trying to take Asian propylene to the West; we had an offer. But the arbitrage window is not big. Asia appears to be adequately supplied," says a source from a major Asian cracker operator.

Meanwhile, the propylene situation has started to impact PP markets. European buyers are bracing for PP price hikes in March while offers in the Middle East have already risen by $30/tonne, reports ICIS news. Availability from this region is likely to be constrained in March as Oman Polypropylene and Advanced Polypropylene will be carrying out maintenance shutdowns in March.

"Polymer markets opened with a bang after the Lunar New Year; prices went up yesterday. There are the Asian turnarounds and people are still struggling with new plants," the source points out. This is certainly creating room for optimism, he adds.

By John Richardson

THE whinging is getting almost unbearable in Southeast Asia over the Asean-China Free-Trade Agreement (ACFTA).

The deal was under discussion for EIGHT years and yet chemicals and polymer producers and customers seem to have left it until after-the-fact to start raising objections.

Indonesian industry association representatives have gone as far as to suggest that 7.5m out of the country's total of 30m manufacturing jobs are under the threat as a result of ACTFA.

And at a conference in Singapore today I had to endure polymer producers from Southeast Asia moaning about not being able to compete with big bad China.

"There's no point in complaining now. What needed to happen was for industry representatives to take an active interest in negotiations for these free-trade deals right from when they first began," said a well-informed source.

"But instead this was pushed to the back of the collective mind. Clearly, China's competitive position has improved greatly since the talks started eight years ago, which is exactly why producers should have been constantly engaged in the debate.

"It will be very, very difficult to change the terms of ACTFA now because of the level of politics involved."

The approach of the Southeast Asian industry players was in stark contrast to that of their counterparts in India who managed to get petrochemicals excluded from an India-South Korea free-trade deal a few years ago, he added.

Have the lessons being learnt? Let's hope so as discussions take place for Singapore-European Union (EU), Thailand-EU, Vietnam-EU, Indonesia-EU and Malaysia-EU free-trade deals.

More on these negotiations later on.

By John Richardson

PROPYLENE pricing is heading for "a crash" in Asia as a result of spot supply increasing by around 20,000 tonne/month, a senior industry source has told the blog.

Shell Chemicals will have a surplus 440,000 tonne/year of C3s from its Singapore cracker - in the process of starting up right now - as the oil-to-chemicals major failed to attract propylene derivatives investors, he added.

"There will also be a substantial surplus from the Map Ta Phut complex when the Dow Chemical/Siam Cement cracker is on-stream."

The Dow/Siam cracker is again in the process of being commissioned.

A second industry source added: "The market is bracing itself for huge C3s surplus once Shell is fully operational.

"You can add to the Singapore and Thailand surpluses, 150,000 tonne/year from Vietnam (the PetroVietnam fluid catalytic cracker) and 100-150,000 tonne/year of additional supply from Saudi Arabia."

Olefins supply has been pretty tight in Asia of late, helping to support the sustained rally in polyolefins (see graph below)Source of graph: ICIS pricing

With a lot more polypropylene (PP) capacity due on-stream this year, it's easy to forecast that this greater supply will combine with weaker support from feedstocks to bring about the long-awaited trough in PP pricing.

"We are talking about an awful lot of extra spot C3s into what is a very thinly-traded spot market. I can see propylene going from being a co-product back to by-product status," added the first industry source.

More liquefied petroleum gas (LPG) cracking and changes in cracker severity will probably be methods producers use to reduce the propylene surplus.

PP producers might benefit. They should have greater ability to discount as they battle for market share against their polyethylene (PE) competitors.

(Ethylene markets will also become longer, with new merchant-market supply including 115,000 tonne/year from Shell in Singapore However, the total surpluses don't look as if they will be as disruptive as those in C3s)  

And the stand-alone PP producers - some of whom have had to shut down recently as a result of high C3 costs - may be able to resume production.

By Malini Hariharan

Penchom Saetang of Ecological Alert and Recovery - Thailand (Earth) is not a typical activist vociferously denouncing companies for their environmental misdeeds. She is soft spoken and rational in her criticism of the state of affairs at Map Ta Phut, Thailand's premier industrial zone and a major petrochemicals hub.

After spending over ten years studying and documenting the pollution problems at Map Ta Phut she was not surprised to see the local population take legal action last year to block implementation of new projects at the industrial estate.

She is hopeful of a compromise that will enable completion of projects already underway but warns of an anti-industrialisation wave that is spreading across Thailand, especially in the southern provinces where the government would like to create a new industrial zone.

"People of every province have networked to resist investments; now it is almost too late to recover. People are opposing any king of factories, even power plants, as they fear pollution and loss of livelihood; the feeling is very deep," she warns.

And she admits that even she has problems discussing the matter rationally with the local people.

"It is not easy to communicate; if my group acts neutral we will be resisted. It is a very sensitive issue," she says.

The roots of this crisis can be traced to the mistakes made by the government and companies over the years at Map Ta Phut which has generated bad feelings and an antagonistic stance towards industry, says Penchom.

"Map Ta Phut is a modern industrial estate but some local communities don't have supply of clean water; they have stopped using rain water because of contamination

"There was a big incidence of air pollution in 1997 when thousands of students were taken to the hospital. But no one from the factories walked out to acknowledge their fault. The following year there was another incident.

"Local people set up their own smelling group to use their nose to walk around Map Ta phut to detect the source of air pollution. They found 7 factories responsible and requested for a temporary closure.

"Every year since 1998 there has been lots of illegal dumping; the erosion of the coastal area is still going on. The local people have demanded several times to stop expansions but this voice was ignored by the Industrial Estate Authority of Thailand, "she says.

Pic Source: Bangkok Post

The first proposal to declare Map Ta Phut as a pollution zone was made in 2003-04 but this was rejected a couple of times.

There was a conflict of interest as some government officials held positions in companies with operations at Map Ta Phut, points out Penchom.

Today Map Ta Phut is in urgent need of a big environmental cleanup and the government needs to focus on this rather that talking of further expansions, she advises.

Penchom also dismisses claims of Bangkok city being more polluted than Map Ta Phut and Thailand having better environmental standards than some developed countries.

"There is a difference in the air pollution cocktail; benzene content is high in Bangkok in areas of traffic congestion but the air does not have as many compounds as Map Ta Phut," she points out.

As for environmental standards, it is only on some parameters that Thailand is better, she says.

"The big problem is VOC and Thailand did not have any regulation before 2009".

But Penchom has a positive attitude and would like to work towards solving the environmental problems.

"It is not easy to change but we want to let them [the government and companies] know that civil society is keeping a watch on them," she warns.

.....but time to party for some thanks to re-exports to Brazil

Source of picture: edgsgonesouth.com

By John Richardson

It's a funny old world - or so it seems in poylolefins at the moment as traders re-export resin from China to Latin America and elsewhere.

"I phoned up a trader in China the other day and asked if he wanted to buy some consignments of polyethylene (PE)," said another trader, based outside China.

"He asked me whether I would instead like to buy material for re-export."

And yet another trader - who is based in Singapore - added yesterday: "A lot of the re-exports have gone to Latin America, but I have also sold material to Bangladesh and Israel.

"Some of the shipments have made money. For example, I bought Linear-low Density PE (LLDPE) from Brazil at $1,170 CFR China a few months ago. Last week, I sold the same cargo back to Brazil at $1,450. With freight at $170/tonne I made a decent profit.

"Other re-exports have lost money, though, as traders have cut their losses due to high inventory levels in China.

"I estimate around a total of 10,000 tonnes has been re-exported over the last few weeks.

"This is a very small amount when measured against the huge volumes traded, but it seems to have helped sentiment a little. Confidence has slightly picked up in the Chinese trading community as a result of the re-exports easing inventory pressures."

Bonded warehouses in the south, the east and the north of China were, however, still close to full, he added.

"The problem is that traders purchased a lot of material in November and December because confidence at that time was high.

"They underestimated the risks of weakening monomer prices undermining support for both PE and polypropylene (PP) pricing, and measures the Chinese government has taken to slow the economy down."

Successful start-up of the new 800,000 tonne/year Shell cracker in Singapore took place on 22 March, according to an official announcement.

And in Thailand, Mab Ta Phut Olefins was heard to have achieved on-spec production at its 900,000 tonne/year naphtha cracker, ICIS news reported yesterday.

Shell was expected to export around 150,000 tonnes of ethylene and 250,000 tonnes of propylene on an annual basis, while Mab Ta Phut Olefins would ship out more than 100,000 tonnes of propylene a year, the same news report added.

But the blog has been told that much more than 100,000 tonne/year of extra propylene will be available for export from Thailand over the next 12 months.

And returning to ethylene, exports are expected to increase from Qatar and Saudi Arabia.

The mood among poylolefins buyers has shifted in China towards one of much-greater caution, added the Singapore-based trader.

"I recently visited five factories where all the factory owners knew that resin was long and didn't feel in a hurry to buy beyond their immediate needs.

"They can smell blood in the air as new capacities are coming on-stream and plants that have already started up are ramping-up production.

"The buyers also know that the traders are coming to the end of their 90-day credit terms and so are desperate to sell stuff out of the bonded warehouses.

"End-users are also becoming much more cautious because of the uncertainty over government economic policy and a potential Yuan revaluation. And they are struggling with the labour shortages."

The good news, though, seems to be that overseas producers are in comfortable positions due to their low stock levels.

"We are in no hurry to sell as we continue to manage our production very prudently," said a Singapore-based source with a global polyolefin producer.

The trader said that this was a comment that had been made by many of the big Asian ex-China and Western producers

"One of these producers has been offering PP homopolymer grade at $1,350 CFR China, which is completely unworkable as the current China price is $1,310, suggesting a comfortable position."

But the longer-term issue remains the strength of growth in China this year (to repeat, we think it's bound to be lower than 2009) as all the new capacities start-up.

By John Richardson

IT IS always dangerous to assume that the future will be exactly the same as the past - a big lesson from the recent financial crisis.

But so seems to have been the assumption amongst China's polyolefin traders late last year as a close look at import statistics for December and January, supplied to us by the New York-based International Trader magazine, reveal.

In December 2007, for example, 251,600 tonnes of high-density (HDPE) arrived at Chinese ports compared with 292,664 tonnes in December 2009.

January 2010 arrivals totalled 363,129 tonnes against 223,456 tonnes in January 2008 (a "normal" year as there was no economic crisis) and 227,818 tonnes in January 2009.

December 2009 polypropylene (PP) shipments totalled 373,669 tonnes as against 251,179 tonnes in December 2007 (again a more valid comparison than Dec '08 - just about the high-point of the recent crisis, when arrivals were 266,463 tonnes).

 "We all thought that credit in China would remain as ample as before, supporting demand and polyolefin pricing," a Shanghai-based trader said today, echoing comments made by a Singapore competitor last week.

Polyolefin pricing has since slipped in Asia (see chart below) because of reduced lending by local banks, labour shortages in Guangdong province and new capacities.

Source of graph: ICIS pricing 

"Interestingly, the new restrictions in local credit might actually provide some support for imports over the next few months as the overseas traders can more easily lay their hands on LCs from international banks," said an industry observer.

"But on a net basis imports are still likely to be down this year over 2009 on slower growth in China and new capacities."

Consultancy Nexant ChemSystems wrote in a Q1 review released earlier this week: "At least five new crackers (in China), with a combined capacity totalling more than four million tons per year of ethylene achieved commercial production in the first quarter. Most crackers are integrated with further new derivative capacity on site."

By Malini Hariharan

A merger of PTT Aromatics and Refinery (PTTAR) and IRPC has once again been postponed to early next year due to concerns about legal issues and the business outlook, reports to Bangkok Post.

The legal concerns relate to the country's competition law and outstanding lawsuits filed by Prachai Leophairatana, the founder of Thai Petrochemical Industry, which was taken over by PTT and renamed as IRPC.

And when in doubt it is best to ask for a fresh study.

So an unnamed consultancy company has been hired to once again examine the pros and cons of a merger, the global petrochemical business outlook and future performance of the two companies.

The proposed merger has been delayed fairly regularly since it was first mooted in early 2009. It was first planned as a merger between all subsidiaries of PTT Plc but was then narrowed to PTTAR and IRPC in the first phase.

Meanwhile, Thailand's new minister for industry, Chaiwuti Bannawatis, has been assuring companies that he will find a quick solution to the legal impasse that has stalled projects at Map Ta Phut.

As a first step the minister will isit companies at the industrial estate to restore confidence. He has also suggested road shows to boost confidence of international investors.

But investors are looking for action and not words. Confidence will quickly return if Thailand can get a few projects going.

By John Richardson

Bayer Material Science (BMS) has announced plans for a new polycarbonate ((PC) plant in Asia in another sign of confidence that the chemicals industry, despite major macro-economic threats, is continuing to benefit from the continent's soaring growth.

BMS will make a decision on whether to build a new polycarbonate plant either in Thailand or China by the end of this year, said the company's CEO, Patrick Thomas

Start-up would be in 2013-14 and the capacity would be 200-300,000 tonne/year, said Thomas, who was speaking at the official opening of the German major's functional films research centre in Singapore.

                                                      Patrick Thomas

                                       Source of picture: Bayer Material Science

"Our global PC capacity is now fully occupied. We have brought back on-stream 120,000 tonne/year of capacity which we idled 12 months ago during the economic crisis," he added.

"Asia dominates the market and accounts for around 65% of worldwide demand compared with 50% before the crisis."

He confessed that BMS had been surprised by the resilience of the optical data storage market for PC.

"We had expected a collapse, but what we have instead seen is strong growth in emerging markets such as Latin America, the Middle and India for back-catalogue films on CDs."

He added that PC demand was also benefiting from a boom in electronics, office equipment and flat-screened TV panels.

"In America, we have received a boost thanks to increased sales in office automation machine.

"Office machines, which combine functions such as photocopying, faxing and emailing into one unit, have replaced people since the economic crisis began.

"The casing for these units is made from acrylonitrile butadiene styrene (ABS)/PC composites.

"But replacing jobs with machines means that the unemployed will stay unemployed and, of course, that's a big problem for the US market."

Thomas said that despite Thailand's recent political problems, the country's sovereign risk was low.
.
He also believes that environmental problems that have halted investments at the country's Map Ta Phut petrochemicals complex will be resolved.

The layout of the Pasir Gudang complex

Source of picture: Titan Chemicals

By John Richardson and Malini Hariharan

HONAM Petrochemical's plan to buy Malaysia's Titan Chemicals  for $1.5bn - which was announced today - is likely to be followed by further buys, including a refiner, an industry observer has told the blog.

"I am neutral on this deal because Titan, like Honam, has to buy in its naphtha feedstock so integration isn't good at the moment," he added.

"But the Lotte Group (Honam's parent company) is looking at a refinery acquisition which would solve the integration problem. They are also looking at more downstream chemicals companies.

"Lotte is very aggressive and wants to raise turnover to Won40 trillion by 2018. Turnover, if you include Titan, will only be Won12 trillion this year and so they have a lot further to go in their acquisitions strategy."

The price for Titan is an average of 5-6 times Titan's EBITDA over the last seven years, he added.

Honam has bought 73% of Titan for major shareholders, which included Taiwan's Chao Group.

"The last seven years were exceptionally good for the industry. Will the next seven years be as good? Possibly not, and Honam might have been able to get a better price by waiting until later this year, when we are likely to be into a severe petrochemicals down cycle," said the observer.

But Honam gets, through Titan, better access to the Association of Southeast Asian Nations (ASEAN) market through the ASEAN Free Trade Agreement. It is also set to benefit from the ASEAN-China free-trade deal.

The acquisition is the first by a South Korean petrochemical company overseas and the biggest so far by Honam. Its previous buys were in South Korea and were of Hyundai Petrochemical and KP Chemicals.

Honam's products include polyethylene (PE), polypropylene (PP), polyethylene terephthalate (PET), polycarbonate (PC) and ethylene oxide/ethylene glycol (EO/EG).

The deal comprises the Titan cracker complex in Pasir Gudang, Malaysia, which sells benzene, toluene, polyethylene (PE), polypropylene (PP) and butadiene and PT Titan - the Indonesian PE producer.

PT Titan, formerly called PT Peni and originally under BP ownership, had been bedevilled by lack of captive ethylene supply until Titan took over and began shipping feedstock from its Malaysian complex.

By Malini Hariharan

Formosa Petrochemical Corp's problems are mounting after two accidents in less than a month at its refinery and petrochemical site in Mailiao, Taiwan.

Wu Den-yih, the country's premier was at the site last week and ordered an investigation report to be submitted on 6 August.

And in a bid to reassure residents he declared that the company's No 6 naphtha cracker "will not be allowed to re-open unless the cause of the fire is discovered and operating safety is fully guaranteed".

Pic source: Focus Taiwan

It was not clear if he was referring to all the plants at the No 6 naphtha cracker site or only parts of the refinery that were damaged by the fire and the No 1 cracker that was hit by a blast in early July.

The No 6 site includes the refinery, two crackers, an aromatics unit and a number of derivative plants operated by affiliates of Formosa Petrochemical.

Formosa Petrochemical restarted one of its three 180,000 bbl/day crude units in Mailiao last week, with plans to put another unit back on stream this week.

Meanwhile, local residents have started asking for extensive compensation. They want Formosa to pay their health insurance premium, subsidise their electricity bills and even offer jobs to the local young people at the company. Practical considerations appear to have outweighed concerns about health and safety.

Residents have also been seeking a suspension of all operations at the site so that all plants can be inspected. They are also asking for a termination of Formosa Petrochemical's expansion projects.

ICIS news reports that the company has plans to beef up its ethylene capacity by 300,000 tonnes/year and increase the capacity of its refinery to 580,000 bbl/day under the fifth phase of Mailiao complex expansion.

The planned Taiwan Dollar (NT$) 280bn ($8.75bn) expansion - which would involve 43 new projects, including petrochemical intermediates such as methyl methacrylate (MMA) and phenol - is currently being assessed by Taiwan's Environmental Protection Administration (EPA), said Jack Shieh of the Petrochemical Industry Association of Taiwan (PIAT).

"The expansion permit was supposed to be given to them [Formosa] by the end of the third quarter (of 2010) but because of the fires last month this could be pushed back by half a year, said Danny Ho, a Taipei-based petrochemical analyst at brokerage Yuanta Securities.

But the company remains optimistic of obtaining an approval by the end of the year.

Formosa is not the only Taiwanese company facing project-related problems. Kuokuang Petrochemical is still struggling to get approval for its cracker and derivatives project which was first mooted in 2006.

The latest news is the withdrawal of one of its investors.

"I'm not investing. No investment project in the world can defer for so long," said Preston Chen, chairman of the Chinese National Federation of Industries.

He complained that major investment projects in Taiwan did not receive enough support and pointed out that a similar project proposed in Singapore half a year later than the Kuokuang project had started commercial production.

Given a bleak environment for petrochemical projects in Taiwan and also Thailand it is perhaps not surprising that Singapore is gearing up to attract more investments.

By Malini Hariharan

The Thai government is doing all it can to quickly resolve the Map Ta Phut crisis but full operations at PTT Chem's new cracker is likely only in early 2011.

Feedstock ethane for the 1m tonnes/year cracker will be supplied from PTT's No6 gas separation plant commissioning of which has been held since last year.

A PTT source told the blog that a health impact assessment (HIA) report is being prepared and will be submitted to a government-nominated independent committee for evaluation by September.

Meanwhile, the company is also waiting for the prime minister to announce a list of Map Ta Phut projects that are harmful to the environment and would require HIA.

"As the gas separation plant is not on this list we can appeal to the central court for a waiver of the HIA report once the prime minister that made the announcement," he added.

But when asked to give a precise date for completion of the formalities, he would only said that since it is beyond the company's control they could only target full operations by early 2011.

However, PTT should be able to supply some additional volumes of ethane once revamping of the No2 and No3 gas separation plants is completed this month.

PTT Chem commissioned its cracker last year but has been running it at around 60% because of a shortfall of ethane.

And start of commercial operations at PTT Chem's new 300,000 tonnes/year low-density polyethylene (ldPE) plant has once again been delayed, this time to September due to technical problems.

By Malini Hariharan

Jurong Aromatics Corp (JAC), part of a rare breed of standalone aromatics projects, is finally seeing some progress.

At a time when most new aromatic projects are integrated with refinery operations, JAC plans to build a condensate splitter and an aromatics facility to produce 800,000 tonnes/year of paraxylene (PX), 450,000 tonnes/year of benzene and 200,000 tonnes/year of orthoxylene in Singapore.

Financing of the much-delayed $1.5bn project, first mooted in 2007 but held up by the 2008 financial crisis, is now likely to be completed by end-2010 with support coming from two South Korean government export agencies.

The Export-Import Bank of Korea is expected to provide a direct loan of $330 million and a 100 percent guarantee for a further $270 million. Another $600 million tranche will be fully guaranteed by Korea Trade Insurance Corp.

The project is now targeted for completion in 2014.

South Korean major SK Energy and Chinese polyester maker Jiangsu Sanfangxiang Group are the key promoters of JAC. The other major shareholders are Vijay Goradia and M Y Ling, founding members of the Continental Chemical Group, Swiss oil trader Glencore, Singapore's EDB Investments, and downstream petrochemical player Thai KK Industry Co Ltd.

JAC has already awarded a construction contract to SK Engineering & Construction Co.

It has also committed to take space at the Jurong Rock Caverns, the 1.48 million cubic metre underground oil storage facility that is due to launch the first two of five caverns in 2013.

The aromatics project, another example of Singapore's success in attracting investors, will be geared to meet Chinese demand. Offtake of the PX output is likely to be guaranteed by promoter Jiangsu Sanfangxiang which is building a 600,000 tonnes/year purified terephthalic acid (PTA) plant in Jiangsu, China.

The project is a rare combination of Korean, Chinese, Swiss, American and Thai investors coming together. Trust Singapore to provide fertile ground to make this happen.

By Malini Hariharan

Companies with projects at Thailand's Map Ta Phut must have heaved a sigh of relief last week after the Administrative court ruled that 74 out of 76 suspended projects could move ahead after completing health impact assessment studies and obtaining necessary approvals. The court's decision was based on a list of 11 harmful industries identified by the government that

But Map Ta Phut residents are unwilling to give up their fight to curb new investments at the country's premier industrial estate and there are signs that the conflict will continue in one form or the other.

Srisuwan Janya, a lawyer fighting on behalf of Map Ta Phut residents, has vowed to appeal the court ruling. He believes the court has wrongly applied the list retrospectively and complained that the Map Ta Phut projects had been let "off the hook".

And the four party panel, led by Thailand's former prime minister Anand Panyarachun, has questioned the government's decision to trim the list of harmful industries from 11 from the 18 that it had suggested.

Source: Bangkok Post

Anand said that while it was the government's prerogative to disagree with the list, it needed to offer the public a credible explanation as to why certain types of activities were not included.

A rally has been planned for 30 September by Map Ta Phut residents to protest against the new list.

But even as the people and politicians fight it out companies are preparing to resume project activity.

PTT Chemical is scheduled to soon start test runs at its expanded high-density polyethylene (hdPE) plant. Trial production is expected to start in October with commercial production by early 2011.

And PTT expects to start its No 6 gas separation plant in the fourth quarter. Once this is up and running PTT Chemical will be able to secure sufficient ethane to raise operating rates at its new cracker.

Source of picture: tycoonreport.com

By John Richardson

This is a very dangerous time for petrochemicals producers as they attempt to separate real, sustainable demand from feedstock-cost related price rises and speculation.

A bubble - as we discussed yesterday - seems to have formed in purified terephthalic (PTA) and, according to ICIS news, in caprolactam.

The surge in cotton prices is a factor behind the price rallies in both these production.

You need to ask yourself: To what the extent is the rise in the price of cotton driven by fundamentals versus speculation on the cotton futures markets, and so what's the risk of a collapse?

PTA also has its own future market in China - the Zhejiang Commodity Exchange, where, as we have also reported, trading was suspended this Tuesday because prices rose beyond their daily limit.

And as we also blogged about earlier this week, another inventory-related crisis could hit the chemicals industry if oil prices retreat - along with other commodities and equities - if there is a sudden change in the overall macroeconomic mood.

A few extra servings of scepticism about what chemicals and polymers traders are saying about demand and supply are therefore necessary in order to prevent inventory overbuilding. And my, as we shall detail later on, there are some nonsense stories out there.

This is the fourth quarter when chemicals and polymer demand in Asia usually slows down, and yet price rises in the polyethylene (PE) market continue, as my colleagues on ICIS pricing have been reporting. Click here for a slide illustrating this point:

ChinaImportPEPrices12November.ppt

Last Friday's price increases seem to have been mainly driven by crude and what was happening on the all-important Dalian Commodity Exchange. This points to the very-strong likelihood that recent price rises have been mainly feedstock-cost and sentiment driven.

And yet, in conversations with traders this week the blog has heard a couple of curious stories to support the notion that the rallies are about real supply and demand.

For instance, one Hong Kong-based trader told of us of further production cutbacks in the Middle East as a result of more reductions in feedstock supply to crackers that are dependent on associated gas.

He justified this by claiming that OPEC has further reduced Saudi Arabia's oil quota on weaker global crude demand.

But as we will post next week, the reverse is likely to soon be the case as global oil demand is on the up (there is still a strong argument, though, that the more-bullish forecasts on crude demand do not entirely justify the recent spikes in crude. These appear to have been mainly driven by QE2 and, as a result, what's happening with the US dollar).

The same trader cited further outages in the Middle East, whereas other sources tell us of no major new production problems - and of output being ramped-up at the recently commissioned Borouge complex in Abu Dhabi. There is also more output from Thailand following the recent start-up of linear-low density PE (LLDPE) plant.

(Also watch out next week for a post on how financial analysts may have got ahead of themselves in predicting market-tightening from next year. There is a strong argument to be made that as rising production in the Middle East will make 2011 a more difficult year as extra output is absorbed).

Now let us look about what is being said about demand in the fourth quarter in China.

As my colleague Nigel Davis wrote earlier this week in an ICIS news Insight article, linear LLDPE and low-density PE (LDPE) are benefiting from this being an agricultural film-buying season.

I was highly amused a couple of weeks when a trader told me of how exceptionally cold weather in China had already added a further boost to agricultural film demand as farmers sought to better-protect their crops.

At that time, though, it was the expectation of very cold weather that had driven-up all sorts of commodity prices, including steel - indicating yet again the speculative influences on PE.

Since that time there have been a few days of very cold weather, but now forecasters are expecting milder-than-expected conditions across the south and east of the country. This has led to a slight retreat in oil futures pricing.

The key thing to remember here - as we said before - is that this the fourth quarter when demand traditionally slows down in Asia.

In China we are also well-beyond the peak manufacturing season for finished goods for Christmas.

There are claims out there that PE end-users in China are already ramping-up production of packaging material ahead of next year's Chinese New Year (CNY).

But as CNY 2011 doesn't fall until 3 February this seems exceptionally early to the blog - and any increase in packaging-related demand will not be enough to compensate for the end of the manufacturing season.

Further, it will be interesting to see if overall industrial production in China dips in Q4 as the government continues to strive to meet its 2011 emissions targets.

There are reports that electricity-supply reductions that have already taken place - aimed at achieving the emissions target - have led to a shortage in diesel fuel due to industrial users switching to diesel-powered generators.

This could exert further margin pressure on converters who might be already struggling to cope with higher resin prices.

A question the blog will attempt to explore is to what extent the converters have been able to pass-on these recent resin price increases. This might give us a firmer indication about the real state of demand.

By John Richardson

OVERCONFIDENCE is perhaps the biggest risk for 2011 as a result of sales volumes that have this year exceeded even the most wildly optimistic forecasts.

The danger is that we have yet to see the worst of this current petrochemicals cycle. Companies and chemicals analysts might have got a little ahead of themselves by predicting that a "Supercycle" will begin from as early as the second half of the coming year.

A strong argument can be made that by 2013-2014 lack of investment in sufficient new capacity could lead to record-high margins. This assumes that the world economy doesn't suffer a double-dip recession.

But cautious commentators are warning that a delayed supply-shock is still on the cards in the New Year, thanks to further start-ups and more stable operations at recently commissioned plants in the Middle East and Asia.

"At the end of 2009 the industry was, in hindsight, too pessimistic and this fed through into sales targets for 2010," said a UK-based industry observer.

"I get the feeling that forecasts for 2011 have gone too far the other way and that we are about to go through a period of absorption as operating rates at new plants increase.

"This is where human nature comes into the game. Product managers faced with targets that are too high could end up chasing market share through maximising output. This would make oversupply even worse."

Chemicals analysts at South Korea-based Woori Investments wrote in a November report that 2011 would see a decline in global utilisation rates.

"We believe that [global ethylene] supply will rise by 10m tonnes over the next year, topping our global demand-growth estimate of 5m tonnes over the same period," said the report.

This was based on commercial production starting at new facilities with a total capacity of 6.2m tonnes/year and higher operating rates at plants already on-stream.

Extra capacity absorption that still needs to take place includes Borouge's 800,000 tonne/year polypropylene (PP) and 180,000 tonne/year linear-low density (LLDPE) plants that started up in the third quarter.

"We are not seeing much material from these plants right now and so we are expecting the real impact to occur next year," said a Singapore-based polyolefins trader in early December.

The same can be said for Saudi Kayan Petrochemical's polyolefin capacities, which includes 400,000 tonne/year of high-density polyethylene (HDPE).

Although the SABIC subsidiary's Saudi-located complex has been on-stream since August, the big volumes seen in the market so far have only been of ethylene.

Source of picture: whrbsportsblogspot.com 

Plants in Thailand, delayed by a complicated environmental muddle, have recently been allowed to start-up. These include Siam Cement/Dow Chemical's 350,000 tonne/year LLDPE and PTT Chemical's 300,000 tonne/year HDPE facilities.

Recently commissioned complexes in China are expected to run a little more smoothly next year.

A further danger hanging over the market is an increase in OPEC crude-production quotas.

The oil cartel left its quotas unchanged after it met in Ecuador earlier this month, but if the cost of crude keeps on increasing the pressure for greater output will rise.

Saudi Arabia's current quota, around 8.5m bbl/day, has resulted in a reduction in associated gas supply to many of the country's crackers. Oil production needs to be at 10m bbl/day for the crackers to run at full rates, estimate several industry observers.

Ethylene exports from the Al-Jubail industrial city on Saudi Arabia's east coast have fallen to virtually zero in 2010 from several hundred thousand tonnes in 2009 because of the cut in associated gas.

Higher oil quotas could result in exports returning to 300,000 tonnes or more over a 12-month-period.

Either that or SABIC might successfully push for much-higher downstream operating rates now that the company, in theory, has more control over its subsidiaries thanks to a new corporate structure introduced earlier this year.

From a "value addition" point of view, exporting ethylene can be viewed as making less sense than shipping-out poyolefins or mono-ethylene glycol (MEG).

One would have thought that major technical issues at complexes such as PetroRabigh in Saudi Arabia will have to eventually be resolved. The Saudi Aramco/Sumitomo Chemical joint venture has suffered around five major polyolefin outages during 2010.

Further support to the market has been provided by what have reportedly been delays at the container port in Al-Jubail.

If customs-processing issues said to be behind the delays are resolved, this could mean a smoother flow of volumes into Asian and European markets.

A consensus is building that refinery margins have bottomed-out, meaning that some refiners might push production harder in 2011. This would help solve the butene-1 co-monomer shortage that has restricted LLDPE production.

The growth side of the story can also be viewed as little more negatively.

New plants in China have raised the country's polyolefins self-sufficiency and the country's GDP (gross domestic product) growth is forecast to fall to around 8% in 2011 from approximately 10% this year.

Lower growth in China is expected to be the result of efforts by the government to control inflation.

Inflation is a threat to growth in many major Asian chemicals-consumption markets including India, Indonesia and Thailand.

"The battle against inflation in Vietnam has been lost by the government," added the polyolefins trader we quoted earlier in this article.

"Nobody is buying anything because they are very worried about the economy and don't want to be caught on the wrong side of another currency depreciation."

The value of the dong (the local currency) has fallen by one-fifth over the US dollar since mid-2008 and last week, Moody's Investment Service downgraded Vietnam's sovereign debt.

All of the above might have sounded a little like the kind of comments that Ebenezer Scrooge would have made if he had been involved in the chemicals industry.

He is instead the lead character in the Charles Dickens' novel, A Christmas Carol.

But being told to cheer up and show a little more generosity of spirit at this festive time of year is hardly the basis of sound planning.

By Malini Hariharan

The long-awaited merger between PTT Chem and PTT Aromatics (PTTAR) was finally announced last week.

A presentation made to financial analysts gave details on what the merged entity will look like, planned synergies and opportunities for growth.

The new company with a total petrochemical capacity of 8.261m tonnes/year and petroleum products capacity of 228,000 bbls/day will be a clear leader in Thailand (ahead of Siam Cement Chemical) and also in Southeast Asia. It will be second to Petronas Chemical in terms of enterprise value but number one on revenue and assets.

Source: PTTAR

Synergy projects have already been identified which would require an investment of $92m. These include tapping the offgases, C3/C4, heavy aromatics and other streams from the PTTAR's refinery as feedstocks for PTT Chem's existing crackers and optimisation of facilities such as oil tanks, jetties, and steam and gas turbines, Once completed by 2015, these projects would yield annual benefits ranging from $80.2m to $154.1m.

The merged entity sees opportunities for expansion in value-added products/ differentiated products such as polyurethane, propylene oxide (PO), polycarbonate, polymethyl methacrylate and caprolactam.

In a statement to the Stock Exchange of Thailand (SET) the two companies also talked about improvement to the refining process that would result in increased production of hydrowax which will be used as feedstock for a new cracker project. No further details were available about this project.

The merger of PTT Chem and PTTAR is the first stage in the full consolidation of all the PTT affiliates. The next stage will see a merger of IRPC with the new company.

"This is our future plan, to combine all the petrochemical units in order to gain market capital, add value to our assets and improve cost efficiency," said PTT president and chief executive Prasert Bunsumpun at a press conference last week.

By Malini Hariharan

After sorting out their merger, PTT Chem and PTT Aromatics and Refining (PTTAR) are looking at a major new investment to take care of their future.

In an interview with the blog's colleague Tahir Ikram, PTT Chem's president and CEO disclosed that the two companies are jointly studying a cracker project.

"We are exploring the possibility of a new cracker. Whether it is going to be gas or naphtha, or where it is going to be located, it is under study," said Veerasak Kositpaisal.

Details at this stage are sketchy.

It is not yet clear if the project would be at Map Ta Phut, Thailand, which has finally seen the end of a protracted legal battle between environmental activists and the government. The settlement has no doubt given companies the confidence to look at new projects.

But what about feedstock availability? In an interview to ICIS news last year, Kositpaisal had said that while Thailand has gas it was not clear if it would be enough to support a world-scale cracker.

So will the project be located elsewhere in Asia?

Well, China is on the ceo's mind. Kositapaisal said in the recent interview that the company is looking at investment opportunities in the country.

"China is a big market. We think China will continue to grow at least by 8% and with that kind of growth they need new capacity, big capacity," he said.

True, but what can PTT bring to the table to tempt the Chinese to give a share of their market?

By John Richardson

THE soaring confidence of the US petrochemicals industry over abundant ethane feedstock from shale gas could end up being colossally misplaced, as we have discussed before on the blog.

America is the most NIMBY (not in my backyard) of all societies and so it shouldn't come as a surprise to anybody that scrutiny is increasing over the environmental impact of the "fracking process". For example, several Senators said on Tuesday that the Environmental Protection Agency should step up regulations of shale gas because of concerns that toxic chemicals, such as barium and benzene used in fracking, could get into the water supply.

This followed another New York Times article on  Monday ahead of the release of a Cornell University study that will argue that as much as 7.9% of global methane emissions come from shale gas.

The gas is intentionally vented or flared from shale-gas wells or seeps out from loose pipe fittings along gas distribution lines, the study will claim.

This results in shale gas being worse for the environment than using coal for power generation.

But if the US wants to increase energy independence it is going to have to make some tough choices and with crude prices where they are right now, the natural gas industry might well find that its counter-arguments are well-received.

At the very least, though, this raises doubts over claims that the US is set to become the new Middle East of petrochemicals.

Chevron Phillips Chemicals has announced a feasibility study into a new cracker in the States and the blog has heard that that at least two more new facilities are under study.

Several expansions of existing plants are also under study amounting to a total of aorund 1m tonne/year of potential new capacity.

By Malini Hariharan

Confirmation has come in from the Siam Cement Group (SCG) that it is in the race to acquire stakes in two Indonesian companies - Chandra Asri and Sulfindo Adiusaha.

"We are interested in both firms in Indonesia as petrochemicals are SCG's core business. But we cannot disclose anything at the moment because the deals are quite big," said SCG's ceo.

As mentioned by the blog last week, Singapore's Temasek Holding is interested in divesting its 22.9% share in Chandra Asri for $400m. Chlor-alkali and vinyl's producer Sulfindo owners, the Victoria Group, are said to be looking for $700m for the whole company.

SCG's interest in the chemical assets follows its acquisition of an Indonesian ceramics producer and building materials distributor earlier this year. SCG had said at that time that it would utilise cash reserves of $2.5bn for strategic acquisitions in the Asean region.

The Sulfindo asset would significantly expand SCG's share of the Indonesian PVC market which it currently serves from a 120,000 tonnes/year plant operated by subsidiary TPC Indo Plastic & Chemical.

Others interested in Chandra Asri, Indonesia's sole cracker operator, are Thailand's PTT Chem and South Korea's Honam Petrochemical. And Hanwha Chemical is said to be interested in Sulfindo.

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 Malini Hariharan

After picking up a 30% stake in Chandra Asri, the Siam Cement Group (SCG) is looking to seal its next Indonesian buy.

Two companies, SCG and Japan's Itochu Corp, are reported to have advanced to the second round of bidding for chlor-alkali and vinyls producer Sulfindo Adisuha. The deal is expected to be worth around $700m.

The two companies are among three or four parties short-listed for the second phase of bidding after the sale process attracted 8-10 parties in the first round.

But SCG stands a good chance of winning the race especially after South Korean major, Hanwha Chemical, decided to drop out.

As reported by the blog earlier, Sulfindo would fit well with SCG's existing product portfolio and help it expand its share in the growing Indonesian market which it currently serves from a a 120,000 tonnes/year plant operated by subsidiary TPC Indo Plastic & Chemical.

Sulfindo produces 262,000 tonnes/year of caustic soda, 295,000 tonnes/year of ethylene dichloride (EDC), 100,000 tonnes/year of vinyl chloride monomer (VCM) and 80,000 tonnes/year of polyvinyl chloride (PVC).

The move also confirms SCG's commitment to expand its position in Indonesia. Earlier this year the Thai conglomerate completed the acquisition of an Indonesian ceramics producer and building materials distributor.

If successful, Sulfindo would be SCG's largest overseas acquisition. The company certainly has the money - it had said earlier this year that it would utilise cash reserves of $2.5bn for strategic acquisitions in the ASEAN region.

By Malini Hariharan

News of operating rate cuts is pouring in. Crackers in Japan, Taiwan and parts of southeast Asia have been running at reduced rates of 80-90% in October. But now there is also talk of rate cuts at crackers in South Korea.

More importantly, a Sinopec source confirmed yesterday that the Chinese major would be running its crackers at around 90% in November, down from an average 95% in October, writes the Peh Soo Hwee on ICIS news.

The company operates 13 crackers either on its own or through joint ventures.

Besides weak markets the rate cuts are also because Sinopec is under pressure to increase production of diesel which is running short in China. The company will be producing more diesel at its refineries which would result in lower production of naphtha and other middle distillates.

The cuts come at a time when naphtha-based ethylene margins in northeast Asia entered into negative territory for the first time since October 2009.

And the rate cuts are also extending to polymer plants.

Korea Petrochemical Industry Co has already decided to cut production at its polyethylene (PE) and polypropylene (PP) plants because of squeezed margins.

In Thailand, PTT Global Chemical is said to be considering shutting a 400,000 tonnes/year linear low density PE (LLDPE) plant for two weeks because of weak domestic demand.

Producers in Europe too are on the same road.

Ineos will be joining Dow Chemical to run all its low density PE (LDPE) and LLDPE plants at minimum rates for the rest of the year, reports Linda Naylor on ICIS news. Production of high-density PE (HDPE) will also be cut to 'meet the reality of demand', said a company source.

Whether these operating rate cuts in Asia and Europe will be sufficient to push markets into balance remains to to be seen.

By Malini Hariharan

There have been no headline-grabbing deals but bit by bit PTT Global Chemical is extending its business beyond Asia and entering new product areas.

Yesterday, PTT Global announced plans for a joint venture with Perstorp Holding France in toluene diisocyanate (TDI), aliphatic isocynates such as hexamethylene diisocyanate (HDI) and derivatives.

PTT Global will have a 51% share in the joint venture, which includes Perstorp's coating additives group with manufacturing sites at Pont-de-Claix in France and Freeport in the US

The transaction, subject to approval, will also give PTT Global access to technology and is part of a strategic move into the 'high volume specialty downstream business'.

The joint venture is likely to invest in new plants as well boost R&D spend to improve operations efficiency to strengthen the competitive position.

It has been a busy year for PTT Global, formed after the merger of PTT Chem and PTT Aromatics.

PTT Global successfully bought a 50% stake in US-based polylactic acid maker NatureWorks from Cargill for $150m. It also invested $60m US-based Myriant Corp which makes bio-based chemicals.

But it lost out to Siam Cement for a stake in Chandra Asri, Indonesia's sole cracker operator.

Meanwhile, Siam Cement and Barito Pacific, the joint owners of Chandra Asri, are planning a public offering on the Indonesian stock market to raise funds for a cracker expansion. A borrowing from the banks is also being considered for the project which will raise ethylene capacity to 800,000-1m tonnes/year from the current 550,000 tonnes/year.

A final decision on the project is due next year.

"Only 5% of CAP's shares have been floated in the Indonesia stock market. We're thinking of increasing that to 20%," said Cholanat Yanaranop, president of SCG Chemicals to a Thai newspaper.

And SCG is still waiting for a decision on its bid to acquire Indonesian vinyls producer Sulfindo Adiusaha.

Its cracker project in Vietnam is still alive with the government offering fresh incentives. The $4.2-billion project has been given a 30-year tax exemption on propane, butane, naphtha, industrial salt and coal, as well as a 3% tax rate products such as polypropylene (PP) and polyethylene (PE) for 10 years.

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.

By Malini Hariharan

India trails far behind China in the polyester business but there is growing interest in new investments that also extends upstream to purified terephthalic acid (PTA).

The latest entrant to the projects listing is Thai major Indorama Ventures which has signed an MoU with Indorama Synthetics (India) for an integrated PTA, polyester staple fibre (PSF) and polyethylene terephthalate (PET) project.

This is the first joint venture between the two companies which are run by the Lohia brothers.

Details of the planned project have yet to be disclosed. But according to one Indian media report, the $700m venture is expected to be located either in the southern or eastern India start production in three years. The PTA plant would be worldscale with a capacity of 1m tonnes/year with half of the production used by Indorama Ventures and 30% by Indorama Synthetics.

"We have already identified land parcels in four states and [are] going to start negotiation with each of them," said Aloke Lohia, CEO of Indorama Ventures, one of the largest PET producers in the world.

This is the fourth PTA project being planned in India. Reliance Industries is working on two worldscale plants at Gujarat, on the west coast while JBF Industries has announced plans for a 1.12m tonnes/year plant at Mangalore, in south India.

By John Richardson

AS the US contemplates raising its ethylene capacity by up to 29 percent by 2017, we would be fascinated to know whether the companies involved in these proposed expansions, and the "cheer leader" chemical industry observers spurring them on, have ever considered a chart such as the one below: 

First used in workshops during our New Normal seminars last year, the slide illustrates the point that petrochemical projects outside the West are not always only about economics. They are also about the Michael Porter concept of  'Shared Value', which we discuss in our e-book, involving delivering wider benefits to society.  

The Japanese built petrochemical plants in the 1960s onwards to achieve security of supply of raw materials for auto and other downstream industries. Building these plants was not always, therefore, only about the economic efficiency of the plants themselves.

Then came the South Koreans who followed the same model, and to some extent Thailand through its petrochemical master plans in the 1980s and 1990s.

Now we have a new wave of projects, which are also at least partially "social and political" - i.e. they have a wider agenda beyond just making money.

China has aggressively expanded its petrochemical industry, again for security of supply reasons. Sinopec has a poor rate of investment return from it petrochemicals business, as making money is not its main objective. Instead, it has been tasked by the government with once again guaranteeing supply of plastics etc to the country's vast manufacturing industry. This is why, even when market conditions are bad, Sinopec still tends to run its plants flat out.

The Middle East petrochemicals industry has, up until now, been a license to print money, thanks to feedstock-cost advantages. But its new agenda is also social and political through cracking heavier feeds, including naphtha, enabling downstream diversification, as the region seeks to create jobs to deal with the challenge of youthful populations.

And finally, there is Petronas and its $20bn Refinery and Petrochemical Integrated Development (RAPID) project, which is set to include a 300,000 barrel a day refinery, a worldscale cracker and a wide range of derivatives, including speciality chemicals. We are not saying that the project, due on-stream at end-2016, will not make money. But is the objective entirely about profitability, or is this again partly to do with nation building? Strong government support might be one reason why foreign investors are reportedly queuing up to invest in RAPID.

If you are sitting in Houston, contemplating an expansion based on low-cost shale gas-based ethane, you need to think about how many of these social, or semi-social, projects will be built over the next decade. The assumption that you will always be able to export your surpluses to an ever-hungry booming Asia - and to Latin America where "nation building" is also on the agenda - has to be questioned.

Your assessments of whether or not a rival project is going to be built cannot just take into account supply and demand analysis.

Evaluations will have to be also based on your relationships with senior government officials, and other policy and agenda setters, and your understanding of what is driving their decision-making. If you don't develop this type of market intelligence, you are in for some nasty surprises when uneconomic projects go ahead. These are global markets, of course, and so what happens in Guangdong can matter as much, or even more, than what happens in Louisiana.

Further, when your new plant is up and running there will obviously be periods when markets are bad, leading to pressure for operating rate cuts.

How do you respond when your competitors in Asia, and in Latin America, are still running at 100 percent?

And in a broader sense, what does it mean to be confronting competitors who don't care about losing money?

Perhaps everyone in Houston has thought this through, but none of our discussions, and nothing that we have read, points this way. Apologies if we have missed something.

By Malini Hariharan

The drama continues in the Asian butadiene market. Bids this week are about $100/tonne lower than sellers' price ideas, writes Helen Yan in an ICIS news report. Buying indications have dropped to $3,350-3,400/tonne CFR Northeast Asia.

Butadiene prices appear to be going through another downcycle, reflecting the fundamentals of a market that it is structurally tight over the long term.

Spot butadiene prices have fallen steadily, from a peak of $3,900-4,000/tonne in early February, on strong resistance from buyers who have been unable to pass on the price hikes.

The average butadiene price in February was $3,800/tonne CFR NE Asia, as against $3,700/tonne for polybutadiene rubber (BR). BR producers usually need a price delta of $600-700/tonne for profitable operations.

Several downstream styrene butadiene rubber (SBR) and BR producers in China, Japan, South Korea and Taiwan have already cut production, and this has started to affect butadiene markets.

Traders are also holding back purchases in anticipation of further decline in butadiene prices. A sale tender for a 2000 tonne butadiene cargo for March loading is said to have drawn little buying interest.

The shift in the butadiene market comes at the worst possible time for Asian naphtha cracker operators, as their margins have been squeezed by the rapid rise in feedstock costs.

As we discussed earlier this week, Northeast Asian integrated high-density polyethylene (HDPE) margins have fallen to their lowest levels since ICIS records began. Low-density PE (LDPE) margins in Northeast Asia slipped into negative territory for the first time since we started tracking the data.

The cost push has even forced Sinopec to trim operating rates at its crackers.

Polyethylene (PE) prices have inched up this week in China on improved buying sentiment. But the margin squeeze is unlikely to ease if naphtha continues to climb.

By John Richardson

NEW banking regulations could severely restrict the ability of small and medium-sized (SMEs) companies to access trade finance. This would hit Asia particularly hard, as the majority of chemicals and polymer business involves SMEs.

Under the Basel III regulations, due to be phased in from next year, a three-month trade finance loan will be treated the same as a one-year loan. This will force banks to hold more top quality capital against this type of lending, according to the Financial Times.

This is deterring some banks from staying in the trade-finance business and could increase the cost of letters of credit by 300 percent or more, adds the newspaper.

Some French banks have already decided that the extra regulatory burden is not worth it, and so they have withdrawn from the trade-finance business, says the FT.

"Basel III's implementation could have unintended consequences for trade financing through the proposed leverage ratio, which would require banks to set aside 100 percent of capital for any off-balance-sheet trade finance instruments, such as letters of credit," says the World Bank.

"This is five times more than the 20 percent credit conversion ratio used for trade finance in Basel II. New capital regulations would also require banks to set aside capital for one year for any instrument, even though that security may carry a maturity of under a year. Most trade finance instruments have maturities of about 90 days; this would triple the capital cost of such instruments."

Trade finance volumes could fall by 6 percent, representing a $270bn a year reduction in global trade and a 0.5 percent decline in global gross domestic product, the World Bank adds.

'Eighty-five per cent of all letters of credit will have Asia at one end or the other," said Andy Dyer, managing director of transaction banking in Asia Pacific for ANZ, in this article in Singapore's Business Times.

By John Richardson

SOME polyolefin companies continue to present an optimistic picture of markets to investors.

They point to positive factors such as renewed economic stimulus in China and a recovery in auto production in Thailand following last year's floods.

But, as we said yesterday, those involved in the day-to-day grind of trying to sell a wide range of petrochemicals, including polyolefins, paint a very different picture.

A source with one producer we spoke to this week was notably pessimistic.

Here is what he said, with a few of our own additions in brackets:

"A lot of the speculators have gone short on the Dalian Commodity Exchange's futures contract in linear-low density polyethylene (LLDPE).

"This is on the assumption that prices will fall by the end of May, when they will need to go in to the physical market to honour their contracts. They are therefore betting on a price correction.

"By the end of this month, I am concerned that LLDPE will have fallen to around $1,240/tonne CFR China (last week ICIS accessed LLDPE film at $1,330-1,400/tonne CFR China).

"There are two factors driving the market at the moment - the lack of Chinese demand and the approach of the Middle East producers.

"Chinese demand continues to really surprise everyone on the downside and we are all frequently looking for explanations about what is happening.

"A theory I heard the other day was that many of the polyolefin traders have either directly invested in property through their own real-estate companies, or are indirectly exposed through investments in other people's real-estate companies.

"As bank lending has become harder to get hold of, and as property prices have declined, they have been forced to cover their obligations by selling polyolefins at low prices - thus driving the whole market down.

"I think the blog's earlier assessment of the other factors shaping growth this year was a very good summary.

"The buyers are very cautious and continue to wait for prices to bottom out, but there is no sign of this happening because the Chinese economy is weaker than anyone had expected.

"The Middle East producers have so far held the line on price reductions, as they have a responsibility to their naphtha-based joint ventures in Asia. As a result, they have yet to aggressively reduce prices.

"But the concern is that if the market doesn't recover by the end of May, they will be forced to lower their offers because of more Middle East supply pressure. Several turnarounds in the Middle East have just finished."

(Saudi Polymers is also due to bring on stream two 550,000 tonne/year high-density PE plants and a 440,000 tonne/year polypropylene facility by the end of Q2 this year).

Martin Brudermüller

Source of picture: BASF

By John Richardson

"THE struggle over China's future direction seems to be harder fought than we had imagined," said BASF vice chairman Martin Brudermüller last Thursday, in a German newspaper interview.

"There are very intensive discussions being held in China about the direction the country should take.

"For investors, the times when a project was unanimously rubber-stamped by politicians are over."

As fellow blogger Paul Hodges points out, when the world's biggest chemical company makes a statement as bold as this, one should sit up and take notice.

And so, here are our thoughts.

BASF might be right to worry about China's uncertain direction because:

*There are no guarantees that the 12th Five-Year-Plan 2011-2015), which involves a radically new economic blueprint, will be effectively implemented. This is a result of all the uncertainty over who will lead China following this year's leadership transition.

*Even if the plan succeeds, GDP (gross domestic product) growth could be a lot lower than many economists assume over the next decade, due to the painful process of weaning China off its addiction to investment.

*And if the plan fails, then China could end up pouring ever-more money into inefficient investments with ever-decreasing benefits as domestic demand remains relatively weak.

His comments on project approvals follow those made by Peter Huntsman, CEO of Huntsman Corp, during an investor call two weeks ago.

In the short term, the uncertainty over who will lead China might be making investors very nervous.

Relationships are important and if you end up building strong connections with the political faction that fails to gain control, then you have problems.

And even if companies choose the right faction, there is a big risk in these highly uncertain economic and political times that investment policies will be in constant flux.

Longer term, China might also become far-more self-sufficient in petrochemicals than some people have assumed.

On India, Brudermüller said: ""India is recording growth but the market is feeling the effects of home-grown problems, such as the backlog of reforms and the caution of foreign investors in reaction to questionable legislation.

"The political paralysis in certain areas does hold things up, and it's sad to see how the country is currently falling short of its potential."

India has muddled through in the past, but cannot afford to do so in the future.

Brudermüller, however, said that Southeast Asia (SEA) continued to perform well.

Indonesia alone, with its 240m people, was averaging stable growth of more than 5% per year, he added.

Meanwhile, Malaysia could become an even stronger export base, Vietnam was gaining in stature through its manufacture of shoes, textiles and printers, and Thailand was becoming increasingly important for international automotive and electronics value chains, Brudermuller said.

"We will also need to look more closely at Myanmar in the next few years, for example in the field of crop protection and the expansion of labour-intensive manufacturing," he added.

Geographical diversification is important at a time when growth so uncertain in India and China.

Even if reform in China is effective, there will be changes in the patterns of demand growth as low-value manufacturing migrates from the southern and eastern provinces either into inland China, or overseas to SEA and elsewhere.

By John Richardson

THE blog has been attending the 25th World Gas Conference in Kuala Lumpur, Malaysia, this week where one of the themes repeated on numerous occasions has been the wonderful environment benefits of natural gas.

Poor old coal and crude-oil have received short shrift as presentation after presentation has stressed how gas is cleaner-burning.

But it occurred to us that:

*The age of natural gas abundance, thanks to shale gas, tight gas, coal-bed methane and improved technologies for accessing remote conventional reserves, such as in the arctic circle, might not be good news for the most effective means of lowering emissions: Conservation. There is now some 250 years worth of global natural gas reserves. Might not this tempt countries to guzzle their way through their reserves? This could especially be so in the US if it enjoys a manufacturing and therefore economic revival, given its history of energy profligacy.

*A typical shale gas field, we were told, contains more than 100 individual wells. As the shale gas revolution sweeps across the world, is it realistic to expect high production standards at every one of these many thousands of wells? If standards slip, which seems quite possible, we could see a big increase in the release of methane during natural-gas extraction and, of course, methane is a far more potent global-warming gas than carbon dioxide.

*The gas industry dismisses claims that fracking causes groundwater pollution. Nobody disputes, however, that the fracking process consumes a lot of water. If shale gas takes off in water-stressed countries such as China, the environmental consequence could be very severe.

*As the liquefied natural gas (LNG) trade expands, so will the emissions from moving these giant ships around the world, plus, of course, all the other energy required to refrigerate, regassify and distribute the gas.

Environmentalists are already going after the shale gas industry in a big way.

If the issues we have listed above are not convincingly addressed, one can imagine increasing pressure from environmentalists on the gas industry as a whole, which would also be applied to petrochemicals capacity downstream of gas production.

Source: ICIS

By John Richardson

CHINA'S fibre intermediates industry could end of being a game of two halves in 2012, to use an old football (or soccer for the benefit of our America readers) cliché.

The reason is that the first half of the year was characterised by very weak demand as the overall economy slowed down.

And yet traders still kept buying lots of mono-ethylene glycol (MEG) to ship to China during H1, contributing to a steep rise in imports

"Coastal inventories at one point totalled 900,000 tonnes during the first half, more than enough to meet average monthly demand of around 800,000 tonnes," said Becky Zhang, ICIS pricing's Asian fibre intermediates editor.

The same applied to purified terepthalic acid (PTA) and polyester. Everyone had underestimated the extent of the economic slowdown and so inventories down the chain were around one month.

Now inventories down the fibres chain are at two weeks or less as a result of stronger demand growth in Q3.

The market has picked up a little on the build-up to the next peak textiles and garments manufacturing season, which takes place in Q4.

There has been a lot of talk about textile and garment mills being badly affected by a slowdown in exports to Europe during this year.

But Zhang made the point that the mills have been dealing with this problem since 2009 and that, to some extent, they have found compensation through improved domestic sales.

Nevertheless, despite the Q3 pick-up, Zhang now expects that China's 2012 polyester demand growth will be in the region of 8 percent compared with her earlier estimate of 10 percent.

The Q4 peak season might also turn about to be damp squib, given all the macroeconomic problems.

And in a sign of just how volatile the fibre intermediates business has become, sentiment turned bearish during the week ending 17 August, after several weeks of recovery, added Zhang.

This was the result of a two-day increase in average polyester yarn raw-material inventories in China.

PTA and MEG pricing also declined in response to a weaker PTA futures contract on the Zhengzhou Commodity Exchange.

The futures contract has become an increasingly important guide to short-term physical pricing movements since it was launched in 2006. Every scrap of macroeconomic and oil-market news move the contract.

MEG producers are, however, laughing all the way to the bank because of production problems at several major Middle East plants that have significantly tightened supply.

Zhang added that a reason MEG shipments from the Middle East to China were so high in H1 was that plants were running flat-out on the greater availability of associated gas. More associated gas has become available due to higher OPEC oil output quotas introduced in an attempt to put a cap on expensive crude.

Profitability in the purified terephthalic acid (PTA) business is something altogether different - or to be more precise, it has been non-existent for some producers since late 2011, said Zhang.

The reason is chronic oversupply as a result of new capacities being brought on-stream in China. Eleven new plants are due to start-up over the next three years, with a total capacity of 18.5m tonnes/year. The country's total PTA capacity is due to reach 39m tonnes/year in 2015 - double that of 2011, according to ICIS.

A further factor is lack of sufficient paraxylene (PX) to supply a lot of these new plants.

"Chinese PTA producers are in a better position than their overseas competitors because they depend mainly on domestic supplies of PX which are more affordable than imports," said Zhang.

China's PTA producers have the market muscle to set domestic prices for PTA at levels that further help to guarantee profitability, it has been claimed.

Not so the Thais, Taiwanese and South Koreans who will likely continue to struggle.

China's PTA industry serves as an example of of two aspects of the New Normal, which are:

*Constant increases in Chinese petrochemicals self-sufficiency, beyond the range of some estimates.

*New producers in China enjoying strong advantages in domestic markets, enabling them to always run at high operating rates.

 By John Richardson

LET'S put this into context: China's polyethylene (PE) demand grew by 53 percent in 2008-2010.

Growth during the first seven months of this year was just 1.7 percent over Januuary-July 2011, according to Global Trade Information Services (GTIS).

And when compared with the same seven months in 2010 growth was flat, as the above chart illustrates.

Also compared with 2010:

*Middle East shipments to China surged by 40 percent, The big winners in the region included Iran (up 24 percent as more ethylene has been polymerised to avoid sanctions) and Saudi Arabia (23 percent higher). Saudi production has increased on greater availability of associated gas.

*New capacity in Thailand resulted in a 131 percent rise in the country's exports, as Southeast Asia as a whole gained 27 percent.

*South Korean exports were down by 21%, which further underlines the problems confronted by the region's higher-cost exporters. Overall Northeast Asian exports were down by 32%. 

There is something seriously wrong when demand is so much below GDP growth, which was 7.6 percent in Q2.

This reflects lingering inventory problems in all the synthetic resins (the demand growth story is likely to be very similar for the other resins).

And, as we discussed on Monday, stockpiles of finished goods are increasing as the economy slows down.

A further problem for the poylolefins business is that supply is set to increase next month, when the first on-spec shipments from the Saudi Polymers plant in Saudi Arabia are expected. The facility includes two 550,000 tonnes/year high-density PE (HDPE) units and one 400,000 tonne/year polypropylene (PP) plant.

By John Richardson

"You cannot just sit back and expect things to happen the way they have happened in the past, especially in emerging markets." This insight from a senior Asian-based executive with a global polyethylene (PE) producer highlights the risks faced by the global industry as we transition to the New Normal.

The executive added:

"The key to success is to stay on top of developments in the economy, society and politics and constantly think how these are changing and how you need to reposition your business. You need lots of good people on the ground who can detect micro changes at the level of your customers that can become major economic and social trends."

The interview is contained in this new ICIS Chemical Business article. This argues that planning during the Supercycle was based on the theme of Kevin Costner's 1989 movie, Field of Dreams (above) - 'if you build it, they will come'. Today, however, a difficult transition is underway, as we describe in Boom, Gloom and the New Normal.

The risks are rising all the time that policy makers will fail to deliver a return to the supercycle. The winners will instead be those companies who refocus on the new economic and social trends that are already starting to drive future growth.

To download a free copy of the article, please click here.

By John Richardson

SINOPEC's remarkable rise in the petrochemicals business continued in 2011 as it jumped two places in the ICIS Top 100 ranking, compared with 2010, to finish second overall, behind BASF. This was the result of a 28.9% rise in chemicals sales in local currency and a 34.9% increase when sales were measured in US dollars.

The steep rise in sales reflects the Chinese government's strategy of boosting petrochemicals self-sufficiency. New cracker and derivatives capacity was commissioned by Sinopec in 2011. Between 2000 and 2011, the company's total production in all chemicals rose from 2m tonnes to 10m tonnes - a 14% increase per year.

Sinopec's operating profit also almost doubled in 2011 compared with the previous year.
But the problem is that this reflected a strong first half of 2011. By Q4 of last year, markets had weakened.

And 2012 has been an immense disappointment. Chinese demand growth in all the major synthetic resins is likely to be in the low single digits.

Doubts are also growing over the long-term health of the Chinese economy. GDP (gross domestic product) growth could call to as low as 3% per year over the next few years, as China undergoes a painful rebalancing from investment to domestic consumption-led growth.

If it fails to rebalance quickly enough, there is a risk of a major non-performing loans crisis as a result of continued investment in unneeded infrastructure and industrial capacity.

This doesn't mean, however, that Sinopec will necessarily delay capacity expansions. The main role of the company , which is still 76% owned by the government, is to guarantee supply of raw materials to domestic downstream industries even if, at certain times, this means losing money.

China as a whole is scheduled to increase its ethylene capacity from around 15m tonnes/year in 2011 to 27m tonnes/year in 2015, according to ICIS data.

This puts some of Sinopec's overseas competitors, which have to answer to shareholders, in a very difficult position if the worst fears over China's economy are realised.

South Korea's Honam Petrochemical, however, had a tremendous 2011 as a result of a 47.6% increase in sales.

But the South Korean companies in general are expected to struggle to achieve full-year 2012 financial targets because they are so heavily dependent on China for exports.

At least in the case of Honam, though, its position has been strengthened by its 2010 acquisition of Malaysia's Titan Chemicals.

This has given it better access to the booming ASEAN (Association of Southeast Asian Nations) markets, and an edge in exporting to China through the ASEAN-China Free Trade Area.

The challenge for Thailand's PTT Global Chemical, also, of course, within the ASEAN region, is to maintain its 2011 progress in 2012. In 2011, it leapt into the top 30 of the ICIS ranking, thanks to its emergence from the merger of the former PTT Chemical and PTT Aromatics.

India's Reliance Industries, which saw its 2011 petrochemicals sales jump by 28.2%, faces the very different challenge of effectively executing the biggest "off-gas" cracker project of all time.

It is due to bring on-stream a cracker, which could eventually produce 1.6m tonnes/year of ethylene, and associated downstream capacities at its Jamnagar complex in Gujarat in 2015

The cracker will be entirely fed by off-gases from Reliance's 1.24m tonnes/year refinery capacity at the same site.

"The biggest previous cracker to run solely on off-gases had an ethylene capacity of only 100,000 tonnes/year," said a source familiar with the Reliance project.

Reliance is to spend a total of $12bn on new petrochemicals capacity, including not only the cracker complex, but also on new paraxylene (PX), purified terephthalic acid (PTA) and polyester plants.

This is a major play on a domestic Indian market that, even if GDP growth slows quite dramatically, should be able to absorb all of the new Reliance capacities.

This time last year, most people would have said the same thing about all the capacities added to serve China, but maybe not now.

Graph prepared by The Economist

By John Richardson

INDONESIA has enjoyed eight consecutive quarters of 6% GDP growth and so - along with several other mainly domestically-demand driven Asian economies - is viewed as a haven of stability in an increasingly uncertain world.

The country's 2012 demand growth for polyethylene (PE), polypropylene (PP), polystyrene (PS), polyvinyl chloride (PVC) and acrylonitrile-butadiene-styrene (ABS) will be 7.5%, according to the Indonesian Olefin & Plastics Industry Association (INAPLAS).

Around 50% of Indonesia's polyolefins demand is covered by imports, with substantial imports of ethylene and naphtha also needed to meet the very steady, and very strong, demand growth, says ICIS.

Hence, notwithstanding problems with bureaucracy and an unclear regulatory environment, Chandra Asri plans to build an $8bn refinery and expand ethylene capacity, while also adding a butadiene extraction unit. Honam Petrochemical, which owns PE assets in Indonesia, has plans for a 1m tonne/year grass-roots cracker, adds ICIS. 

Indonesia has done a fantastic job to recover from the economic misery inflicted by the 1997-1998 Asian Financial Crisis. Along with Thailand and South Korea, it suffered enormously from the collapse of its currency against the US dollar. This led to soaring inflation and unsustainable debts dominated in the greenback.

Since the crisis, the affected countries have switched from dollar debt to investment by foreigners in local equity markets and lending in domestic currencies.

There is also talk of "macro-prudential policies" smoothing out the peaks and troughs of economic cycles.

But, as The Economist writes: "Wise monetary policy was also one of the reasons cited for the Great Moderation enjoyed by the G7 economies.

"Another was the supposed depth and sophistication of the rich world's financial systems, which, it was said, allowed households to smooth their spending, firms to diversify their borrowing and banks to unburden their balance-sheets.

"Both of these pillars of stability proved false comforts. Economists had not quite settled on an explanation for the Great Moderation before it inconveniently ceased to exist."

Hyman Minsky believes that drops in volatility allows firms and households to borrow more of the money they invest, the magazine continues.

"Stability, in Minsky's formulation, eventually becomes destabilising. Over-leverage does not require excessive optimism, merely excessive certitude; not fast growth, merely steady growth," it adds.

According to Fred Neumann of HSBC, Asian leverage is now higher than at any time since the Asian Financial Crisis (see the above chart).

Excessive exuberance might also be driven by possibly misplaced confidence over China's economic future.

The Indonesian manufacturing sector faces the additional problem of very competitive imports from China, including of finished BOPP film, as a result of  overcapacity in China and the Asean-China Free Trade Agreement.

These imports could well increase as China's economy further decelerates and it attempts to unburden itself of huge inventories of finished and semi-finished goods.

.....For Now 

By John Richardson

RELATIVE to most of 2012 - when China's polyolefins market was in dire straits - November, December and early January have been excellent for traders who took the right positions. At least one producer has also reporting a strong recovery in sales.

"I thought there would be a mini-rebound in early November, and I was correct," said a Singapore-based trader.

"Prices then retreated slightly before a stronger rally began in late November (see chart below)."

The latest recovery is being driven by:

*Shutdowns in the GCC. The estimated production loss as a result of the confirmed plant turnarounds is 118,000 tonnes of linear-low density polyethylene (LLDPE), 353,000 tonnes of high-density PE (HDPE) and 238,000 tonnes of polypropylene (PP), according to ICIS.

*Outages at the PetroRabigh and Daqing petrochemical complexes in Saudi Arabia and China, respectively. The Daqing outage is expected to last until around February and includes the company's 300,000 tonnes/year HDPE/LLDPE swing plant and its 250,000 tonnes/year HDPE facility. The PetroRabigh complex is expected to restart in late January. Offline at the moment are the producer's 600,000 tonnes/year LLDPE plant, its 300,000 tonnes/year HDPE unit and its 700,000 tonnes/year PP facility.

*Reports that Northeast and Southeast Asian cracker operators have cut capacity utilisation from more than 90% in November to around 85% in December/January. But, as we have just said, these are just reports, and there are suspicions that some South Koreans are continuing to run hard.

*Confidence amongst converters that China's new leaders mean business on economic reform.

*Low stocks amongst the converters, especially those who need to fulfil orders before the Chinese New Year, which falls on 10 February.

*The fiscal-cliff fudge. This has caused a rally in stock markets, in oil (Brent crude was up by $3 a barrel last week) and commodity prices in general. Iron ore, for instance, is now more than $153 a tonne. "Prices are up by around 70% over the last four months, and the rally gained extra momentum in December. This is mainly the result of misplaced confidence in a sustainable Chinese recovery," said a Perth-based investment analyst.

"Is there a real improvement in polyolefins demand or is this the result of short-term tight supply and an improvement in sentiment?" queried the Singapore trader.

"Quite frankly, I don't really care as I've made good money since November and can now afford to play very cautiously over the next couple of months, without worrying about missing out on anything further."

Reasons to be cautious about the sustainability of the recovery include:

*The end of turnarounds in the GCC in February-April and the resumption of production at PetroRabigh and Daqing.

*Substantial amounts of new capacity. ExxonMobil is expected to ramp up production at its two 650,000 tonnes/year metallocene LLDPE plants and its 450,000 tonnes/year PP facility in Singapore, now that its 1m tonnes/year cracker is being commissioned. China is also set to bring on-stream significant amounts of polyolefins capacity this year, including Sinopec Wuhan Petrochemical Co at Wuhan in Hubei. "We have heard that the complex's 300,000 tonnes/year LLDPE plant and its 400,000 tonne/year PP plant will start-up in early Q2," the trader added.

*The fact that stock and commodity markets also rallied in 2009, 2010, 2011 and 2012, only for the rallies to peter out.

A key question for the blog is: When will stock and commodity markets start worrying about the likelihood of a bitter and prolonged fight between Republicans and Democrats over the need to raise the US debt ceiling?

The fiscal-cliff fudge has left the two political parties even further apart, with the Republicans also blighted by deep internal divisions.

By late February or early March, the Treasury Department will run out of options to cover US debt and could begin defaulting on government loans unless Congress raises the legal borrowing limit - the debt ceiling. Economists warn that a default could trigger a global recession.

As far as China's new leaders go, the blog feels they will attempt a "steady as she goes" policy over the next few months, possibly even the rest of this year, as they try to shore up their support.

Modest stimulus, along with more of the right noises about economic reform, might well be the desired approach. This doesn't necessarily mean that genuine reform will be sufficient to put China on the right economic path.

If the external environment weakens substantially, however, (for example because of a US debt default or a new crisis in Europe), Beijing may be forced into a big new stimulus package - adding to concerns about inefficient investments and bad debts.

More immediately, factor in a possible bounce in confidence when the official purchasing managers' index for January is announced in early February, as the December PMI is said to have been manipulated downwards in order to store up some more good news.

Returning to polyolefins, a source with a global producer told us: "From late February/early March, when the Chinese New Year is over, plants have returned from turnarounds and new capacities start to come on-stream and the debt ceiling issue has come to a head, we should get a real idea about the strength of demand."

Note that markets in China are expected to quieten down from 15 January, ahead of the New Year, until late February.

So far so good...lack of arbitrage in 2012

By John Richardson

Despite a strong recovery in China's polyethylene (PE) prices and sales over the last month-and-a-half, producers are viewing the coming year with great trepidation.

One of the wild cards is how the US producers behave in 2013, as we also discussed in November.

Faced with weak demand in their own market as a result of a failure to negotiate an increase in the debt ceiling, will US producers seek to export their way of out of difficulties?

While the Middle East sharply increased PE exports to China in January-October on new start-ups and more stable production at plants brought on-stream in 2010-2011, North American Free Trade Agreement exports declined by 42% on US production losses and a stronger home market.

"That pretty much saved us. I am worried about this year, though, as, of course, US producers have a big feedstock advantage," said a Singapore-based source with a global producer. 

My colleague Nigel Davis, in this ICIS news Insight article, neatly summarised the US outlook when he wrote "Olefins prices in the US rose towards the 2012 year end on a series on unplanned cracker outages.

"And planned maintenance shutdowns in the first months of 2013 are expected to underpin the higher prices.

"(But) North America's ethylene producers are planning significant new capacity additions to take full advantage of increased ethane supplies from shale gas extraction and a mood of optimism prevails in the sector.

"In 2013 more than 2bn pounds (more than 900,000 tonnes/year) of ethylene capacity will be added to the US total (a significant proportion of which could be turned into PE).

"This 3.3% increase in the US ethylene capacity total is expected to help stabilise prices which fluctuated wildly in 2012, as the impact of numerous scheduled maintenance shutdowns was amplified by a string of unplanned outages.

"Cracker operators are keen to take full advantage of North America's ethane advantage which has put the region second only to the Middle East in terms of feedstock cost competitiveness.

"Capitalising on that advantage, however, is causing disruption in a low demand-growth environment.

"US cracker operating rates have been estimated at 85% in 2012 compared to closer to 92% in 2011 but rates could push back up to above 90% this year with fewer turnarounds putting some downward pressure on prices."

If the US does export bigger quantities of PE to China, the losers will, of course, be the higher-cost naphtha cracker operators in Northeast and Southeast Asia.

By John Richardson

ONE of Sinopec's subsidiaries, Shanghai Petrochemical, has weighed-in to the debate over US shale gas by warning that cheap petrochemicals imports from the States could erode the whole of China's competitiveness.

"We can't tell how severe the blow will be, but it will pose a serious challenge, and the entire industry will need to brace itself for the hit," said Shanghai Petrochemical vice-chairman Wang Zhiqing, in the South China Morning Post earlier this month.

"We need to reduce costs and differentiate our products by adding more value," he added.

We once again return to our favourite triangle (see above), which was created fellow blogger Paul Hodges. Sinopec has traditionally not been about making money, but instead has been tasked by Beijing with supplying cheap petrochemical raw materials to China's vast manufacturing industry.

The focus was on creating jobs in order to lift hundreds of millions of low-income Chinese out of poverty, rather than on a strong bottom line for Sinopec.

But we think the Sinopec business model has now changed because:

• Beijing wants a more sophisticated manufacturing industry as China attempts to escape the "middle income trap". This involves less protection of state-owned companies from intenational markets.

• Demographics mean that, at least in the developed eastern and southern coastal provinces, job creation is no longer the priority. Instead, it is about the quality rather than the quantity of growth, which is connected to the technological upgrades vital for escaping the middle-income trap.

Thus, perhaps Sinopec will have to take cheap US exports on the chin and get on with becoming more of a higher-value internationally competitive company, as Wang's comments perhaps indicate.

We are not suggesting that Sinopec will have to close-down petrochemicals capacity in the face of increased volumes of very competitive imports. That wouldn't make any sense because the company's refineries need a home for naphtha in order to make gasoline etc.

But it could be that the opportunities for further capacity growth in basic petrochemicals are more limited.

The blog also wonders how Sinopec is going to absorb the extra costs of upgrading all of its refineries to meet higher-fuel standards.

Sinopec chairman Fu Chengu ended up in hot water with the Shanghai Daily in February when he claimed that it was lax government fuel standards, rather than refiners seeking to save costs, which were the main cause of Beijing's dreadful smog crisis and growing wider concerns over pollution.

As the Shanghai Daily wrote: "Much of China still uses the National III vehicle emissions standard, which are similar to the Euro III standard - allowing the sulphur content in gasoline to be as high as 150 parts per million.

"The Euro V standard caps the sulphur content at below 10 ppm.

"Shanghai and some relatively developed regions like Jiangsu and Guangdong use the National IV standard.

"Sinopec is not violating any rule or law in supplying most of China with National III standard fuel. But it does benefit from relatively low fuel-quality standards."

In response to the bad publicity, Sinopec said that it would upgrade desulphurisation facilities at 12 subsidiaries by the end of this year, and would start selling cleaner gasoline that met the National IV standard from next year.

This has triggered concerns about rising fuel prices.

There is already upward pressure on fuel prices because the subsidy system for pricing gasoline etc has twice been reformed since 2009, with the latest change taking place in March this year.

But the positive news is that these reforms have allowed Sinopec to enjoy a stronger stand-alone bottom line, as it can more accurately reflect the fluctuations in the costs of imported oil in the prices it charges for gasoline and diesel etc. It is also better able to plan production to prevent fuel shortages.

The new market-oriented system for pricing fuel was a factor behind Sinopec's 25% improvement in first quarter 2013 net profit.  

Perhaps we have answered our own question here as to how Sinopec will pay for upgrading its refineries. The adjustments in the fuel-price mechanisms might well be partly designed to give it the revenue to make the necessary changes.

And if Sinopec follows through on its pledge to help clean-up China's foul air, it might be better able to attract and retain the talent necessary for it to move up the petrochemicals value chain!

China's educated middle classes, who can afford to get out of the country, are increasingly doing so because of concerns over pollution and food safety, the blog heard during its recent visit to China.

Attracting and keeping expatriates is also becoming much harder, as the New York Times wrote in this very worrying article. 

If you can't guarantee the safety of your children, what's the point of a big salary?

By John Richardson

SOUTHEAST (SEA) polyolefins demand grew by 15-20% last year in some of the region's emerging countries, such as Indonesia, according to a source with a major global producer.

Confidence is high as overseas money pours into super-hot property markets in Indonesia and Thailand. In Indonesia, property prices have risen by as much as 300% in the last few years in US dollar terms (yes, that's not a typo - 300%!), according to the same source and in certain parts of Bangkok, condos have reportedly doubled in value over the past three years.

Several polyolefin industry contacts we spoke to talked about plastic converters who bought land years ago and have since subdivided that land and sold it to property developers at vast profits.

But whilst stronger polyolefin volumes in SEA are good news for producers seeking to compensate for flat or even negative growth in China this year, as a source with a second producer pointed out, "Southeast Asia is no China as its total volumes are relatively small."

And the other concern, of course, is that events in SEA remind many people of the build-up to the 1997-1998 Asian Financial Crisis, when overheated economies suddenly collapsed. Capital flows can so easily be reserved.

This excellent article from the Christian Science Monitor is worth reading on the subject of parallels with the pre-crisis era.

Much of the advances of the 1990s were lost because of failures to tackle corruption, improve education and invest in infrastructure, says the article.

HSBC wrote in a recent report on the Philippines: "The country faces considerable challenges. Infrastructure in much of the country remains poor and corruption is widespread, despite progress under Mr. Aquino's [the president's] administration. Growth has generated pockets of urban prosperity surrounded by vast areas of grinding poverty and few jobs."

An IMF report, released earlier this week, suggested four ways in which Asia's emerging economies, which they  categorise as China, India, Indonesia, Malaysia, the Philippines, Thailand and Vietnam, can avoid the middle-income trap.

They are:

• Invest in infrastructure. IMF analysis suggests that subpar infrastructure is a key factor that can check an emerging economy's growth. India, the Philippines and Thailand are particularly exposed in this area and should focus on building new and upgrading existing public transit systems, freight channels, ports and energy infrastructure.

• Guard against excessive capital inflows. Money flows from abroad can energise an economy and give domestic consumption a boost, but can send an economy south if investors retreat in a hurry. Policy makers should have macro-prudential controls in place to mitigate potential rapid outflows.

• Boost spending on research and development and post-secondary education. Both are needed to foster the innovation that's a hallmark of advanced economies. Malaysia and Thailand have the highest college enrollment rates among emerging Asian economies, but China is rapidly catching up, according to IMF data. China far outstrips other developing Asian countries on R&D, with 2009 spending at more than 1.5% of GDP.

• Get more women into the workforce and raise the retirement age. Ageing populations are a problem in much of Asia. Governments can take steps to reduce "dependency ratios" by raising the age when workers are eligible for pensions and encouraging girls to enter university and vocational training.