The expression "tthis really gets my goat" is in common usage in Northern England, where I hail from. Indeed, despite spending 11 years in Singapore, few people other than my wife (who is Scottish and has an even worse accent and some even stranger expressions) can understand a word I say.
This is the Asian century - and this doesn't get my goat at all.
The failure, and quite possibly the death, of the Doha round of trade negotiations earlier this week could create a very confusing and erratic regulatory landscape for the chemicals industry.
As Fred points out, John McCain, if elected, has made it clear that he won't accepted emissions caps if China and India do not follow suit.
Obama. however, is prepared to let the US take the lead ahead of the Asian giants. He warns, though, that if they don't agree to fall in line at some point, import tariffs could be imposed equivalent to the energy content of finished goods.
The European Union is also understood to be considering the same safeguards as it looks to extend its cap-and-trade system. Industry, including at least one of the oil-to-chemicals majors, is lobbying hard for safeguard provisions of taxes on imports if no global agreement is reached.
Chemicals and other producers would obviously shut up shop in the EU and move to countries where there was no price set on emissions or if there was no effective import-tax system or some other kind of economic disincentive.
Despite the few remaining climate-change scepticis - quite rightly derided in the same New Scientist blog - climate change as a result of human acitvity is accepted by most scientists and governments as a reality.
A global agreement on a price mechanism for carbon - whether its a cap-and-trade system and/or a tax - would be the best outcome for the chemicals industry. It would enable producers everywhere to accurately assess the cost of investment in better processes and new technologies.
They could also make reliable and predictable income through trading credits globally and from operating and licensing new technologies.
Piecemeal legislation wouldn't provide the same degree of clarity, leading to equally piecemeal strategies from company to company and region to region.
The lawyers might also make a lot of money out of disputes over carbon import taxes.
And, of course, companies might still look to move their investments elsewhere by searching for loopholes in US and EU carbon import-tariff rules.
As the effects of climate change accelerate, you could also see knee-jerk nonsensical regulations introduced by governments out of sheer panic. This could make life very difficult, if not impossible, for chemical producers in certain countries.
So let's hope the Doha round can be rescued - and that it serves as a confidence builder towards the much bigger job of a new global agreement on emissions.
In my previous post, I talked about the collapse of the Doha round of trade negotiations and how this didn't auger well for a new global agreement for setting greenhouse gas-emission limits and a worldwide price on carbon.
The chemicals industry needs clarity. A global price for carbon would enable companies to plan R&D investments over the long term.
I also discussed how it seems more than likely that if no global agreement on carbon prices was reached, countries and regions with pricing mechanisms already in place would have to impose import tariffs based on carbon content. The tariffs would be levied on intermediate and finished goods from places where there were no carbon-pricing mechanisms.
But in this thoroughly globalised world, who should bear the blame for CO2 and other emissions?
Christopher L Weber from the Carnegie Mellon University in Pittsburg, Pennsylvania and his colleagues have concluded that one-third of China's CO2 emissions are the result of exports. This is up from only 12% in 1987 and 21% in 2002.
Could proof of collective blame for emissions made through the WTO or other international bodies result in icarbon mport tariffs becoming unworkable?
You could spend fruitless years and millions of dollars in lawyers' fees trying to determine what percentage of tariffs to levy on companies at different points of production and logistics chains.
Shouldn't anyone who exports to China - whether for re-export or domestic use - carry the can for the country's emissions?
Might unworkable import tariffs force the EU to scrap or limit its cap-and-trade system out of fear of an investment drift?
The next US president could also be deterred from introducing a price on carbon, especially if the economic crisis drags on. Protectionist sentiment has risen since the slump began.
It is very easy assume that Asia ex-Japan will eventually catch up with the West and become as good at "solution" chemicals as the West. I am excluding Japan because it has long been a major speciality player.
All the money that China, for example, is pouring into its state-run research institutes would seem to suggest that eventually, the country will produce a BASF - or at least a collection of companies that come close to matching the German giant's innovation.
But this report from Deutsche Bank - in a theme I will be touching on a lot over the next few weeks - points out that despite the great drift east, Europe has has held its own.World_chemicals_market_Asia_gaining_ground.pdf">
I've created a new category "Analysts' Reports" which you will hopefully find useful.
The Deutsche Bank report concludes that the West has a great opportunity - and has already made an excellent start - in the green chemistry race.
"In 2007, Europe accounted for 31% of global chemicals turnover; in 1997 the share was 32%." write its authors.
Here's another important statistic from the study: BASF's turnover in 2007 was Euro60bn - the same as the entire Indian chemicals industry.
Knowledge retention, which I talked about yesterday, will be crucial for the West if it is to maintain this lead.
Constant innovation through a willingness to fail many times before succeeding might also be important. As Winston Churchill said: "Sucess is the ability to go from failure to failure without losing your enthusiasm."
It's going to be fascinating to see how the new Dow and Rohm & Haas entity raises its game to meet the challenge of responding to the need for clever new products that must also be sustainable.
Finally, here are a couple of examples of Western innovation, the credibility of which I cannot vouch for.
Ford claims to have developed a way of sequestering VOCs from paints for conversion into fuel for fuel cells.
These serve to illustrate one of the other points I made yesterday - the need to navigate all the information out there to keep up-to-speed with a rapidly changing chemicals world.
I'm bewildered. I don't know about you
Only in America, surely.
If I had made this up you wouldn't have believed me. Rocky Twyman (see picture above), Founder of the Pray For The Pump Movement, and his pals have been touring the US asking the big guy in the sky to intervene and bring down the price of gasoline.
What's quite clearly needed is for some divine intervention, Old Testament Style, involving perhaps a little smiting of carbon molecules, to speed up the process of creating new and easily accessible crude oil reserves - by several hundred millions of years.
Maybe Mr Twyman is right and all that there is left for us to do is pray.
Either that or stop driving disgustingly huge gas-guzzling cars, cut back on the gargantuam-portioned meals that further waste precious hydrocarbon resources (and result in very large Americans who need those bigger cars and bigger clothes - again using yet more hydrocarbons).
Heaven forbid that Americans should change their lifestyles. It's far better, surely, to tell the developing that they can't have the things that America's got and continue believing that cheap and abundant gasoline in the States is a God-given right.
Grrrrrrrrrrrr..................
China and the environment might not be only about rivers changing colour several times a day and factories belching out air pollution that kills hundreds of thousands of people prematurely every year.
In what could turn out to be the ultimate irony of ironies, the very economic system which has caused the crisis in the first place could end up resulting in China becoming the world's leader in clean technologies.
Ample evidence already exists to this effect, according to the Climate Group - a London-based non-profit organisation, the members of which include BP and Dow Chemical.
The group's latest report - China's Clean Revolution - claims that China's transition to a low carbon economy is already well underway. This is the result of supportive government policies which are driving innovation in low carbon technologies and diverting billions of dollars into energy efficiency and renewable technologies.
The huge energy that was poured into industrialisation, once Deng Xiaoping declared that getting rich was glorious, seems to have now been turned to wind, solar and other forms of renewable energy - along with conservation.
China now ranks fifth behind Germany, the US, Spain and India with six gigawatts of wind turbine capacity, says the Climate Group. Some experts believe that this could climb to 100 gigawatts by 2020.
As was the case with industrialisation, State backing might overcome that nasty burden of capitalism - the need to return short-term profits, or even any kind of profits at all.
Lending from China's big banks is still largely directed by the government and the banking system is awash with liquidity - a drastic contrast with the Western credit blight.
Incentives are in place to boost wind power, but have yet to be introduced for solar energy. China. however, is second only to Japan in the global solar photovaltaic market.
Research is taking place in to carbon capture and storage and integrated gasification combined cycle technology.
China is also introducing fuel efficiency standards for cars which are 40 per cent higher than those in the US. Twenty one million electric bicycles and 1.64 million energy efficient compact cars were sold in 2007, the report adds. Clearly, the Chinese are doing a great deal more than just praying for lower gasoline prices.
This all sounds fantastic, but the old story about China is that what works at a central government level might not necessarily be implemented evenly across the country.
Arthur Kroeber of the China Economic Quarterly, however, believes that this old tale about China is total nonsense when the central government decides to take something seriously. The environment is one problem that Beijing is taking exceptionally seriously as it tries to build a more "harmonious society", he says.
But the task remains huge. According to The New Scientist magazine, if China's emissions continue to increase at 8 per cent per year, its per capita CO2 emissions will be double those of the European Union by 2020. While China's emissions keep on rising, EU member countries are making big reductions. For example, Germany reduced its greenhouse gas output by more than 19% between 1990 and 2003.
The problem for China is that it still has to create lots of new jobs of a rapidly urbanising society, whereas many of the rich people in the EU are desperate to return to the rural life.
But, of course, the Europeans are hardly likely to return serfdom. Instead it's all about four-wheel drive gas guzzlers, centrally-heated converted barns, and conveniently located supermarkets stocked with food and booze from the four corners of the Earth.
What planet are we all really on? We rich-world people are all desperately trying to get rid of that tiresome leftover venison as we insist on Afghan melon, to quote the Big Yin.
When I looked in the fridge the other day, my wife had bought Sicilian lemon juice. For pity's sake...
This article, by David Strahan, author of The Last Oil Shock, says that it would take three million coconuts to power one flight from London to Amsterdam on 100% biofuels.
Some of the comments posted at the end of this excellent article, first published in the New Scientists, agree with Strahan that we have reached "Peak Aviation" - no matter what the developments in second-generation biofuels.
The first generation nonsense of corn-based ethanol (as Andrew Liveris pointed in my post yesterday) and palm-based biodiesel have been thoroughly discredited.
But what the Strahan research also contends is that even the much-touted next wave of technologies will never realistically be able to 100% replace hydrocarbon-based fuels for aviation, transportation and power generation. The argument can also easily be extended to the chemicals industry, which, of course, is so tied into the production of transportation fuels.
Strahan supports this view with another startling calculation: an area bigger than China (10 million kilometres squared) would be needed to provide enough biomass to completely replace the world's current demand for fossil fuels for all forms of transportation.
Then you need to contemplate the likelihood that we have reached, or are very close to reaching, Peak Oil. The huge growth in crude demand from developing countries is pushing us much closer to Peak Oil, if it hasn't already arrived.
In The Last Oil Shock, Strahan quotes Dick Cheney in 2001 as characterising Republican energy policy thus: "Conservation may be a sign of personal virtue, but it cannot be the basis of sound energy policy."
But just a few years later, shortly after hurricanes Rita and Katrina had exposed the fine balance between crude supply, refinery capacity and demand, President Bush said: "We can all pitch in by being better conservers of energy."
Winston Churchill saved Britain, and the world, from the Nazis. He was, though, widely viewed as mad - even by many prominent Americans such as Joseph Kennedy - for sticking it out during the dark days of the Blitz.
The parellel here is that we need politicians and business leaders with the courage not just to react to temporary crises, as Bush did by telling people to conserve after the 2005 hurricanes.
We need the next president of the US to persuade the public to accept one-car ownership, greater use of public transport and recycling. A visionary leader has to emerge who will, in the long term, be willing to dismantle the whole structure of our current consumer economy through persuasion backed up by tough legislation.
The short election cycles in the US - when as soon as you are elected, virtually, you need to start worrying about the mid-terms and then your own re-election bid - might prevent any such leader emerging.
Equally, oil and chemical company CEOs don't last that long. Even the current generation of leaders might be well into comfortable retirement by the time our modern way of life collapses as energy runs out.
There's a marvellous line in Ian McEwan's great novel, Saturday, where the main character enjoys a shower after a game of squash and reflects that his could be last generation to enjoy luxuries such as limitless hot water.
Our supposed betters, the politicians and the business leaders, need to have the courage to tell us, to make us, consume less - and American has to take the lead (as it eventually did, albeit a little belatedly, in the Second World War). Only if America takes the lead on conversion, and on climate change, will the result of the world follow.
We need the CEO of a plastics company to, for example, to come out and say "please use less of our products, for the good of humanity". You can just imagine the reaction of his or her fellow Board members, however,
In this era of short attention spans fed by soundbites, spin, Google and YouTube - leading to erratic voters and equally erratic and fickle investors - visionaries of this nature are unlikely to emerge.
We are living on borrowed time
are greatly exaggerated" wrote Mark Twain who twice had the misfortune (or perhaps good fortune, given that he was still breathing!) to read his obituary in newspapers.
The same could be said of the US commodity chemicals industry. Until very recently, just about everyone was predicting that the States would fairly soon shift from a net export to a net import position due to higher gas prices, the build-up of very competitive capacity elsewhere and the constant drift of manufacturing overseas. The country's chemicals industry has lost 120,000 jobs with 3 million jobs lost in manufacturing over the last five years.
But what's changed over the last few months is gas prices which have become relatively cheap compared with crude and the weak dollar. This has created what consultants predict will be the "last hurrah" for the US styrene industry ahead of the big slew of new Middle East capacity due on stream soon.
From a carbon footprint point of view, it does seem ridiculous that oil is shipped from the Middle East to make benzene in South Korea and the C8s are then shipped to the US. The US combines the benzene with its competitive gas-based ethylene to make styrene which is then shipped to Europe - already a net importer of commodity chemicals.
But the carbon footprint argument, along with rising freight costs, could offer a lifeline to the US chemicals industry in general. There has been much talk of "reverse globalisation" recently. This might lead to the economic justification for building new commodity chemicals capacity in the US and elsewhere in the West.
The good news on the radio as I came into work this morning was that Hurricane Gustav had weakened in intensity with forecasts that it might make landfall in the US with wind speeds of less than had been earlier feared.
But this is not the point. The point, as Jeffrey Rubin of CIBC World Capital Markets makes in his report - Supply Crunch - is that just as the US has come to rely more on US Gulf oil and gas production, the frequency of high grade storms (class 3 to 5) in the region has increased.
"With both crude and total oil production inventories running significantly lower than they were when either Katrina or Rital sidelined Gulf oil production, both oil and gasoline prices are more exposed to potential storm-related disruptions than they were three years ago," he writes.
This blog isn't about the short term. But the the short term tension in crude and crude-product markets created by this latest hurricane scare is the result of tightly balanced supply and demand that has long-term implications for the global economy and for our hydrocarbon-dependent way of life.
The Gulf region - now so much more important to US supply because of production problems elsewhere - has itself suffered from delays to new capacity coming on stream. The BP Thunder Horse project, for example, is behind schedule - meaning that new production has grown at a fraction of earlier predictions for the Gulf. This has compounded the crisis caused by depletion of offshore fields as existing oil wells run dry. For example "some one-and-a-quarter million barrels per day from Mexico is likely to vanish (over the next five years) as its giant Cantarell field continues to deplete at a 30% annual rate", Rubin adds in his report.
Without getting into the argument over whether the increased frequency of severe storms in the Gulf is the result of global warming (or whether a long-term pattern of more dangerous weather has established itself - a view dismissed by some in the three years since Katrina and Rita because the region has so far escaped major hurricanes), there seems to me no dispute that supply is very stretched in the Gulf and globally.
Talk of demand destruction in the US benefiting crude pricing over the long term was earlier dismissed by Rubin. He estimated that by 2010 there will be 12 million less motorists on the road in the US. The problem is that ten new motorists in countries such as Brazil and India are buying cars for the first time for every one that leaves the roads in the States, he said.
High oil prices might slow down the pace at which people in emerging markets switch from push bikes to motorcycles and from mortorcycles to cars.
But without a global recession of a severity we have never seen before, it's hard to see how the slowdown will be enough to result in a net reduction in global oil consumption sufficient to end the crude crisis.
Chemical prices have gone through the roof this year on higher feedstock costs, causing greater recycling, greater conservation and a slowdown in the rate of substitution of petroleum-based products for natural materials in emerging markets.
If Gustav causes severe damage to oil and gas production and any further severe hurricanes hit the region this year (Tropical Storm Hana is brewing off the coast of the US as I write this post), the chemicals industry could lose even more ground.
I am afraid I do when it comes to climate change and, as a result, don't always switch off lights when I leave rooms, don't always say no to unnecesssary plastic bags when I buy anything and will happily (and this could be the worst damage of all) jet anywhere in the world either for business or pleasure.
I am feeling guilty today for accepting a 20 minute speaking engagement in Hong Kong which won't generate any direct revenue for our training business.
Of course it might create that intangible benefit of goodwill plus I can also do some other meetings while I am there.
But is this the kind of marginal trip that businesses should cut back on and if this happens, what will be the effect on bottom lines as building goodwill is so important?
Equally important in Asia are all those face-to-face meetings. Relationships can have more value than sometimes even the quality of the product you provide.
How do you decide as a company, therefore, what is essential and what is unncessary travel?
And as an individual, what about those flights at the weekend for short breaks? I've often jetted off to Phuket in Thailand because I've been tired from travelling too much for work!
I was glad to discover I am not alone about my sense of the enormity of it all, for feeling that turning the odd light bulb off is not going to make a jot of difference in the great scheme of things - and for feeling trapped by the corporate machine that so voraciously consumes carbon.
This was thanks to yet another excellent article in the New Scientist on a meeting of the American Psychological Association which took place in Boston, Massachusetts, last month.
"It's easy to feel overwhelmed and think: 'What can little me do?' ", said David Uzzel at the University of Surrey in the UK during the meeting.
Paul Stern of the US National Research Council said a key deterrent was a lack of guidance on which actions would have the greatest impact, and feeling paralysed by the size of the task.
His research paper on this subject provides more detail - and to my great relief tells me that switching light bulbs off when you leave the room doesn't do that much good.
Some impractical suggestions he quotes from the Live Earth Global Warming Handbook include composting household waste, building a bat house or if all else fails, buying a camel.
I can just imagine the reaction of my neighbours, and I am sure the authorities, if I attempted these measures in Singapore. And anyway, my balcony isn't quite big enough to accommodate a camel - although my 20-month-old son would enjoy the rides around the condo.
Enough of the fatalism. I am going to get off my backside and do something practical.
In what could be the world's first fat tax, the State Employees' Insurance Board of Alabama is to charge extra insurance premiums for employees with a body mass index over 35 from 2010.
The southern state enjoys the dubious status of being the most obese in the whole of the US, just pipping Mississippi for the top prize.
Now before you make any jokes about fat Americans, there is a serious point here.
We are consuming too much, whether its pizza with extra cheese injected into the crust - that great invention of the Americans, gasoline or plastic bags.
The world's metaphoric waistline is expanding beyond its means and maybe this type of tax is the way forward to make us consume less.
But, of course, being overweight can be genetic and is very often nothing at all to do with overeating.
The giant portions in American restaurants don't help, however. Americans must throw more food away than Africa eats each day.
Perhaps the fast-food companies should be ones penalised.
The cost of shipping a standard 40-foot container has tripled since 2000 and labour cost increases have risen by average of 19% per year in China compared with just 3% in the US.
The consultancy makes the point that you have to do very thorough input-by-input calculations for each product and grade of product before making any decisions. And, of course, you need some reliable forecasts of where the economics of offshoring versus onshoring are heading - including predictions on crude-oil prices. Predicting crude, as I discussed earlier on today, is where I fall short.
You also need to take a view on the direction of environmental legislation - i.e. will there by carbon taxes and/or cap and trade systems introduced globally that penalise producers for extended global supply chains?
If history is anything to go by, McKinsey has worked out that manufacturing a "midrange" product in Asia will cost you an extra $16 today compared with the US when all landed costs are included. In 2003, Asia had a $46 advantage.
Add to this the likelihood that more petrochemical feedstock will become available in the US thanks to declining gasoline demand and perhaps, as again I talked about last week, the industry in the states might be set for a revival. It has been comparatively higher feedstock costs and the drift of downstrean customers overseas that has caused so much damage to the US industry.
For anyone who subscribes to ICIS news, you might find this artice of interest. Allen Kirkley of Shell discusses some of the new emerging feedstock options and converging economics between the West and the Middle East.
Apparently it's a fallacy - ostriches don't stick their heads in the sand.
Investment bankers frequently do, though, especially all the greedy ones who only cared about their end-of-year bonuses when they knew perfectly well that the credit crisis was on its way.
I am sitting here sipping a beer and thinking "Oh my goodness, this really could be as bad as the Great Depression" now that Lehman Bros has been forced to file for bankruptcy.
But the danger is that we'll all forget about the even bigger threat to the global economy which is yes, you've guessed it, Peak Oil and climate change.
We'll all be so grateful when the credit crisis is over that we'll rush out and buy more garbage we don't need, jet around the world once again, talk excitedly about emerging-market growth, and bang - the price of crude will be close to or above $150 a barrel again (not that current levels in the historical context are anything to cheer about).
Read the last chapter of David Strahan's The Last Oil Shock to put the credit crisis in perspective (read the whole book, but the last chapter provides some practical ideas).
The survivors of the energy crisis over the next 20 years will be those who are the most energy efficient. So start growing your own vegetables, invest in energy saving in your home and for goodness sake, sell your SUV you self-indulgent idiot.
The value of your home, your shares and your pension might rebound once the credit crisis is over but in the long run, any investment in the conventional hydrocarbon-based economy seems to be fundamentally flawed.
Back in the heady days of 2006, I asked a group of five like-minded nerds what their favourite business book was.
They unanimously voted for The World Is Flat: A Brief History of the 21st Century by Thomas Friedman.
I rushed out and bought a copy. It has sold by the truck load and was quoted by Mohamed Al-Mady of SABIC during his speech at the Asia Petrochemical Industry Conference in Thailand in 2006.
Back then everybody was talking about a new paradigm of growth, driven by the relentless rise of emerging market consumption. Nobody mentioned that other book, The Limits To Growth, published in 1972 by the Club of Rome, during those heady days of the economic boom.
I ploughed my way through most of The World Is Flat (it is overwritten - all the points worth making could have been made in considerably less than 488 pages) and was profoundly irritated by Friedman's relentless enthusiasm for globalisation.
At that time I must confess I hadn't heard of the Club of Rome book, nor did I give any consideration to the idea that Friedman might be dead wrong for any reason other than a gut reaction to his seemingly boundless optimism.
Now he has woken up to the fact, 36 years after The Limits To Growth was published, that indeed this might be the case with his new book Hot, Flat And Crowded.
In a review in the Financial Times, Rahul Jacob makes the point that we should have all seen the weaknesses behind Friedman's flat earth theory.
Friedman was entranced in his earlier tome by the rise of India, particularly the booming IT hub of Bangalore.
"I have lost count of the times friends or relatives in India have forwarded by email Mr Friedman's comment that, while his parents told him to finish his dinner because there were people starving in India and China, he told his daughters to finish their homework because there were people there eager and willing to take their jobs," writes Jacob in his review.
As Jacob points out, the very roads that Friedman travelled along to get to the headquarters of the IT giants point to the limits to India's particular form of middle class, elitist growth; they are pockmarked and hugely congested with ancient patched-up vehicles pumping all sorts of foul fumes into the air.
India suffers from a self-inflicted limit to how far it can grow without creating unsustainable social and environment pressures - because of a political system that has created virtual development paralysis.
How can a country with terrible infrastructure, poor irrigation and very low literacy rates ever hope to create sustainable economic growth?
According to the CIA Factbook, India's female literacy rate was only 47.8% in 2001. This compares with 86.5% in China, based on the country's 2000 census, adds the Factbook.
The speed limit on Indian and, of course, also global growth is resources - so presciently highlighted by the Club of Rome back in the 1970s.
I've only just woken up to this reality. Back in the dim and distant 2006, all I cared about was riding the global property and share boom while consuming immense amounts of carbon in pursuit of my career. This involved writing my own much-shorter tomes that encouraged others to do likewise.
Many of us became so enamoured by globalisation that we ignored the fact that there are simply not enough resources available to allow all of us to consume as much as the typical Texan, or more latterly a middle class Indian in Mumbai.
Friedman gets excited in his new book, according to Jacob, about China's potential to lead the way in solving the environment crisis.
I agree that China has potential, but some huge challenges lie ahead.
Idealistic enthusiasm (the ungenerous might use the phrase "gormless enthusiasm", which has applied to many of us over the last few years) might have its place in generating the individual energy to make a difference: Each of us need to find new ways of individual and corporate behaviour if we are to prosper in a world threatened by Peak Oil and catastrophic climate change.
This type of enthusiasm needs to result in more than just further consumption of trees through higher book sales (and when do we have the time to read books like The World is Flat? When we're flying, that well-known environmentally friendly form of travel).
We need to radically change the way we lead our lives.
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It is September 2025 and the financial system has imploded due to the collapse in value of collaterised green obligations (CGOs).
So how did we end up in this sorry state? Here is a guide to how the crisis developed:
Governments (often sovereign wealth funds that had made a fortune from selling oil and gas), investment bankers, pension-fund managers and hedge funds began transferring cash from traditional hydrocarbon-based investments when Peak Oil arrived in 2015.
A further motive for the enormous capital transfer - amounting to trillions of dollars - was the gradual evolution of the global carbon tax and cap-and-trade system.
Companies that had failed to innovate (including many in the chemicals sector) went under - as did even some of the stock exchanges that had failed to evolve.
But because of woefully bad funding of and interest in science teaching (far too many undergraduates were still taking degrees in media studies), there was a widespread inability to separate the good from the bad new-technology prospects.
The global shortage of science and engineering graduates, which stretches back to the early years of this century, has therefore continued.
Ignorance about good science extended from senior government levels down to the public who poured their money into the new "green" bourses.
Charlatans made fortunes from government funding and ridiculously overpriced initial public offerings by making spurious claims about the commercial viability of their inventions.
But there were some tremendous successes, notably big breakthroughs in carbon capture and storage and a second-generation biofuel made from animal and human nose hairs.
Then, as we all know, the "Green Equities Bubble" went pop in 2018. Wall Street's Renewable Energy Index lost 1,000 points on December 3 of that year alone when investors realised that many of the new-tech companies would fail.
The Federal Reserve, desperate to prevent a recession, aggressively cut interest rates.
This forced lenders to seek higher returns through developing ever-more complex financial instruments, including the now widely discredited CGOs.
But the good news was that homeowners and companies had made a packet in 2015-2018 from trading carbon credits earned by adopting proven energy-saving measures that had been around for decades.
Energy bills were also substantially reduced and most importantly of all, we had capped atmospheric greenhouse gases at 450 parts per million.
The surge in the value of "green homes" continued post-2018 - thanks to the money left in the economy from these carbon-credit earnings and low interest rates.
A new breed of mortgage brokers emerged after the green equities bull-run ended. They made huge commissions from selling mortgages with incredibly low "teaser" interest rates to lenders who initially had to show proof of a strong carbon-credit history.
But by 2021, the greedy brokers were only asking for carbon credit self-certification.
Homeowners who had made false claims on their forms were able to afford to service their mortgages and still have spare cash to spend in the shopping malls. This was because low interest rates and surging green property values more than compensated for high energy bills and the cost of buying carbon credits.
Easy lending conditions gave them even more money to spend as they were able to refinance their homes on rising notional property values.
Mortgages lent to these unsound customers were repackaged with good lending into the now discredited CGOs.
The ratings agencies had no idea of how to value these secondary debt-instruments and so - erring on the side of their customers - gave them all triple As.
As we all know, August 2024 marked the end of the free lunch as the US property market collapsed and the inter-bank lending market gummed up on the realisation that nobody knew the real value of the CGOs.
The price of oil also rose to more than $350/bbl last December - the result of the failure to carry out proper carbon due diligence when mortgages were issued.
Energy profligate homeowners in the US, and more recently in the UK, are being hit by falling property values, higher interest rates introduced to tackle runaway inflation and tougher carbon disclosure and trading regulations.
The boom in emerging market growth has also helped to drive up the price of oil. A lot of this growth was based on exports of supposedly green products to the West.
But in the rush to cash-in on the consumer boom, lax life cycle analysis has led to many of these products being carbon inefficient.
The huge profits earned from the Western consumer bull-run has more than compensated for the need to buy carbon credits to accommodate for wasteful product-chain practices.
There have also been allegations of government officials being bribed to turn a blind eye to carbon efficiency abuses, thereby enabling companies to avoid having to buy extra credits.
Growth has also boomed in the emerging market economies themselves, where energy efficiency standards have also suffered.
Greenhouse gas emissions are on the rise again and last year hit 600 parts per million, according the majority of independent scientific research.
However, the drive to reinforce legislation is being blunted by the work of some scientific institutions. They claim that emissions are in fact falling, but a scandal erupted last year when it was discovered that many of the institutions are funded by companies with questionable carbon practices.
The economic crisis has now become global with developing nations under threat from collapsing stock markets, a lack of credit as financial institutions fail and runaway inflation. The decoupling theory has been thoroughly discredited.
Sound familiar? History repeats itself repeatedly.
But to be more accurate - and to quote the guy who first coined the phrase before I paraphrased it - Clarence Darrow (pictured above), a Defence Attorney in the US between 1857-1938, is credited as saying: "History repeats itself. That's one of the things wrong with history."
I just hope I can get in and get out at the right time and make my family's future financially secure.
As 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.
I can just picture the scene in the Paulson household, poor old Hank's wife having to get up early to prepare his "snap tin" so he could off to work shifts at the weekend.
He would then take his lunch, walk out of his door, "through the mansions of fate and the mansions of pain" and walk "through those factory gates in the rain". Might seem corny to some or not "trendy" enough, but Springsteen is always passionate, sincere and the antithesis of the materialistic empty heads who make up a sizeable percentage of the music and showbiz communities.
The US Treasury Secretary and the rest of that other materalistic "community" (what an ironic word to use given the circumstances) - the financial one - bear a huge responsibilty for the almighty mess the world finds itself in.
The good news (and we knew this already, didn't we?) is that the supposed bastian of capitalism is not pure capitalist at all (is there such a country and would we ever want such a country?) - but an economy that's occasionally managed, but mainly only as a knee-jerk reaction to the failures of capitalism.
Long term market-distorting management does occur in some area when there are votes at stake - for example, the corn-based ethanol, auto and airline industries, resulting in very little if any benefit for the common national and global good.
Wouldn't it be better to have a properly regulated economy to avoid catastrophes like this in the first place? Or this impossible because of the US political system which is so heavily shaped by the lobbyists?
The old-style Labour Party in Britain used to believe in the Marxist doctrine of "nationalising the commanding heights of the economy", which in those days meant the mining (see the picture above - UK miners with their "snap" or lunch tins), utility and steel industries.
In America's case it's the banks and the housing markets that represent the commanding heights of its economy, and so what's the difference? Risk has been well and truly socialised and the potential for huge moral hazard created so the greedy can get away with it.
And the main point - hence my sarcasm at the beginning - is that Paulson and his like will be financially fine regardless of what happens. The people who will suffer are the rest of us who stand to lose our jobs, or worse could be pushed into severe poverty in many parts of the world if his rescue plan fails.
The reach of the credit crisis is such that liquidity is even becoming hard to come by in the hugely wealthy Middle East, according to this report.
With so few petrochemical projects officially announced for the region post-2012 (although I am hearing rumours of numerous plans kept from public view, but feedstock is the issue for all of them in the GCC), could we see a big slowdown in the growth of the region's industry?
The irony, of course, is that many of the Middle East and emerging market countries have huge government surpluses and high individual savings rates.
When I was trying to cheer up a downbeat member of staff today, I said that the financial rescue package being proposed by the deadly duo of Paulson and Bernanke might get overseas support from these solvent administrations.
"It's in everyone's interests to keep the US afloat because it is so crucial to the global economy. If this had been 10 or 15 years from now, the Chinese might have done the economic equvalent of flipping the states fhe finger because by then they will be the biggest economy. But the US has got off the hook because of the timing of this crisis."
I sounded so optimistic I almost believed this flannel myself.
More evidence is also emerging of project delay, including the Aramco/Dow Ras Tanura mega-investment. The sheer scale of the thing seems to be the issue here.
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.
As delegates gather for this year's European Petrochemical Association meeting in the unreal world of Monaco (unreal for the 99.9 per cent recurring of us who don't own Ferraris), I thought it was worth summarising some of the issues discussed on this blog over the last few months.
We've dealt with:
*Oil-price volatility and the likelihood that high and volatile crude is here to stay. Crude at or around $100 a barrel seems to be a new long-term level with the strong possibility that geopolitical shocks could send costs much higher. Supply and demand balances remain tight and as soon as global economic growth recovers we will see much higher prices - meaning that the recovery could be nipped in the bud. Are we heading for a new economic climate where recoveries are constantly set back by rising energy costs? For every one barrel we are discovering, we are consuming three.
*The new credit environment that might well emerge from tougher banking regulations. No longer will it be possible for a truck driver from Iowa earning $20,000 a year to borrow at ridiculous multiples of his salary and at "teaser" interest rates. How these regulations will effect emerging markets his harder to read as Asian governments and consumers are in far better financial shape than those in the West. Many of the banks in Asia have been more prudent. But the events in the US will surely lower the appetite for risk globally - and there is no guarantee that the financial-rescue package will work. Ask your consultants or inhouse researchers you use whether their demand-growth predictions factor in the possiblility of lower growth because consumers no longer have access to as much credit.
*Innovation will be the key as the environment becomes a bigger and bigger issue for the chemicals industry. You need right technologies and the right kind of staff. As there is a possibility of a global carbon tax or carbon cap-and-trade system, do estimates of what this might cost need to be factored into feasibility studies? How feasible will it therefore be - given both high energy costs and the possibility of a price on emissions - to continue building plants long distances from major consumption markets?
*One of the big areas of innovation will be attempts to break the link between the refinery and petrochemical industries. BASF is claiming it could be as little as five years away from breakthroughs in catalyst technology that could change the industry forever, enabling highly competitive petchems to be produced from biogass, natural gas or coal.
And finally, other theme I haven't blogged on yet but will do are plant and energy efficiency. Some very interesting research projects are taking place at the National University of Singapore chemical engineering department into monitoring the exact output of plants in differennt climate conditions and a model that might enable producers to much more accurately predict changes in yields from switching feedstocks. Much more later...
Meanwhile, have a great meeting - and let's hope the economic conditions improve.
Yes, indeed, with all the talk of the collapse of capitalism and with liberal economists running for cover, dear old Karl might once again be the flavour of the month.
Oh how I remember those dewy-eyed days, standing on the picket lines in the pouring rain during the 1984-1985 Miner's Strike in the UK, believing passionately in the noble cause of the downtrodden working man as he (and she, of course - sorry sisters for putting you second) fought against the evil forces of Thatcherism.
Oh how I remember on one such occasion, a miner asking me what I did, to which I replied "a student in English Literature", to which he replied "what do you produce? Essays? You useless............(followed by two unmentionably rude words).
And how I remember when the forces of Thatcherism won and the miners were forced to march back to work I waited for some noble and great workers' song as they marched, some stirring ditty speaking of the struggle against the oppressor and the honour and dignity of honest toil as opposed to the grubby and slimy pursuit of evil money.
Instead all I heard coming out of the TV during the Look North programme was a rendition of that great brain-dead football chant, "here we go, here we go, here we go".
How our illusions can be shattered and how the illusion that pure capitalism works is also now in ruins.
This is still not The End of History as history never ends.
So why not a sensible compromise between socialism and capitalism - a workable system of regulations versus freedom to innovate? How about the Japanese model, may be, or that which is pursued in Singapore?
Mr Obscenely Rich Got Out In Tiime Banker, please look into these eyes, see the pain from the last Great Depression and maybe you will give some of your obscenely huge bonus towards poverty relief.
And perhaps also you'll be willing to pay for all the counselling that the children of this new Great Depression will need when they grow up into adults. As a rich an educated breed, you should be aware that the first few years of a child's life, how secure and encouraged they feel, determines their entire future.
Anyway, see below for my take on the state of the crisis and its implication for chemicals, written for a good friend and contact.
Chemicals demand is being affected by frozen credit markets and the fall in export trade of finished goods to the West.
The credit markets are showing signs of easing thanks to all the government intervention.
But as you can see from this article, the feedback effect on the consumer, and therefore, manufacturing companies, could get a great deal worse before it gets better. Bad corporate results caused the declines in stock markets yesterday (Wednesday 23 October) and as more consumer loans turn soar and unemployment rises globally, corporate earnings will deteriorate even further - at least for the 12 months, I think.
However, the chemicals industry will remain under severe strain for at least the next year, even if the credit crisis eases enabling letters of credit to be more easily obtained (a global shortage of LC's has left commodity shipments, including chemicals, stranded).
The reasons are:
1.) The export dependency of some economies. China's GDP growth will be around 9% this year compared with 11.9% last year, for example, largely due to the slowdown in export trade. Delegates at the APPEC conference in Singapore this week were talking about very quiet demand for fuel products and chemicals at a time when China should be ramping up manufacturing for exports to the West in time for Christmas. Economies such as Singapore are even more vulnerable
2.) The volatility in energy and chemicals pricing. You could probably produce a graph these days linking crude-oil price movements with the equity markets. So until everyone reaches a consensus that the bottom has been reached, we are going to see constant dramatic day-to-day fluctuations in equities and therefore crude. OPEC might cut production at its next meeting, but this will just mean the volatility is within a higher band ($70-90 a barrel is the prediction instead of the current $60-80 a barrel. You cannot rule out the possibility, even if OPEC does make cuts, of a lower range than today - $40-60 a barrel. This would indicate that the real economy has become a great deal worse). Volatility creates the danger of being caught on the wrong side of the deal for sellers, buyers and traders (e.g. high cost raw materials purchased one day that cannot be passed on in higher-cost finished product because of a sudden fall in crude). For resin buying patterns, the uncertainty over the direction of crude is a crucial factor - in a bull market they stock up and in a bear market they de-stock. Crude is in no-man's land and so, combined with LC issues, worries about the overall economy and cancelled orders from customers buyers are remaining firmly on the sidelines.
3.) Last but certainly not least, is the huge wave of new capacity. Polypropylene was supposed to lead the downturn this year but didn't because of start-up delays. Equipment-delivery problems are being blamed, but market reasons seem likely to be another factor. The problem is that with markets showing no signs of turning, producers with heavy debt commitments can only hold back for so long and so will have to commission capacity soon - even if at operating rates lower than planned. For the Middle East producers, now that there is no immediate sign of markets turning, start-ups might as well take place because at the very least on a cash-cost basis contributions will still be achieved on a cash-cost basis (because of low and fixed feedstock costs), just about no matter how low crude goes - and with it petrochemical pricing.
Conditions could get dramatically worse very quickly. One factor not included above is the run on Asian currencies, and possibly even some banking systems, because of the dollar ironically being used as a "safe haven investment".
In the medium term, (the next 12-18 months) the only upside I can see is short-term recoveries in chemicals buying on signs that government interventions are working (with more likely to happen). But these recoveries, as I said, could be short-lived as more evidence emerges of the delayed effect on the real economy (e.g. further falls in corporate earnings).
To be frank, all bets are off on demand-growth forecasts - (so I am sorry this is not going to help you much in coming up with firm numbers!).
Everyone has been wrong and so it's best to err on the side of extreme caution and with a bit of luck we might be pleasantly surprised.
To give you an example of how quickly things can change, a Chinese PTA producer had been forecasting overall polyester growth in China at 12% are recently as July; now it thinks the market will be lucky to get away with zero.
I'd suggest looking at your forecast numbers, going back to those who have supplied the numbers, and asking them if these take into account their worst-case scenarios. Any forecast that predates September cannot be trusted at all.
Hope this helps!
Best Regards
John
Unbelievable, incredible - what prehistoric planet do these people live on?
Please see below for a rant from a-soon-to-be-extinct species of business leader - the US chemicals executive against Barack Obama.
I have my doubts about Obama, but at least he has a brain bigger than a shrivelled pea (unlike certain other holders of the most important job in the world) - and he gets it.
The point is it's not business as usual, it's not regulation (Democrat) versus anti-regulation (Republican).
The world has changed forever, and this happened long before the financial crisis.
I don't know about you, but I want to be able to tell my son that I did something in the battle to save the world from the energy and environmental crises - even if it's just the odd small thing like recycling my plastic bags annd vicariously (I can't vote in the US election, of course) supporting politicians such as Obama who get it.
03 November 2008 21:04 [Source: ICIS news]
WASHINGTON (ICIS news)--The US appears poised to elect what one chemical industry leader on Monday termed "the most anti-business federal government" in recent history and one that is likely to raise tax and regulatory burdens.
On the eve of the US national elections being held on Tuesday, a wide range of public opinion polls give the Democratic presidential candidate, Senator Barack Obama of Illinois, a perhaps decisive edge over his Republican opponent, Senator John McCain of Arizona.
Perhaps more significantly, according to industry and business observers, the outcome of Tuesday's congressional elections is likely to give Democrats even greater majority control in both the US House of Representatives and the Senate.
Democrats are expected to gain as many as 30 seats in the House, which would boost their grip on that chamber to a 60% majority with 263 Democrats against 172 Republicans in the 435-member body.
More critical, say business sources, is the real prospect that Democrats could secure 60 seats in the 100-member US Senate where they have held only a slim 51-seat majority since the 2006 mid-term elections.
If the Democrats hold a 60-seat majority in the Senate, they would be able to override minority attempts to block legislation and even force some bills into law despite a presidential veto.
"I think we are looking at what will be the most anti-business federal government in many years," said Chris Jahn, president of the National Association of Chemical Distributors (NACD).
Jahn, who served as a senior staff advisor in the US Senate before returning to the private sector, said his gloomy view of the elections likely outcome is not partisan.
"Whether Obama or McCain wins the White House, I think federal policies over the next several years will be very anti-business," he said, "because there will be a much larger, anti-business majority in Congress and no one at 1600 Pennsylvania Avenue [the White House] to act as a check on the pent-up ambitions in Congress."
Jahn expects that a stronger Democratic majority in Congress beginning next year will mean passage of more stringent anti-terrorism chemical security legislation that will include a federal mandate for inherently safer technology (IST) as a security requirement.
In environmental matters, he worries that the new Congress will take the opportunity to reshape the 30-year-old US chemicals regulatory law, the Toxic Substances Control Act (TSCA), as a US version of Reach, the EU's programme for registration, evaluation and authorisation of chemicals.
"Certainly there will be far more regulations coming across the board," Jahn said of what is expected to be a more Democrat-controlled Congress.
In addition, he expects higher taxes on businesses and greater energy costs if, as seems likely, Congress and the new president move to implement a cap-and-trade climate control law.
"If you want to paint a picture of gloom," Jahn said, "put increased regulations and higher taxes on top of an economy that is already struggling."
In anticipation of a new Congress more willing to impose regulations and taxes on business, Jahn said NACD is going to beef-up its advocacy team and work to raise more grass-roots involvement in federal policymaking by the association's member companies.
To discuss issues facing the chemical industry go to ICIS connect
By: Joe Kamalick
+1 713 525 2653
Chemicals demand still exists, believe it or not, but the new economic order -one that could last as long as six years - requires new approaches.
Purchasing managers need to start acting locally as well as globally.
Who would want to be a financial controller if you work for a big company or the jack-of-all-trades managing directors of a small or medium-sized enterprise? Every purchase order and every invoice, literally every single transaction, needs to be reviewed by whoever understands overall credit availability.
One small step out of line, one tiny error by an over-enthusiastic purchasing manager or sales executive and bang, you've exceeded your credit limit. Even if you have a sound business model, your bank might have no option but to say "sorry, but that's it - we are withdrawing all your credit". But is there really such a thing as a sound business model these days?
This new economic order could have major implications for how chemical pricing behaves. Old understandings on how to read the direction of markets might need to be revised.
"There have always been two kinds of demand in the confectionary industry - long and short term," said a plastics-wrapping manufacturer on the sidelines of the ICIS World Polymers Conference, which took place in Bangkok, Thailand, earlier this week.
For the next few paragraphs, the confectionary industry and upstream to polyolefins will be used as an example of how purchasing managers need to act differently. The same rules could also apply to other product chains.
"Nothing has changed when it comes to your big 1b bar of chocolates. You can still ship large volumes of packaging material economically from, say, China to the US as these slow-moving items will sit on the shelf for months," the manufacturer added.
But for your fast-moving confectionary - for example, discounted big bags of miniature chocolate bars placed in toddler-reach on shelves near supermarket checkouts - shipping wrapping material from China no longer makes sense.
"A big percentage of a confectionary manufacturers' revenue comes from fast-moving and short-term promotional offers. The trouble is that these promotional offers are no longer as fast-moving because consumers are cutting back on spending."
Much smaller quantities of wrapping material are needed and so for logistics reasons, buying locally adds up. If you make chocolate in a developed markets, these small suppliers might have previously been ruled out because of their high labour costs and low capacity.
"It's not economic to half-fill a container and ship it all the way from China. Local suppliers can also much more quickly respond to small day-by-day changes in demand," the manufacturer added.
There are other reasons to buy in small quantities (and therefore locally).
Oil prices move in an almost perfect relationship with equity markets these days. Stock markets rebound as investors clutch on to some fleeting good news and crude rallies by a few dollars a barrel, only for the reverse to occur the following day.
So nobody at any point in any product chain wants to sell or buy big in case they end up on the wrong side of a shift in highly erratic energy prices. For example, why buy a big quantity of resin today only to see the WTI price tumble the next?
Your equally hard-pressed customers, even the ones you've worked with for years, will not be able to do you any favours if you plead that you made a mistake on crude.
Shortage of credit is a further reason to keep orders at a minimum.
"My MD is signing off every purchase order. You need to make your credit stretch. The other problem is that you need to very carefully monitor the credit situation of your suppliers and your customers. Make sure you have enough of each in every region where you operate in case some of them go bust," said the manufacturer.
Buying locally also extends up this chain to polyolefins.
"Polyethylene (PE) and polypropylene (PP) exports from the States have declined because of the weaker dollar and the collapse in pricing that closed-off arbitrage," said a polyolefins producer on the sidelines of the same conference.
"Another factor is that end-users prefer to buy local because retailers are placing smaller orders."
A further reason to keep inventories low is the huge economic uncertainty out there. Nobody knows how deep this recession will be and how long-lasting.
"We keep looking further and further back into history for parallels," said Matthew Sullivan, Director of Energy Structuring and Origination for Standard Chartered Bank, in a speech during the conference.
First it was the dot-com bubble crash of 2001, then the Asian financial crisis and next the global economy downturn of 1980-82. Now all the talk is of the Great Depression.
"Vehicle sales in the US, on a population-adjusted basis, have fallen to their lowest level since World War II," he added.
"I hate to give you the bad news, but I think it could take 5-6 years to get through this. Most of the iceberg is still beneath the water."
The dreaded consumer confidence feedback mechanism may have only just begun.
Banks might, theoretically, be in a better position to lend thanks to all the rescue packages - but at ground level in the chemicals industry trade finance remains desperately hard to obtain.
Inventory write downs are huge because of raw materials bought before the crash in demand and pricing. This will affect financial results in Q1 next year.
This will in turn lead to more job cuts in chemical and other companies. When you are worried about losing your job, if you haven't lost is already, you don't spend; and as Japan found out during the 1990s, consumers are even less likely to spend if they think that prices will be lower tomorrow.
As consumers make even deeper cuts into their spending, this leads to even worse corporate results, more business failures and more job losses and so on and so on....
"People are reviewing their retirement plans (because of the collapse in equity markets). They feel a lot poorer, which is another disincentive to spend - and they will have to add 5-6 years to their working horizons," Sullivan added.
The next big banking scare just around the corner might be further write downs on credit-card losses
In the midst of economic calamity and the resulting shift in buying patterns, what does this mean for how chemical pricing will behave?
Chinese buyers used to periodically withdraw from markets en-masse, in the case of polyolefins.
This would lead to big price declines because the volume of lost trade was big.
The guessing game would then begin over inventory levels and demand - meaning when they would need to re-stock.
When they did return, of course, volumes on the positive side were equally big, resulting in big price rallies.
Bu increments are these days as low as $20 or $30 a tonne a time because of small-volume sales. Prices then quickly fall back.
When prices retreat, even more ground can be lost than had been gained because of worsening economic news.
Nobody can be sure when chemical-pricing markets will bottom out for good in this current cycle - just as nobody has any clue when the economic recovery will arrive.
We need great leaders in the current crisis.
Below is the kind of speech I'd like to hear from my CEO - delivered in person - if I worked for a chemicals company.
Everything that now follows is fiction and any resemblance to an industry leader, either living or dead, might sadly be purely coincidental:
"Things are really bad - there is no disguising it, and they will get a great deal worse. This is at least the worst global economic crisis since 1980-1982. Conditions are a lot worse than during the Asian financial crisis of 1997-98 when markets fairly quickly recovered.
"The financial security of hundreds of families depends on our company. Many of the main breadwinners of these families work for us.
"I have been through this myself - I was made redundant. It's not just the money that counts, it's the loss of self-esteem - because work for many of us goes to the core of how we define ourselves, of who we are, of what we mean to ourselves and others."
"I will do my very upmost to avoid having to tell anyone to leave for economic reasons. The only reason I will willingly let anyone go is if they make a careless mistake.
"We are all in this together, we must watch each others backs, support each other, encourage each other - and try not to make any mistakes.
"I would rather see volumes go down substantially than for us to acquire raw material from suppliers or sell product to customers in difficult financial positions.
"We need excellent market intelligence on the viability of all our suppliers and customers. How strong are their business models and credit positions? This knowledge needs to be constantly revised.
"I am not asking you to take any risks out of anxiety to achieve unrealistic sales targets. I will be revising those targets down, and will revise them and down even further if necessary - regardless of the initial impact on our share price.
"I believe that caution over business conditions will earn us the long-term support of our banks and our shareholders. I really don't care about my share options in the short term - all that matters is that we survive this together. And anyway my share options - and those of the fellow directors - will be worthless if we go bust.
"We cannot afford to make the mistakes of overbuying raw materials or over committing on sales because of our own credit position, the extreme energy-price volatility and the uncertainty over what is 'fundamental' demand'.
"Inventories have been run down because the industry was living in chemicals 'parallel universe', as Paul Hodges of International e-Chem so rightly pointed. Stocks were built-up earlier this year as crude prices soared on anticipation of further price rises up and down the product chains.
"This flew in the face of clear signals that the economic crisis was deepening. These signals included the collapse of Bear Stearns and the US government rescue of Freddie Mac and Fannie Mae. We were also guilty of this and I take the responsibility for following the herd.
"Once bitten twice shy and so everyone is as a result keeping stocks low. And as I've already mentioned, energy-price volatility and the uncertainty over demand is depressing buying and selling activity. Inventories are also being kept to a minimum due to the financial year-end.
"This means that I do not see our raw-material costs and finished-product prices moving up by anymore $20-30/tonne until at least the New Year and so there are no substantial gains to be made out there. But pricing hasn't necessarily hit the bottom and so declines could be much bigger than any temporary and slight increases - so the danger of taking a risk for the potential of a very small gain is the risk of a huge loss!
"But I am telling my sales team to be prepared for sharp upward price corrections at some point - possibly as early as January 2009. Demand is still out there, if only at very-much reduced levels, and once the end-user demand re-emerges, our prices could literally double overnight from very low levels.
"This creates an even greater risk for us and so the policy will remain the same: be cautious, don't take risks and if you miss targets and there is good justification for doing so, you will not be penalised. I would rather lose the odd upside deal when prices start rising and falling in large amounts than run the risk of a disastrous mistiming of raw-material buying and an increase in our operating rates.
"And finally, let's forget about the crisis for the rest of this evening. DINNER'S ON ME - LET'S GO AND GET DRUNK."
The dinosaurs are back......
The new "green team" appointed by president-elect Barack Obama might, after all, turn out to be a dream team for the US chemicals industry. This is despite what some of the old disonaurs within the industry seem to think.
A US energy policy needs to place a genuine long-term cost on gasoline, thereby encouraging, belatedly, the kind of innovation that might just save the domestic auto industry and provide a huge boost to chemicals. Higher gasoline taxes need not be political suicide if they are accompanied by explanations of potential tax cuts, or even credits, for energy-positive steps such as, for example, installing solar panels.
Greater conservation - one that's not just driven by the economic crisis - might reduce a huge defence bill that's created global political instability, increased terrorism and created an untold number of deaths and misery for millions. A lower defence bill would mean huge tax savings.
It would be good if some of those in the oil and gas industry could move away from their long-term obsession with drilling. The obsession reached it's trivial low-point with Sarah Palin's campaign slogan, "Drill bay,drill".
Drilling alone will do little to reduce the US dependence on imported oil unless it goes along with greater conservation.
And anyway, you can make a strong argument that wrecking the Alaskan Wildlife Refuge will make very little long term difference to US energy vulnerablity, while creating a legacy of the loss of yet another beautiful wilderness for future generations.
There also needs to be a gradual movement away from conventional hydrocarbons to unconventional ones (provided the environnmental impact can be neutralised through heavy investment in carbon capture and storage, which will probably need big initial government backing to get the economics off the ground ) and to renewables.
...why not forgive debts as Nail Ferguson suggested in his article in the Financial Times last Friday.
His suggestion about giving those in mortgage arrears a break by converting their loans to longer term durations with fixed interest rates is backed up economist Nouriel Roubini. We've let the bankers off so why not Joe Public?
Without debt forgiveness for the like of you and I, the danger is that the dreaded downward spiral in chemicals demand will continue.
The housing crisis could get a great deal worse before it gets better - and might become a global rather than just a western problem. In Singapore, for example, 10,450 homes could be returned to developers after being purchased under a deferred payment scheme.
It's all about hoarding cash over the next few years, but survival might not even be possible for even the best managed of companies if Martin Wolf's worst-case scenario comes true. The Financial Times columnist writes of the unravelling of globalisation into the protectionism that characterised the Great Depression years if the Obama stimulus package fails.
There is a good chance it will fail, fears the Federal Reserve in the notes released from its December meeting.
At a chemicals company level, leverage is obviously out and the private equity model thoroughly discredited - perhaps for good.
You can argue that the biggest mistake of the biggest casualty so far, LyondellBasell, was timing as the acquisition of Lyondell Chemicals took place in December 2007. Asset prices were then at their peak with many believing that the boom would continue forever, despite the already rapidly deflating US housing bubble. As recently as March last year, The Economist was talking of Asia's decoupling as the potential saviour of the global economy.
But leverage is itself the problem because of how the extraordinary multiples over tangibe, realisable assets were generated through the shadow banking system, creating the climate for deals such as the Basell takeover of Lyondell to occur. It is this badly regulated, free-for-all system that's brought the global economy down.
Maybe we will never again see the break up chemical companies for sale to private, or public, companies burdened by enormous amounts of debt.
Perhaps the well-integrated chemicals company with sufficient diversification to provide compensating cash flows when a particular subsidiary is struggling is the way forward. Is this yet another case of back to the future?
In an even better position are the state-owned giants in the Middle East and China. They are in the enviable position of cash in hand, and government ownership structures that guarantee funding if that cash was to ever run scarce. These are the only companies I can see able to make the acquisitions the industry now needs.
I am reading Charles R Morris's The Triillion Dollar Meltdown at the moment, having also recently cheered myself up with Paul Krugman's update of his classic, The Return Of Depression Economics.
As the private equity model implodes, Morris's following words ring so wonderfully true:
"The leveraged-buyout business, after a highbrow restyling as private equity, came roaring back. A typical deal: Put up $1 billion, borrow $4 billiion more, snap up a healthy company for $5 billion (after making a rich deal with its executives), vote yourselves a "special dividend" of $1 billion, all the while taking no risk. 'People talk about a wall of money,' one banker said. Private equity funds didn't have to raise capital; it was chasing them."
I am sure, of course, that such unscrupulous and whollly dishonourable practices have never, ever applied to any private equity deal involving our great and wonderful, wise and so superbly well-run chemicals industry that has always taken a long term and measured view of how to run its operations in the most financially-optimal way and for the benefit of humanity as a whole in its caring and compassionate pursuit of higher and principled ideas for a sustainable, warm and cuddly future where everyone sits around the campfire and sings "Well be coming round the mountain" (enough waffle, stop - please!).
As a very wise man once said, everything goes in and out of fashion like long skirts and short skirts.
Hence, my very capable colleague Malini Hariharan has offered some analysis of South Korea. Its companies, having being brutally hammered by the West post Asian Financial Crisis (which I had pointed out at the time ignored their strengths) are now at the front of the proverbial cat walk because they have low levels of debt.
Of course they have significant competitive disadvantages, but they might at least survive the crisis.
At the moment, a shell-shocked chemicals industry is still recovering from the impact of destocking following the huge inventory write downs in Q4.
The next step will be to measure the state of genuine, end-user demand and how this compares with the fantastic growth we saw in 2003 right through until the end of H1 2008.
Comparisons will inevitably look bad, even if, as some hope, recovery arrives in the second half of this year. This is bound to have a pyschologically dampening effect on markets.
Plus, chemicals and plastics markets are about to be roiled by large amounts of new capacity.
Recent price rises in the aromatics and olefins chains might, therefore, be reversed.
And so cost will remain King in the second of 2009, and perhaps for several more years.
The rise of private equity in chemicals, which I examined in a previous post, resulted in claims that the sector's more efficient management techniques would result in money being made "even at the bottom of the cycle".
But key to survival may no be longer innovative financial engineering and cutting costs social and bureaucracy costs incurred by previously much bigger, listed companies.
It might instead be all about chemical engineers getting every last cent of value out of production processes through optimising "every pipe and every valve," says my colleague Nigel Davis - editor of the Insight section of ICIS news.
It will be fascinating to watch how this plays out - and what becomes of chief financial officers.
It's easy to take pot shots at the boss, and everyone of course feels they have been underpromoted and could do the job better themselves. Andrew Liveris is just the latest in a long line of CEOs to experience both envy - and at the moment perhaps a little pleasure at their failures. The gloating reaches extroardinary heights in the comments posted on this Wall Street Journal blog entry.
Sure, he should have seen the crisis coming and not agreed to pay such a high price for Rohm & Haas.
And sure, a man being paid such massive sums of money perhaps should have had sources inside Kuwait who would have forewarned him that the commodities merger was going to collapse.
Perhaps we should also expect him to secure world peace, reverse global warming and prevent Manchester Utd from ever winning a Premiership championship again.
A recent briefing by The Economist Intelligence Unit warned that because of the mess the West has made of the world economy, managers in Asia might face unrealistic targets.
Does this sound familiar? All answers will be treated in the strictest of confidence.
This excellent article from The Economist about vertical integration got me thinking that if, say, auto makers start buying up parts suppliers in developed markets (in developing markets the plastics processing industry is too fragmented) we could end up facing a whole new set of industry dynamics.
Buying up your supplier, or at least offering them strategic advice and financing in the way that Toyota does, could end the days of the poor and relatively small converter squeezed between the big petrochemical producers and the giant finished-goods manufacturers. Resin producers might suddenly find themselves facing heavy rather than lightweight opponents.
Petrochemical markets, as is the case with stock markets, are I believe in the midst of a bear-market rally.
As chemicals consultant Paul Hodges predicted on his blog last year, restocking in Q1 was inevitable after the great inventory run-down of the fourth quarter.
Paul has consistently made the right calls on the economic crisis and on its implications for the chemicals industry. His accuracy in predicting the major events - from crude-oil pricing to the collapse of Bear Stearns - can be demonstrated by visiting his blog.
Petrochemicals benefited from the Q1 restocking, of course.
We have also seen an across-the-board price rally sustained by a lot of speculation in China made possible by ample availability of credit. The question now is whether credit will be restricted as China becomes concerned over inflation.
Petrochemicals pricing has also been supported by stronger naphtha due to firmer crude, first of all because of refinery rate cuts when the Q4 crisis occurred and more latterly a huge programme of refinery turnarounds in Asia. According to oil and gas consultancy Purvin & Gertz, this turnaround programme is due to come to an end around June.
Naphtha supply will increase in H2 on more exports from India, higher production from one condensate splitter in the Middle East and the start-up of another splitter. Supply could increase in Asia by 20-30%.
I think crude is likely to trade around the $50/bbl mark for the rest of this year so this will set a floor for liquid-feedstock costs.
However,I don't believe that petrochemical producers will be able to use tight naphtha as a justification for maintaining current price levels because of the increased supply.
Petrochemicals supply will also lengthen when Asias' big cracker turnaround season ends after June.
Middle East project delays are likely to continue, but some further extra supply in polyolefins, MEG, aromatics and propylene oxide (PetroRabigh is in the process of starting up the region's first PO plant) can be expected in H2.
The second half of the year could also see the start-up of lots of capacity in China. But how much volume actually hits the markets will have to be closely tracked.
Demand will be better this year than in 2008, but hey, so what?
Last year was exceptional bad because of the destocking, and all the economic uncertainties will not be compensated for by the boost from government stimulus packages.
So, in short, expect feedstock-price support to weaken and for petrochemical supply to lengthen in a persistently weak demand-growth environment.
The big unanswered question is to what extent the recent price prices were also the result of speculation in China. In methanol, an incredible two-thirds of Q1 imports were for speculation on futures markets.
As Paul again points out on his blog, the volume of contracts being traded on the Dalian Commodity Exchange is nothing short of staggering (an average of 1Om tonnes a day during the first quarter!).
Has this contributed to LLDPE prices trading above LDPE over the last few weeks for the first time in two years?
How much of the chemicals and polymers that have been imported into China recently, or purchased locally, and are being held in inventory for speculation purposes? To what extent has this speculation been made easier by increased credit?
With as many as 30m migrant workers laid off in China and export-focused factories operating at only 50% of capacity, how can all this increased chemicals trade be justified by an improvement in the final demand for finished goods?
China's economic stimulus package is kicking in. Over the last few days I hear of improved sentiment in China that the worst might be over.
But given that 10-30% of China's economy (depending on who you believe) is dependent on exports, it would take a heck of an effective stimulus package to boost domestic growth sufficiently to replace all the lost export trade in the second half of this year.
We've also picked up anecdotal reports that factories are being kept running by soft loans from banks for social stability reasons.
It's unlikely that the total extra production will replace all the volumes lost through factory closures.
But at the end of certain product chains you could see China exporting deflation in H2 to relieve inventory - another reason to believe that chemicals pricing will decline in the second half.
However, it might not be in China's interests to flood oveseas markets with goods at bargain-basement prices if this triggers international tensions and a further rise in protectionism.
Overseas chemicals players seem to have benefited from the relative strength of China's market with volumes of benzene and polystyrene, for exampe, being shipped from Europe.
Large increases in polyolefin shipments from the US to China are also being reported, in the case of PE the result perhaps of comparatively cheaper ethane versus naphtha.
The word on the street, from our price-reporting team, is that nobody can really say for certain whether the recent price rises are the result of improved demand or speculation.
But add all the above factors together and it seems a sharp correction from June onwards remains very likely.
And the more uncertain that price direction remains the closer the correlation might be between oil and naphtha and chemicals pricing on a daily, weekly or perhaps even a longer-term basis.
In the absence of clear direction, crude and equities might end up as the only guides available (or perhaps chemicals might even move in the opposite direction to equities in China as a lot of traders traditionally move their money between the two - and also property - depending on where they think the next gains can be made).
For the traders in China and those who know know how to play the domestic markets extremely well, it's also a question of maximising returns from micro-price movements.
On a weekly basis, one trader estimates that domestic polyolefin prices have fluctuated by $50-100/tonne in 2009 compared with $40-50/tonne in 2007. Last year can be discounted as an exceptional year because of the inventory building and the H2 collapse so, hence the comparison with 2007.
The Dalian exchange must also be adding to this volatility.
Bear-market rallies are better than no rallies at all, of course, and we could several more rises and sudden dips in chemicals pricing before this crisis is over.
To keep you updated on what we believe is happening in petrochemicals, here are some important recent trends:
*Futures markets in China are playing an increasingly important role in influencing pricing in polyolefins, methanol and PTA. Trading volume on the Dalian Commodity Exchange (watch out for Focus piece due out on ICIS today) for LLDPE has hugely increased this year. Traders are playing off micro movements in pricing, and it seems as if all the contradictory government signals on the Chinese economy could be affecting volatility. It would be interesting to also check the correlation between other futures exchanges, local stock markets and the DCE
*There's lots of anecdotal evidence of higher trader physical inventories - the result of easy liquidity
*China polyolefin prices have, a result, of all the above, been higher than in the West. This has attracted increased imports (note the Jan-Feb trade figures). US ethane-based PE production is very competitive because of low natural gas prices relative to naphtha. This is forecast to remain so for the next 1-2 years
*In short, the China market across several chemicals and polymers has become even more speculative than usual
*This might not be true, but watch ICIS to see if rumours have been confirmed of a softening in pricing this week. This would be ahead of the fundamentals that pointed to a correction after June
*This could be followed by a broader fall in crude, equites and global chemicals prices.
*OECD and IEA latest figures point to even higher crude stocks and there are reports of land-based storage being so full that newly commissioned supertankers are being used for storage. The financial speculators seem to be keeping crude at around $50/bbl on the belief that the global economic recovery will arrive by Q2/Q3
Good news, bad or indifferent? It was hard to gauge a clear picture from the Q1 macroeconomic numbers for China.
While retail sales grew at 14.7% in March compared with 11.5% in February, exports fell 20% during the first quarter.
GDP (gross domestic product) growth was 6.1% for the whole quarter, less than half of the pace at which the economy was expanding in md-2007.
Prime Minister Wen Jiabao has warned against "blind optimism" over the speed of the recovery, according to the New York Times. He cited weak overseas demand, overcapacity in some industriess, job losses and low investment in the private sector as the reasons why the foundations for recovery were not solid.
Export trade won't recover until the Western consumer starts spending again close to pre-crisis levels. Without such spending it might be reasonable to assume that China will struggle to post any further years of double-digit growth.
Overcapacity in some industries includes petrochemicals, although markets have been kept tight temporarily for reasons we've already covered in this blog.
China's petrochemical self-sufficiency ambitions could force all but the Middle East and a few other low cost producers out of being able to export some products to China.
I noticed in this Economist article that industrial production was sharply up in March by 8.3% and I read elsewhere that factory gate prices slipped by 6% - again in March - from 4.5% the previous month.
I've picked up anecdotal reports - again mentioned earlier on this blog - that factories are running hard in the textiles and garments sector to keep people in jobs, aided up soft banks. This conjures up an image of rows of warehouses stacked high with shirts that nobody wants to buy.
Is there a danger that in H2 China will export deflation to relieve some of its finished-goods inventory pressures? If so, what would this mean for the business of chemicals?
A sure way of telling might be a survey of purchasing managers in the West, asking whether they have been offered unusually large quantities of very cheap Chinese goods.
Jun Ma, Deutsche Bank's Chief Economist for Greater China issued a note this morning about the possibility of restrictions on the growth in loans because of poor lending practices.
This followed a warning against credit risks by Liu Mingkang, chairman of the China Banking Regulatory Commission, which this Wall Street Journal article has also picked up.
There are widespread anecdotal reports of commodity chemicals prices being over-inflated because easy lending has made it easier to speculate.
This speculation is across chemicals and polymers, futures exchanges for chemicals and polymers such as the Dalian Commodity Exchange and prroperty and stock markets. The same trader can often be dabbling in all the above.
One of my good contacts and friends had a "Joe Kennedy" moment last week (this refers to the famous story where the father of John F Kennedy was advised to invest in stocks by a shoe shine boy. He promptly went out and sold his shares just in time to avoid the Wall Street Crash).
The trader's moment came when he was asked by a Bangladeshi customer for ten full container loads of polyethylene (PE).
"I knew something was very wrong because there is no way demand in Bangladesh would justify this size of shipment. It was obvious this was for speculation," he said.
This followed a call from a Chinese chemicals trader who had never traded in polyolefins before asking for a cargo on behalf of a friend of a friend. "It was obvious he knew nothing about melt indices, the product or its applications. I could hear the sound of the herd stampeding towards the edge of the cliff."
So the trader liquidated all his positions late last week ahead of what he thought would be sharp price falls in polyolefins in China. It will be interesting to see if he was right.
In the longer term, as the Economist article also points out, better infrastructure - a major feature of the stimulus package - will help boost domestic growth and reduce reliance on exports.
If the government also manages to introduce a good nationwide health and social security system, domestic growth could really accelerate. I would bet that China has a much better chance of success than the US.
But China is China and if there is a way of making money out of a crisis, the famously savvy Chinese traders will find a way.
The danger is that this sends misleading signals about the true state of demand to outsiders - and at the moment, we are all desperate for any bit of good news. Has this made us a little more gullible than normal?
Speculative bubbles in property and construction - brought to an end by credit restrictions- was the start of the country's economic decline, The Economist adds.
Government policy was wrong.
If factories at the end of some chemical product chains are being kept running at high operating rates for social rather than demand reasons, this could turn out to be another flawed policy.
Could the chemicals industry be in danger of wanting to believe something so much that ignores overwhelming evidence to the contrary?
The widespread perception is that China's economy has reached a turning point.
"The worst of the crisis is over and the world is entering the time when things will gradually get better," wrote former US presidential adviser John Rutledge in an article on the Chinese news service, Xinhua.
According to The Economist, it wasn't the collapse in exports that triggered slower growth in China.
It traces the origins of the downturn to tightening of credit in 2007 that led to a collapse in property prices in China's first-tier cities and a decline in construction.
"If the collapse in domestic demand led China's economy down, it can also help lead it up again. Not only is China's fiscal stimulus one of the biggest in the world this year, but the government's ability to 'ask' state-owned banks to spend and state banks to lend more means that the government's measures are being implemented more rapidly than elsewhere," writes the magazine.
The huge spending on infrastructure will hugely benefit rural communities as two-fifths of villages lack a paved road to the nearest market, it adds.
A large increase bank lending also appears to be behind a 36% rise in housing sales by value in the year to March after sharp falls in 2008.
If construction picks up this should help reduce unemployment as half the job losses among migrant workers have been in the building industry, the magazine continues.
But The Economist concedes that a misallocation of capital is a concern.
However, the article continues: "China is one of the few countries in the world where bank credit has fallen relative to GDP over the past five years. Banks have an average loan-to-deposit ratio of only 67%, low by international standards, and less than 5% of banks' loans are non-performing, down from 40% in 1998."
So in other words because the Chinese banks are awash with cash a major Western-style financial crisis seems unlikely, no matter how much money is wasted.
But if money is being misallocated, the boost to growth might be less than some people are forecasting.
There are strong rumours that easy bank loans have fuelled speculation.
"When we are selling to a trader in China they have no interest in our letters of credit because they can borrow so cheaply and so easily from their local banks. They are even prepared to pay 20% up front by telegraphic transfer," said a Singapore-based polyolefins trader.
"I used to sell 80% to end-users and 20% to other traders in China, but now those percentages have been reversed.
"I think a lot of traders in China have taken risky long positions because lending terms were so easy."
Money has even been borrowed and then made or lost on domestic stock markets, some sources claim.
The same might apply to the Dalian Commodity Exchange, which has seen a huge increase in trading in linear-low density polyethylene (LLDPE) over the last few weeks.
Large of inventories of steel, aluminium and concrete are being built as a result of speculation and perhaps an anticipation that demand will get better in H2. The same might apply to chemicals and polymers.
But Michael Pettis, a professor at Peking University's Guanghau School of Management, makes some worrying observations about the economy in his blog.
It is worth reading the lengthy posts for 20 April and 13 April.
In summary, he talks about:
*Private companies - the main engine of economic growth - struggling to get financing as the state-owned enterprises receive a flood of loans
*A poor return on money spent versus jobs creation - for example, CNY1trillion which is being spent in Henan province to create 650,000 jobs. He has calculated that if this same sum had been spent on giving workers salaries of CNY3,000 a month (more than twice the average salary of migrant workers) this would have been enough to pay the wages of 650,000 people for 43 years
*A boost in industrial production, "leaving the unresolved question of who is going to absorb the excess capacity if the US is no longer willing to play the role"
*Signs that China is trying to export its way out of oversupply. The trade surplus was $62.6bbn in Q1 this year, up from $41.7bn for the same period in 2008. "Although lower than the astonishing heights of January and late last year, the trade surplus is still much higher than this time last year. That means China's export of overcapacity is increasing," he writes
*A much larger vulnerability of GDP (gross domestic product) to exports than some economists have calculated. He quotes a Wall Street Journal article, quoting a working paper prepared for the International Monetary Fund. The paper estimates that for every 10% fall in exports, GDP will decline by 2.5%. Exports fell by 20% in the first quarter
*Government subsidies and tax distorting demand - for example, state-owned enterprises bringing forward vehicle purchases which was of the major reasons why auto sales rose by 10% in March. JD Power, the car consultancy, is forecasting flat Chinese passenger car sales in 2009
It would be nice to start the weekend with a little cheer, but I'm afraid no amount of gormless optimism would work.
DuPont, as you can see from this excellent piece from my colleague Nigel Davis at ICIS, has revised its forecast for 2009 global growth down to minus 2.5% from minus 0.6%.
Every chemicals end-use segment you can think off from automobiles to construction to electronics looks a lot weaker than in H1 2008.
We need a new way of thinking to get through this, but as I head for a weekend with my family where the plan is to avoid reading any financial news, I am short of any ideas - other than maybe working for an NGO and accepting a much-reduced standard of material liviing.
Making money in this climate remains extremely hard - although from a business journalist's perspective, it is of course a fascinating time.
The first stage of the 105th Canton Trade Fair - which involves electronic and electrical appliances, hardware and tools, machinery, vehicles and spare parts, building materials, lighting equipment and chemical products - concluded this week. Sales totalled $13.03bn - a 20.8% fall on the same stage last year.
I also read this other report about a surge in job creation in China's cities in Q1 over the the fourth quarter last year. What are all these extra workers doing?
Are they building dangerously high inventories of semi-finished and finished goods?
China's economy is showing signs of recovery, but not enough to replace the 20% fall in exports during the first quarter.
My current favourite blogger is Michael Pettis, professor at Peking University's Guanghua School of Management, who, in his latest post, makes a very worrying point below.
As an aside, and without wanting to take the 1930s analogy too far, this debate in China is a little like the split in the 1930s between the internationalists in the US who favored hard money (incorrectly, I think) and a rapid liquidation of overcapacity (painful but probably correct), and who vehemently opposed measures, including tariffs and competitive devaluations, to boost employment via boosting the export of overcapacity, versus the large and powerful constituencies, dominated by local congressmen, miners, farmers and many industrialists, who stressed immediate moves to weaken the currency, boost production, and resolve US unemployment even at the expense of the global system. In part because the 1929 stock market collapse thoroughly discredited bankers and economists, and in part because politicians are always more likely to be influenced by large domestic constituencies than by internationalists, the latter group pretty resoundingly won the debate, at least in the early part of the crisis, and clearly not to the US's obvious benefit.
Economic stimululs packages the world over seem to be attempting to turn the clock back to 2007 - thus adding to the imbalances that caused the crisis in the first place.
In the case of China, short-term political expediency might be causing more damage to the global economy as the country tries overproduce its way to higher growth.
Overproduction in China might be the reason why polyolefin prices continue to defy reason.
Despite a fall in naphtha prices on what we earlier predicted on this blog - a big increase in naphtha supply in Asia - polyolefin prices continued rising last week.
Naphtha had fallen by $13/tonne to $437.25-438.25/tonne CFR Japan while polyethylene prices rose by $20-70/tonne in Northeast and Southeast Asia and polypropylene by $30-60/tonne.
......all the right reasons than to be wrong altogether?
Sounds a dumb question, perhaps - unless you take particular pride in being one of those know-it-alls.
The point I am trying to make (and assuming that chemicals pricing doesn't collapse beforehand on a broader retreat in crude and equites on maybe panic over swine flu or the realisation that a global economic recovery is a long way off) is that I have thought for a while that the fundamentals point to a major price correction from June-July onwards because of:
*New supply from the Middle East. Surely, yes surely, there will be more capacity hitting the market in H2 as PetroRabigh ramps up output - even if YanSab, Sharq and perhaps even the new cracker in Qatar - are effectively pushed into next year
*A lot of new supply in China. My colleagues at CBI Research & Consulting are working on an update of the subtantial amount of additional capacity due on stream in H2, including Fujian Petrochemical & Refining (the latest world on the start-up of which is July)
*The end of the May-June petrochemical turnaround season in Asia
*An increase in naphtha supply (as much as 20-30% in Asia, according to Purvin & Gertz) as a result of higher production from two new condensate splittlers in the Middle East and greater naphtha exports from India
*A I said, my belief that everyone will have to wake up to the fact that the global economy, including China, will not enter recovery in 2009 or perhaps even in 2010. I remain worried about the quality of China's growth (is it too production rather consumption-driven?), how much stimulus-package money has been wasted on speculation, including in building chemicals inventory, and the possiblity that China - directly or indirectly - might start exporting deflation
But today I spoke to some goods contacts and friends at a leading petrochemicals trading company who gave the following additional reasons for their long-held view that prices would tank in July:
*US and European producers upping operating rates in response to strong arbitrage opportunities. The Europeans have already raised rates, apparently, and the US more recently. In the case of propylene, though, stronger demand for refinery-based C3s from several derivative producers might, perhaps, make further US PP shipments unworkable
*Strong interest in shipping petrochemicals from the US and Europe to Asia for arrival after May (all May business was concluded around 20 April). Cargoes could be at sea and uncommitted just as the shift in fundamentals listed earlier starts to take effect. Big quantities have already been shipped from the West to East during Q1, including very large amounts of BTX and polyolefins. Around 200,000 tonnes of US and European benzene is heading for Asia for March and April arrival, according to DeWitt & Co. China imported 114,000 tonnes of benzene in March alone, which compares with just 328,000 tonnes for the whole of 2008 - an average of 2,733 tonnes per month. The surge in toluene shipments from the West to China is equally dramatic: China received 66,000 tonnes in January, 77,000 tonnes in February and 94,000 tonnes in March compared with a 2008 total of 273,000 tonnes.
Inventory pressures in the West have been relieved and some of the big losses suffered in Q4 have been recouped (and some of the traders seem to have done very well indeed).
So batten down the hatches once again.
As the potential swine flu pandemi threatens more lives - and even more damage to the global economy - it's time to watch American Idol re-runs.
It would be great if we could all collectively retire to some paradise island where Manchester Utd and Chelsea have never won a Premiership trophy, or any kind of trophy for that matter, for the last 20 years - and where the anxiety of making and losing money is replaced by a new Affluenza--free style way of thinking.
In the mean time, the free versions of Adam Lambert's stunning version of the Tears For Fears 1980s song, Mad World, have been removed from YouTube. But it is so worth paying for an iTunes download.
Meanwhile, here are the lyrics. Makes you think, eh?
All around me are familiar faces
Worn out places, worn out faces
Bright and early for their daily races
Going nowhere, going nowhere
And their tears are filling up their glasses
No expression, no expression
Hide my head I want to drown my sorrow
No tomorrow, no tomorrow
And I find it kind of funny
I find it kind of sad
The dreams in which I'm dying
Are the best I've ever had
I find it hard to tell you
'Cos I find it hard to take
When people run in circles
It's a very, very
Mad World
Children waiting for the day they feel good
Happy Birthday, Happy Birthday
Made to feel the way that every child should
Sit and listen, sit and listen
Went to school and I was very nervous
No one knew me, no one knew me
Hello teacher tell me what's my lesson
Look right through me, look right through me
As flagged up on this blog last week, ICIS news has confirmed that the US-Asia propylene arbitrage has shut following a rise in US domestic refinery-grade C3 prices.
This could be good news if West-East arbitrage in general becomes more difficult.
During Q1 and the first few weeks of the second quarter, big quantities of US and European aromatics, olefins and derivatives were shipped to Asia as a result of much-stronger prices in this region compared with the West.
The Western producers (and, of course, the traders who seem to have done very well) benefited greatly from being able to relieve inventory pressures.
Volumes would have been even greater if it hadn't been for vessel re-positioning issues and delays caused by increased piracy off the coast of Somalia.
But now the risk is that further big West-East volumes are fixed for arrival after May.
June-July will see cheaper naphtha and increased petrochemical supply, creating the potential for across-the-board price corrections that could be made a lot worse by continued high levels of deep-sea cargoes.
Any excuse to make a reference to the late, great and wonderful Ian Dury.
I sent the following email to my friend in response to the stock market rallies and the green shoots of optimism seemingly turning into beautiful May flowers:
"I take it nothing can has fundamentally changed? The confidence couldn't possibly be so self-fulfilling that all the consumer and corporate debt somehow vanishes into a great big black hole?"
His response, justifiably caustic, was:
"Of course, that's the answer. We wake up on May 1, and its all been a nightmare.
"Suddenly houses are still worth what they were there years ago, and are still increasing in price on a monthly basis.
"None of the banks have been nationalised, and the shadow banking systems is still the same size as the normal banking system.
All is fine with the world, and neither Chrysler nor GM are close to bankruptcy."
Quite. Enjoy it while it lasts.
"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?
The timing of when to strike the ball is everything in the wonderful sport of cricket - and also, apparently, in the American pastime of baseball.
An Australian banker is fond of reminding the English how much better his country is at playing cricket.
But his gloating doesn't extend to how well he's been timing dipping in and out of equity markets of late. Like a lot of other "cashed up" people he is suffering from the "if only" syndrome.
"A lot of money seems to be pouring into stock markets because it has nowhere else to go. I didn't expect this run to last as long," he said.
All the moving indicators are pointing upwards with crude above $55/bbl on Thursday where he thought there would be very tough resistance.
"There's so much crude in storage which has been acquired by the financial traders who perceive the economic recovery is just around the corner. This is a big risk.
"Equity markets are also responding as if a recovery is only three months away. They usually price in a recovery about a quarter ahead of when it actually happens, but I believe that the recovery - or rather the bottom of the market - is at least six months away."
And in his view, you have to be very careful how you measure "recovery" in the context of the worst economic downturn since possibly the Great Depression.
The first important measure is the effect of inventory adjustments on GDP (gross domestic product) growth.
In the US, for example, total inventory reductions subtracted $50bn from growth in the fourth quarter of last year, he said.
The first quarter adjustments will see a further $100bn or so of production cuts and the second quarter possibly in excess of $150bn.
The collapse of liquidity in Q4 2008 forced companies across all sectors to make much quicker operating-rate cuts and plant closures than occurred at the start of previous recessions.
"There was simply no re-financing available so the companies had no choice."
BASF has reduced is global production by 25%, Bayer Material Science has taken 300,000 tonne/year of polycarbonate (PC) capacity temporarily off-line and Dow Chemical's average operating in the fourth quarter was just 64%.
"I expect some inventory replenishment down many of the production chains in Q3 in the US, and probably elsewhere," he added.
"This could give the false impression that we have reached the bottom of this crisis and recovery has begun."
Inventory building in Q3 would need to be measured against consumer spending, he said.
Retail sales on big-ticket durable items such as autos and homes might take longer to bounce back in the West than in Asia. Cost consciousness could also extend for some time to clothing, food and tourism.
Individual wealth has been badly dented by the fall in stock markets relative to their peak and the collapse in housing.
"Savings rates are likely to continue increasing as a result of this loss in wealth - even more so if unemployment keeps on rising."
Recoveries in GDP growth in the third quarter of this year would also need to be measured against the same period in 2007 rather than 2008, he added.
"This will give us a measure of how far we are away from returning to the boom conditions of 2004-07."
The crisis began in the third quarter of 2008.
Any comparison between Q4 2009 and Q4 2008 would be even more misleading as the global economy ground to a virtual halt during the last quarter of last year.
Comparing 2007 with 2009 is crucial for the chemicals industry as new capacity was planned on the belief that growth would continue at levels close to the great boom years.
"Even if were still in a global boom we would still need capacity to shut down," said Paul Hodges, chairman of UK consultancy International eChem.
"In most building block products we are now faced with 20% oversupply."
It could be a very long time before the world economy enjoys another period like 2004-07.
Consumer and corporate credit is likely to remain much more restricted because of financial-sector reforms.
"You also have to look at the potential for credit-card debt going bad to undermine consumer spending and the stability of the banks," the banker added.
"The first quarter results of the Western banks were very misleading. They looked good because of a reduction in competition due to consolidations and bank failures.
(Also, the banks could hardly fail to make money as governments were practically giving money away)
"But behind the numbers you could see warnings over just how much bad debt could result from credit-card defaults.
"As much as 25% of the revenues of some commercial banks come from credit-card transactions."
Consumers who are not in danger of default will be eager to pay off their plastic debts rather than incur 20% interest charges, he said.
The other big risk is the rate of recovery on corporate debt that's gone bad. Optimists think it could be as high as 40%, whereas others are warning of returns of as low as just a few cents on the dollar.
There appears to be the risk of a least a double-dip recession - perhaps even three dips.
Commodity chemicals prices started going up before the current equity-market rally.
This followed the deep global production cuts in aromatics, olefins and derivatives and a rebound in feedstock costs.
It's a moot point whether the cuts, combined with delayed start-ups in the Middle East, created genuinely tight markets or just the perception that they were tight.
In the end, though, the result was the same - raising the age-old conundrum of whether sentiment or fundamentals are driving markets.
A danger is that rising crude prices and the stock-market rally could lead to chemicals production being ramped up (if it hasn't happened already), despite the uncertain outlook for consumption.
Confidence can be a dangerous thing.
It's a great deal easier to off-load shares when you think the market has turned than a warehouse full of polyolefins.
The current run-up in equities might go on and on - perhaps even for several years, according to economist Russell Napier.
For example,the stock market rally after the dot com bubble burst was fuelled by too-lax lending. Was this in effect a bear-market boom?
Now governments are pouring money into economies the world over to stimulate consumption.
This will lead in perhaps as long as 2-3 years time to a big inflation problem, the Chinese losing their appetite for US Treasuries, Treasury yields doubling and a cataclysmic bear market with the S&P falling to 400.
Until then, S&P could easily double from its March low, predicts Napier
Do you have the courage to stick your money in and wait?
It still feels counter-intuitive that the current run-up will last a few years given the scale of consumer and corporate debt.
But since when has logic had anything to do with anything?
One of the new skills being learnt in this current crisis is how to run plants efficiently at low operating rates.
"It's funny that for years now, we've worried about how to scale up profitably. Now industry is faced with just the opposite, how to scale down profitably," says Mark Matzopoulos, chief operating officer at UK-based Process Systems Enterprise in this article in ICIS Chemical Business.
A friend of mine has just graduated from university with a very good degree in chemicals engineering and has managed to land a job with an engineering company. His fellow graduates have not been as lucky in their search for jobs with chemical companies.
At least somebody is making money out of this crisis
It's easy to get caught up in the excitement over the rebound in the Chinese economy and miss underlying weaknesses which point to some major problems ahead.
To some extent, in a desperate effort to compensate for collapsing export trade, China might have borrowed from the future in order to achieve a swift recovery.
"The (Chinese government's economic) stimulus programme borrows from a future investment cycle," writes the online research publication, the China Economic Quarterly (CEQ), in its Q2 report.
"Since 1978 China has run relatively regular five-year investment cycles followed by five years of retrenchment."
Spending by the State on infrastructure and industry boomed in 2003-07 and so the following five years were supposed to involve the reductions in expenditure necessary to repair a big hole in the national balance sheet.
But, of course, the reverse has happened with infrastructure and industrial projects scheduled for the next 5-10 years now set to be completed over the next 3-4 years. This includes speeding up investments in the refinery and petrochemical industries.
"China could be in for some rough times after the stimulus money runs out in 2011," the CEQ adds.
Repair work to the national budget might not be the only reason why longer-term prospects could be a lot bleaker than many expect.
China might also fail to boost domestic demand sufficiently to compensate for export trade which might take many years to recover.
"For the first time in the 30-year reform era, China faces an extended period - five years or perhaps longer - in which exports will provide no significant contribution to growth," says the CEQ.
The reason is the well-documented collapse in the West's debt-financed consumption binge.
On the surface, it looks as if China is making great headway towards realising more of its enormous domestic-growth potential: retail sales grew by 16% in Q1 this year, up from 15% in the first quarter of 2008.
If you dig deeper, though, as the CEQ again does, you discover that retail sales include many "institutional" purchases, meaning those by state-owned enterprises (SOEs).
The government has increased military salaries by 50% and is providing rebates of 13% and 10% respectively off rural purchases of household appliances and automobiles.
Despite all this cash sloshing about, however, when you take away the institutional purchases from the retail sales figures, the CEQ concludes that there is little evidence of a pick-up in consumption.
Longer term, this can be fixed if efforts to create much better pension and healthcare systems lead to more spending and lower savings levels.
Compared with the West, and particularly the US, the Chinese keep an awful lot more of their money bank deposits.
But here's another potential pitfall: all that money sloshing around (the CEQ estimates the total stimulus will be worth Yuan5-6 trillion, or 15-18% - much bigger than the originally announced Yuan4 trillion) could end up creating another non-performing loans crisis similar to that of the early 1990s.
This could force China's banks to lower interest rates on deposits in order to repair their balance sheets, warns Peking University finance professor Michael Pettis on his blog, China Financial Markets.As bank deposits are such an important method of saving money in China, lower interest rates could lead to more money being saved as compensation, leading to damaged consumer growth, he adds.
Numerous economists are also warning that too much of the stimulus is in the form of loans to the SOEs, which can be less efficient in boosting the economy than private companies.
The private sector, hammered by the collapse in export trade, is in contrast reported to be struggling for finance.
An inevitable slow down in bank lending, the result of the huge rise in loan growth during Q1, could also be put yet another brake on the economy.
"RMB (Yuan) net lending fell sharply to YuanB592bn in April from YuanMB1.9tn in March, broadly consistent with our expectation," writes Jun Ma, Chief Economist Greater China for Deutsche Bank, in a report.
"We believe this reflects the success of the window guidance by the PBOC (People's Bank of China) and the CBRC (China Banking Regulatory Commission) that advised banks to "appropriately control loan growth"; the decline in new project approvals; as well as the slower pace of equity capital injections from the central government budget.
"Going forward, the continuation of these factors will likely lead to a further decline in net lending to about Yuan300-400bn per month in the remainder of this year."
A further worry remains the potential global deflationary effect in H2 of China stockpiling raw materials, including perhaps chemicals and polymers.
Imports of polyethylene (PE) and polypropylene (PP) have, for example, been at record levels in Q1.
However, it's impossible at this stage to say whether this involves major stockpiling or is more the result of better demand and big production cutbacks by Sinopec and PetroChina earlier this year.
In the case of iron ore and copper, though, the steep rise in Q1 imports (iron ore was up by 33% and copper by 62%) are being widely attributed to state-backed inventory building and strong investment demand.
"China is stock piling commodities - everything from metals to oil," said a chemicals industry source.
"The argument is that it's better to store financial reserves in commodities rather than US dollars."
"There has also been some stock piling of gasoline and diesel in anticipation of price increases by the government."
Gasoline and diesel prices were indeed increased from early June - the first time since March.
But if you put five economists in a room, goes the old adapted saying, you are likely to get at least ten different opinions.
It can be just easy to interpret some of the recent data in a much more positive way, and it might just be possible that the current euphoria will create a self-fulfilling prophecy of a sustained recovery.
It's worth being aware, though, that a 50% rise in the local stock markets since the start of the year and lots of positive macro-economic news might not tell the full story.
Cartoon: Peter Brookes, The Times
Yes, this blog has gone staggeringly quiet over the last few weeks as I gained a life: I went home to the UK and mixed with some people who had no interest in or desire to know anything about polypropylene. Do you realise that there are some people out there who have never even heard of catalytic reformers? Amazing....
Anyway, before I return to my sad little petrochemicals bubble, here are some reflections on the political chaos gripping good old Blighty caused by MPs' expenses.
The pleasure the Brits are deriving from their fuming indignation over some upper-class twit claiming the cost of cleaning out his moat, and other such extraordinary fiddles, almost makes up for the misery inflicted by collapsing house prices.
But as I kept saying over many a pint of wonderful British real ale during my leave: "Corruption? Call this corruption. If you want real, decent corrupt politicians then go to India or the Philippines, to name but two Asian countries affected by this problem.
"The good people there would be delighted if all that their political leaders did was claim the odd household plant or a bit or mortgage tax relief off the State."
It's good fun to have a go at politicians, though - God knows they all deserve it.
And there is never any excuse to fiddle your expenses and quite obviously, all the journalists enjoying the hunt have never, ever over claimed or falsely claimed for anything (you can be probably tell, except if you are American that is, that this is intended to be sarcastic).
I had a friend many years ago who worked on a national newspaper who received a major telling off for not claiming enough fraudulent lunches, dinners and gallons of alcohol, the reason being that if the accountants saw one person managing on less everyone else might have been forced to follow suit.
Most national newspaper journalists, certainly in the 1990s anyway and so this may have changed, could double their salaries by being on the fiddle.
But in the row over MPs' expenses perhaps not enough focus is being placed on a much bigger issue. This is how Britain is going to repair its government finances without creating major inflation problems or interest-rate hikes that will limit inflation but nip the recovery in the bud. The same applies, of course, to the US.
I don't pretend to understand Bond yields etc.
Perhaps nobody understands, nobody has control, nobody has a flipping clue and so in the absence of any clarity the only debate worth having is over why the former Home Secretary's husband, working as a government-paid political assistant, claimed porn movies on his expenses (still my favourite of all the scandals).
Toodle pip. I promise you in my next post that I'll write about polypropylene for all you fellow sad people out there.
As I've been warning on this blog for some time, the explosion of credit in China has created a great deal of paper-bottomed optimism over the recovery.
Fitch, the ratings agency, has just raised its macro-prudential risk indicator ffor China from category 1 (safe) to category 3 (Iceland et al) because of the lending surge and public debt.
China's Banking Regulatory Commission warned last week: "The top priority at the moment is to stop explosive lending. Banks should carefully monitor the process of credit approval and allocation, and make sure that loans flow into the real economy."
And Andy Xie, the often-quoted Sino-bear, says in the same article I've linked to above from The Daily Telegraph: "Commodity speculators have been using cheap credit to play the arbitrage spread between futures and spot on the oil markets. They have even found ways to trade lumber to iron ore by sheer scale of leverage. "They've made everything open to speculation."
This is probably one of the main factors behind the boom in speculation in linear-low density polyethylene (LLDPE) futures on the Dalian Commodity Exchange. PVC futures were also recently launched on the exchange.
As my fellow blogger Paul Hodges points out on his blog, Chemicals & The Economy, China is at risk of repeating the mistakes of the West: an unsustainable rise in credit.
The obvious danger, as has been flagged up before, is a sudden collapse in chemicals demand and pricing as inventories are unwound (built up with too-easy) as tougher lending conditions are imposed. This could be an even more dramatic bursting of the current equities and commodity price bubbles if it occurs at the same time as sharp fall in crude (which seems likely if equities are hammered.
Have you ever been away on holiday and have cut yourself off from from work, only to return and find that nothing has changed?
So it seems in polyolefin markets. As this blog has been writing about for several months, the recovery in pricing seems to have been mainly feedstock-driven as this article from ICIS news points out.
Demand from converters in south China is reported to be weak; hardly surprising given the chart below from The Wall Street Journal which indicates that China's economy is 36.5% dependent on exports with south China the heartland of China's export sector.
No matter what the wisdom of the Chinese government's huge fiscal stimulus aimed at boosting local demand, a sustained recovery in Western consumer spending remains crucial for China's economic health over the next few years.
You have to doubt the wisdom of the stimulus packages because China could well be borrowing from the future to pay for growth today. And secondly, as we discussed earlier this week on this blog, the enormous increase in loan growth will put China's banking system under pressure.
Chemical prices have risen in tandem with crude prices and with the broader sense of optimism - reflected in equity markets - that the worst of global economic crisis might be over.
True, the rate of declines in the real economy might have slowed down but as Mohamed El-Erian, chief executive and chief investment office of Pimco, argues in this Financial Times article "it is going to take time to restructure an economy (the US) that became over-dependent on finance and leverage. Meanwhile, companies will use this period to shed less productive workers."
This could mean US unemployment will only peak at 10.5-11% and not until 2010. Yesterday saw the release of jobless figures for June which indicated a 467,000 drop in employment, raising the current jobless rate to 9.5% from 9.4%,.
I am sticking to my belief that a sharp correction in polyolefins pricing is likely very soon with markets set to get a dreal longer when the Asian turnaround peak season ends - and when new capacity comes online in China and the Middle East
Evidence of this is clear from the monthly ICIS Ethylene Worldwide Report, which was relaunched in May.
As this slide shows detailing China alone (and the picture looks equally disturbing for the rest of the world, also of course including the Middle East), available capacity is set to increase sharply as maintenance work tapers off and some of the new plants are commissioned.
But there might be more start-up delays and of course we don't know the maintenance schedules for next year.
Clearly the risks are high, though, for any petrochemicals producer or buyer (I think what I've said for olefins and polyolefins applies to many other products) that has swung from the fear of Q4-Q1 last year to over-optimism.
If production or buying have been ramped up by too much and inventory levels have once again been badly managed, the risk of heavy losses from the bursting of this mini-price bubble remain high.
For the cautious and prudent company - and for the likes of Ineos and Dow Chemical that have taken opportunities to refinance during the current stockmarket boom - though, the prospects might not be that bad.
But for everyone, evidence of a real improvement based on stronger global consumer spending has yet to emerge.
Indeed, if El-Erian's analysis is correct overall consumer spending on the things made from chemicals might get worse in H2 this year and throughout 2010.
And as foor beyond the end of next year, again, since I've been away nothing has really changed.
This comment from the economist Nouriel Roubini - although a bit dated as it's from May - still rings true:
"We cannot rule out a double dip W-shaped recession with the wings of a tentative recovery of growth in 2010 at risk of being clipped towards the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates on the public debt of many advanced economies as concerns about medium term fiscal sustainability and about the risk that monetization of fiscal deficits will lead to inflationary pressures after two years of deflationary pressures."
Source of picture: gilesbowkett.blogspot.com
The excellent daily energy and shipping report, The Schork Report said today that the bottom had "fallen out of the entire (energy) complex."
With the Bulls on the defensive, the authors believe that crude could retreat towards $60/bbl.
Natural gas markets are so oversupplied that prices in the region of $2/mBTU are possible, it adds.
Back in March, the report offered what I think is the best summary of the denial of fundamentals that's taken over equity and commodity markets recently:
Our concern is this: with each passing session it appears more traders are encouraged to "participate", hence, the market keeps moving higher. That happens enough times and soon you have $100 oil and Matt Simmons all over the tube alleging the Saudis are doctoring their books and that Petrobras and ExxonMobil didn't just find all of that oil in Brazil. Then, just like we saw last spring, when the price path of the market decouples from the fundamentals, perception trumps reality and high prices become the justification for higher prices. All because the
smart money [sic] doesn't want to "miss out".
Since March, August WTI prices on the NYMEX have rallied from $58.07/bbl to a $73.48/bbl high (+26½%).
Despite some recent headlines pointing to tighter oil supply (for example, more civil unrest in Nigeria and US dollar weakness) the energy-market mood has changed.
Until last week greed seemed to be chasing greed. "The market was going higher...and they (the speculators) went on a buying spree because once again, high prices justified high prices," wrote Schork on July 6.
So what began as a bear-market rally ended up as a growing consensus - which perhaps too few dared challenge - that the recovery would be V-shaped. Doesn't this sound an awful lot like the consensus views of decoupling and ever-rising energy costs which prevailed during H1 last year?
What changed last week was a fall in June US consumer confidence and a sharper-than-expected rise in unemployment. The employment-to-population ratio also fell to its worst level since 1984 and average hourly earnings have remained stagnant in two out of the last three months.
An indication of just how far we are away from a consumer-led US recovery is that US gasoline prices fell last week - for the second week in a row. This was the first consecutive weekly decline this year and occurred even though this is the peak driving season.
Chemicals pricing has increased in line with energy costs - as this chart from ICIS pricing shows. Naphtha, ethylene and polyethylene (PE) have been chosen as examples.
Global production cutbacks and delays to Middle East start-ups have also helped sustain a chemicals price rally which began in February.
Efforts are being made to push through further prices rises. European PE and polypropylene producers are, for example, bidding for 10% July increments. These are aimed at recovering higher upstream costs and improving margins.
But the new capacity won't be delayed forever. China's import demand has already started to weaken on anticipation by buyers of extra volumes in H2 and resistance to price hikes.
This is bad news for the US and European producers. They have enjoyed strong exports to Asia in Q1 and during some of the second quarter, which has helped them keep domestic markets tight.
As I said last week, chemicals companies that have continued to manage inventories well during this paper-bottomed boom will be in a better position than those who have been taken in by the markets.
Picture: The China Daily
"I've given up trying to read the polyolefin market in China. I just can't figure out what's going on," said a senior source with a major North American producer late last week.
"I keep returning to the fundamentals and cannot understand why prices have risen so steeply since mid-February."
Him and me both; we are perplexed by statistics which show a rise in domestic polyethylene (PE) production and imports, despite, as my colleague Paul Hodges points out, a sharp in exports of finished goods.
Where is all this stuff going? Into inventories of finished goods, perhaps, as factories are kept running for social reasons?
Oil is another reason why chemicals pricing in general has gone up by so much.
Now it looks as if equity and oil markets are heading in the other direction.
But as a second source told me by email this morning: "I've stopped worrying about this; I am just making money while it lasts."
Quite, but to return to the North American producer and his theories for these weird numbers, he added the following:
(Anybody else out there - your views as always are more than welcome).
"Dalian (the LLDPE commodity exchange) is now leading the market - i.e. people are pricing off it.
"My big concern is that large volumes are being stored in Dalian warehouses for physical delivery and could hit the market in one flood. I am still confused about how much actually turns physical - very little so far from what I've read, which is strange as the website states that each contract has to close with physical delivery.
"The Dalian exchange might be a reason why we have seen both stronger import volumes and higher local production.
"Some strange things are happening which might be down to the futures market. For example, agricultural film demand remains strong even though this is not the agricultural season.
"This could be the result of Dalian and/or speculation and high storage levels in the physical market made easier by the very easy credit conditions in China.
"There also seems to be a correlation between higher pricing and the fall in recycled or scrap imports.
"The reduction is about 30% so far this year, which is due to less scrap-material availability in the West.
"Supply in the scrap markets is tighter because less consumer goods are being bought in Europe and the US, which are wrapped in recyclable PE.
"The Chinese government has apparently also tightened up regulations on scrap imports after concerns were raised over health risks."
The scrap factor could be important as over the past 2-3 years, the steep rise in recycled material has taken around 4-5 percentage points a year off virgin polymer growth.
Also, once polymer prices go past $1,000-1,200/tonne it becomes economic to ship in scrap polymer and convert, according to one source.
Take away this automatic price-capping mechanism and you could have another reason why prices have risen by so much since mid-February - and why production and imports are both up.
My last blog entry quoted a North American industry source who was concerned over the potential for physical delivery on the Dalian futures exchange to flood the real market and send prices crashing.
In my ignorance of how futures markets works, and as a typicaql semi-numerate journalist, I therefore asked a colleague with a futures/mathematical bent to help out. This will hopefully allay the above fear.
Here is his explanation (please feel free, as always, to disagree):
If you look at the English part of the website you'll see that several months before a contract expires (.e.g. in April for July delivery) there is an enormous amount of open interest (the dating system is confusing as each contract starts with 10 after which it makes sense).
This huge volume of open interest mainly involves financial speculators who have no intention of either acquiring or taking delivery of physical material.
They will agree in advance to cash settle before the expiry of the contract and so you if then look at a few days before a particular contract closes the open interest declines dramatically as once a contract does close and no cash settlement takes place, physical delivery has to take place. This helps to explain the very small delivered volumes also reported on the site.
See an Insight piece from my colleague Becky Zhang in our Shanghai office -. It seems as if the producers and buyers are not using the market in a big way to hedge; it's more the speculators trying to make lots of good money.
This raises an interesting separate point on the debate over whether there are large volumes of physical polyolefins in inventory.
Why would a lot of people bother renting a warehouse, taking delivery and taking all the risks associated with this when you can just go on the exchange and make money out of purely paper trading?
The other good thing about Dalian, as I understand it, is that you can get your money out straightaway - and with such incredible volatility on a daily basis you stand to make (or lose) money very quickly. This a lot quicker return than waiting to close a physical position.
This still leaves the longer-term issue of whether the market could become a de facto pricing influence. This could happen either because people believe it's important (to use another cliché again a self-fulfilling prophesy) or if the big producers and buyers start using it in a big way to hedge.
This is all work in progress so I will keep asking.
The above also doesn't explain why LLDPE demand has apparently remained resilient in the physical market, even though this is not an agricultural film-buying season.
I am also still working on the issue of the influence of availability of imports of recycled polyolefins.
Source of Picture : purchasing.com
In his own words, here is how one contact describes the current situation with a couple of extra points added by yours truly (with links)
"We've seen arbitrage close from Europe on polyolefins with no new business since April-May. Some material was delivered in June but this was merely May deals.
"The recent rise in European monomer prices (about Euros85/tonne for C3s and Euros$80/tonne for propylene) has helped claw back margins at the cracker level. In fact if you now look at the propylene-to-PP spread it's the worst it has been for the past two years.
"Clearly, these increases in contract monomer prices have put paid to any further arbitrage for the time being."
"I think the recent ethylene and propylene prices rises have been driven mainly by short covering from traders and with energy prices coming off I can't see current levels being sustained.
"One of the major reasons is that the non-PP consumers can't continue to pay the high monomer prices and so will have to cut back on operating rates - if they haven't already (for example, in the case of acrylonitrile)
"In the first half, the European industry was helped by pretty good operating rate discipline, but in the US plants have been running pretty hard.
"The European plants were also constrained from running any harder because spot monomer prices made this economic if they had insufficient flexibility in contract arrangements to up their operating rates.
"The rise in China PE imports is probably also reflected in PP which is not what the industry expected - we had anticipated import growth to be flat this year.
"The reason is delays to new capacity and re-stocking. We haven't seen a new PE plant in China for over a year with the next ond due on stream in July-August - Fujian.
There has also been substantial China petrochemical turnaround programme in April-June as our re-launched World Ethylene Plant Report illustrates.
In addition, deep cutbacks were made earlier in the year for market reasons.
"I think the reasons for the project delays have been that EPC (engineering, procurement and construction) resources have been severely overstretched.
"You just couldn't get enough of these experienced project managers to oversee the big investments - and also cost constraints were a big issue because of the high prices of both labour and raw materials.
"You faced a choice of, say, focusing on the cracker and certain derivatives at the expense of lesser derivatives which have meant some parts of some projects have been delayed.
"The delays are not the result of market factors.
"When you think about the China market, if it grows at 5% a year that means there is a need for one new world scale plant every 12 months - which hasn't transpired. If it grows at 10% you need three new world scale plants.
"And despite the global economic problems the market is still growing.
"Another factor behind tight PP in China has been small plants have been off-line because poor refinery economics have meant that the propylene hasn't been available. There is a total of about 500,000 tonne/year of these smaller, refinery-linked plants in China.
"The refineries have been running at low rates because of weak fuels demand and rising oil prices. Restrictions are still in place which prevent refiners from fully passing on the costs of more expensive crude.
"It's clear, though, that when all this new capacity starts up there will be a blood bath.
"The fall in crude by $10/bbl is clearly also going to have an effect and buying patterns will change as everyone holds back rather than brings forward purchases."
Source of Picture: The Earth Institute at Columbia University
I was speaking to a Singapore-based trader this morning over the reasons behind the polyolefin price rally.
Here are his views:
"A maor factor has been a lack of availability of recycled material. This is because people in the West are buying less durable consumer good, for example electronics, which arrive wrapped in plastic.
"During the economic mega-boom lots of this plastic was collected in the States and Europe and exported to China to be recycled back into film for wrapping durable goods. For hygiene reasons you can't use recycled material for food wrappiing.
"Stricter government regulations have also reduced the trade in recycled material. The new rules were introduced because of environmental concerns.
""A lot of the traders who were handling recycled material went bust because of the great petrochemical price collapse last year. T
"hey were left holding high stocks of recycled stuff they couldn't sell. Factories were no longer interested because they could buy virgin material and very-much reduced prices.
"Last year was also very good for selling fillers to make virgin polymer go further. For example, I was able to sell lots of calcium carbonate at $900-1,300/tonne. This year I haven't sold a single tonne."
Very interesting stuff - especially when you consider that in the last few years imports of scrap plastic have taken around 4-5 percentage points of China's polyolefin demand growth.
Ron Kirk faces a tough balancing act
Source of Picture: United States Mission - Geneva
"The rebuilt American economy must be export-oriented and less consumption-oriented," said Larry Summers, Director of the US President's National Economic Council, earlier this month.
But, as The Economist says in this article, this will be a little like turning a giant oil tanker in the opposite direction; meaning, it will take considerable time during which America will suffer sub-par growth, warns Mohamed El-Erian, CEO of Pimco - the world's largest bond investor.
So what's going to happen when the US has to start reining back its huge budget deficit through cuts in economic stimulus? Will the economy have been sufficiently transformed by then?
Or could the US be dragged into a wave of protectionist policies in order to protect domestic industry in the absence of a rise in exports sufficient to make up for all that lost government stimulus? Goodness, that sounded like a mouthful.
It might not be the protectionism we are all familiar with - for example, antidumping duties which are more favoured by the developing world.
Instead you might seen much greater scrutiny of imports from the developing world on the grounds of safety and carbon emissions (by this point, if the House of Representatives gets its way, there could be a carbon import tax in place anyway for countries that don't sign up to a US carbon trading scheme).
Closer attention might also be paid to the working condition, and pay of labourers in countries such as China. Ron Kirk, the US trade representative, recently gave a speech to steel workers in Pittsburgh in which he warned America's trading partners about violations in labour standards.
On the other side of the world, China - as we've written before on this blog - might have to also rein back government spending and order the banks to reduce loan growth.
And in order to repair the their balance sheets, the banks may be forced to raise deposit rates.
If rates rise by enough the real cost of borrowing (i.e. the rates minus inflation) will be positive again.
Real deposit rates becoming positive led to the last real-estate collapse in 2007 and a wider economic slowdown in China.
This could hamper the country's efforts to rebalance its economy in the opposite direction to the US - away from exports and more towards domestic consumption.
Thus in a desperate effort to protect growth, the Chinese government might be even less likely than at present to let the Yuan strengthen. A stronger Yuan would make it a lot easier for the US to raise its exports.
The chemicals industry might be well advised to plan for a very nasty trade war.
A Mars Bar feast in store if crude hits $30/bbl again
Source of Picture: Amazon.com
Polyethylene (PE) inventories in China at the second and third local distributor levels are at very high levels, two reliable industry sources have told us.
Speculating in polyolefins has been made a great deal easier by lax bank lending - contributing to a 51% rise in imports during January-May 2009 over the same months last year.
The US was able to raise low-density PE (LDPE) exports to China by 27% in January-May and HDPE by a staggering 65% (up until end-March shipments were actually down by 3%, indicating how strong the buying spree has been since then on greater macroeconomic confidence, tight supply on shutdowns and rising oil prices).
Strong end-user has also added to the momentum.
The booming construction sector consumed lots of high-density PE (HDPE) pipes.
We are also hearing reports of government investment in better disaster-preparedness - after the mistakes exposed by last year's Sichuan tragedy - as being partly behind very tight HDPE yarn grade markets. Yarn grade is used to make tarpaulin for tents with the surface of the tents laminated by linear-low density (LLDPE) and LDPE.
Demand for agricultural film (LDPE and LLDPE) has received a boost from government initiatives to raise output on farms. One of the peak seasons for agricultural film demand is also about to start.
Lack of availability of recycled plastic is another major factor in the surge in demand for virgin resins.
Recently, though, markets have become becalmed due to a classic buyer and seller stand-off.
Are we at one of those inflexion points or could the rally be sustained for some time yet?
I still think this won't be a V-shaped recovery so it's only a question of when there is another severe correction in pricing (of course, the same applies to the other polymers. I will look at PP over the next few days).
New supply will become the biggest factor in directing markets, but, according to some sources, perhaps not until as late as Q4 due to continued start-up delays.
But even if the new-output glut doesn't hit the market until the fourth quarter -or perhaps even late - a collapse in crude might have already flushed the true level of Chinese inventories out of the system.
Or could more air be first of all pumped back into the crude bubble?
Premiums for long-dated US crude futures have grown dramatically since mid-July, according to this report from Reuters.
"The discount for front-month to second-month oil futures has nearly doubled since July 13, to $1.75 from 89 cents," the report continues.
This shift in the forward curve might be big enough to trigger a new round of buy and store programmes for offshore vessels that were off-loaded in May when the curve moved in the opposite direction.
Bargain prices for very chartering Very Large Crude Carriers (VLCCs), which can help store up to 2m barrels of oil, could revive the offshore storage trend.
But the danger is that one day storage space might simply run out - or before that the cost of storage rises above that of finance. Cheap and easy lending, the result of the US government's rescue of the banks, is one of the main reasons behind the rise in oil.
Before any of the above happens, the weak state of demand might be enough to topple the market.
OPEC is predicting a sharp drop in oil prices over the next few weeks because of the huge build inventories of crude products, according to this report in the Wall Street Journal.
Stockpiles of diesel and heating oil are at 24-year highs, leading to the possibility of more crude oil production cuts being announced at the next OPEC meeting on 9 September.
Venezuela, Iran and Angola are already apparently exceeding existing quotas, raising doubts over whether any additional cutbacks would work.
Further demand destruction seems likely because - as we've written about before - defaults on unsecured consumer debt, such as credit cards, could result in a second wave in the financial crisis.
"The real unknown is to what extent a recession on par with the 1930s will be turned into something much worse by consumer debt," writes the FT in this article.
As this chart shows UK household debt has risen steadily over the last nine months to stand at 170% of disposable income with the US at 140% - well ahead of levels during the early 1990s recession.
Chemical companies as a whole displayed "dangerously complacent" views about second-half 2009 prospects when they released their Q2 results late last week, argues chemicals analyst Paul Satchell in his blog.
"They believe that demand has bottomed. Although they can't see the upturn yet they believe the worst is definitely behind us," writes Satchell.
"This blog sees this as dangerously complacent, particularly as analysts and investors have returned to a positive stance on the sector."
When you look at the results themselves, the numbers look better but only on a sequential basis (and watch out for some misleading year-on-year numbers in H2 when performances are very likely to be better than the disastrous second half of 2008. A more useful comparison might be with H2 2007).
Most companies reported year-on-year volume declines in the low 20% range - better than reductions of more than 30% in the first quarter of 2009.
Margins were again lower than in the same quarter last year but up on Q1 2009.
In the case of basic upstream petrochemicals, producers have largely been playing catch up with higher crude prices in this year's second quarter.
The overall margin improvements are likely to be the result of stronger returns further down the product chains.
These relatively better downstream performance could well be the result of extraordinary increases in apparent demand for polymers and other commodity chemicals. These have occurred at a time of tight global supply (the result of market-driven deep production cutbacks after the Q4 2008 price collapses and turnarounds).
The true nature of the demand increases is at the heart of the complacency Paul is worried about.
Numbers emerging from China remain counter-intuitive.
In January-May over the same period last year high-density PE (HDPE) general trading was up by more than 130%, even though re-exports were down by 16%.
To repeat yet again, how can this happen while China remains so heavily dependent on exports and the global economy remains weak?
BASF, when it disclosed its Q2 results, said that it expected global chemicals output to fall by 8% this year.
This would mean that by the end of this year, production would be back to 2005 levels.
In other words, the global chemicals industry will have lost three years of growth.
The broad-based chemicals giant is signalled out by Satchell as one of the few companies that has acknowledged the risk of another downturn caused by overcapacities, bankruptcies and growing unemployment.
The end of the bubble in oil and oil-product prices might cause severe problems in H2 this year. This could be before new petrochemical capacities and/or a winding down of speculation in China start directing markets.
"The risk from a potential fall in oil is only being thought about in terms of raw materials pricing. People seem to have already forgotten what triggered the de-stocking from last summer," adds Paul Satchell.
How will this one run?
Source of Picture: chemicals-technology.com
In the 12 years I've been covering the chemicals industry I don't think I have come across a time of such exceptional market muddle.
The traders love it. As a wise man said to me the other day, "When I was a trader I only cared about the price today if I was cashing in and not tomorrow."
But for the producers and buyers there are so many more factors that will shape the outcome of the second half, requiring fortunately for me hopefully some more business for ICIS training (one should always live in hope)
Here is Part 1 of what I plan to try and piece together over the next few months. Let's try and keep cooperating on data and analysis - but at the outset, does this make sense to you?
The Impact of Operating Rates, Plant Closures and New Petrochemical Capacities
Production from existing plants
This will be determined by overconfidence versus realistic confidence in the economy. This comes down to your view on the sustainability of the rebound.
To what extent have operating rate and inventory-management lessons been learnt from the oil collapse of H2 last year?
How are imminent new capacities affecting the behaviour of producers and buyers? In the first half, the tightness in some markets (for example, PP and PE) was partly the result of producers and buyers maintaining low stock levels because they expected new-capacity start-ups that didn't happen. To what degree has this experience made them less cautious?
It might be helpful to analyse Q2 chemical company results to get a feel for what production levels might be for the rest of this year.
Do the numbers add up and do the content and tone of what's been said sufficiently take into account all the risks? (Note: there are some individual company numbers on plans for overall average operating rates in H2).
The pace of permanent shutdowns in the West to reduce domestic oversupply and weaker exports positions also needs to be tracked.
Last year sudden decisions to temporarily or permanently close whole complexes - which were not necessarily entirely loss making - were forced on companies.
This was the result of the collapse in oil, the credit crisis and steep falls in demand.
To use PP as an example again, 500,000 tonne/year of US capacity-closure announcements were made in 2008 to take effect in the first half of this year.
Oversupply is still big: US PP consumption totalled just above 7m tonnes in 2008, 8% lower than the previous year with capacity still at 9.4m tonnes. So far this year (as of July) there have been no further announcements of closures.
Further factors affecting the pace of permanent closures could be divestments.
Trade buyers for distressed Western assets now seem much more likely than further private equity players and so attitudes to running marginal, or clearly uneconomic, plants might be different.
You also have to take into account environmental clean-up costs and regulations - and contractual and labour commitments.
And next: How will petchem operating rates be affected by refinery economics?
Dealing with the US refineries first:
How will refinery economics affect availability of PP and aromatics in H2? In the first half we saw a big increase in shipments from the US to Asia due to the global rate cuts, production problems in the Middle East, the peak of the Asian refinery and petrochemical turnaround seasons between April-June and the unexpectedly strong Chinese demand.
But since May/June, PP arbitrage from the US has closed on lower refinery operating rates resulting from weak gasoline demand. Benzene trade flows seem to have also reversed - in July we have heard of cargoes moving from Asia to the US, whereas in H1 there were record-high shipments the other way.
What's the outlook for gasoline, middle distillate etc demand for the rest of the year? (gasoline and middle distillate stocks are high on speculation and weak demand)
Some of the same questions need to be asked about Europe with a few
important differences, which are:
*Europe is a major exporter of gasoline to the US and so the price and availability of naphtha, and therefore petchem economics, will also be affected by US demand for the fuel
*Fuel demand in Europe is heavily weighted towards diesel and how will the European economies perform in H2 and what affect will this have on demand for gasoline, more importantly diesel, and how the refineries run? (Note: most propylene in Europe is produced from steam crackers because of the lower gasoline demand. But there is still a big link as naphtha is the main steam cracking feedstock in Europe).
I don't follow currency or shipping and other logistics markets, but these are obviously also critical factors.
Next question: How will the new petrochemical capacities run?
It's worth considering that there could be many more start-up delays, and
problems with operating new plants already on-stream, because resources were so stretched when these projects were planned and they remain stretched.
There is a shortage of engineers with the right levels of experience. Many of the projects were also planned when raw material, equipment and other costs were sky-high.
Budgets were stretched and so choices had to be made - for example, "Do I focus on my PE debottlenecking using ethylene from my new cracker or do I prioritise starting up the cracker and its new plants on time?"
Another problem is "project bunching". There seem to have been attempts to start up too many projects at the same time, further stretching already-scarce resources (a few years ago there was a lot of fevered excitement over the global economy. There was a rush to take advantage of financing while it was available in order to cash in on this growth and to maintain economies of scale).
There is, reportedly, a lack of the right kind of experience. Even companies with long track records in petrochemicals are confronting start-ups of projects bigger in scale and more complex than ever before.
Source of picture: oxo.typepad.com
Leaving China aside for a change - where the speculative frenzy continues apace -Paul Satchell, chemicals analyst, has a four-step measure for assessing whether the US and Europe are really out of the woods.
"Purchasing behaviour is strongly influenced by a customer's confidence, and, in the current context, four distinct phases could usefully be examined," he writes on his blog.
These are:
1. Normal buying patterns - annual/quarterly indications and regular (say, weekly) off-takes
2. De-stocking by customers - sharp reduction of off-takes, well below indications
3. 'Hand-to-mouth' purchasing - small quantities to satisfy immediate needs (indicator of low stock levels and weak confidence)
4. Gradual return to normal buying patterns as in 1.
"We expect that many chemicals manufacturers have experienced at least stages 1, 2 and possibly 3 since mid-2008. A move by major customers into stage 4 would give producers confidence to return capacity from idling.
Only when normal purchasing behaviour becomes commonplace, accompanied by reasonable volume trends, will we be confident that a recovery is soundly-based."
Who is going to be the first to put his or her head above the parapet?
If you are a chief financial officer who has just spent months explaining away how you lost your company so much money in Q4, do you really want to take that risk?
It seems ironic that in the crazy scramble to protect itself from the consequences of the US collapse of the US debt-growth model, China has headed down the same path.
As my fellow blogger Paul Hodges pointed out last Friday, official concerns over the bubbles in equity and property markets are increasing.
Zhang Jianguo, president of the 2nd largest bank, China Construction, has announced a 70% cut in H2 lending to Rmb 200bn ($29bn), "to avert a surge in bad debt".
What's also alarming is that the government is getting increasingly alarmed that too much lending has gone into speculation rather than where it's supposed to go - investment in infrastructure.
This again raises the danger that chemical companies have made unrealistic assumptions about underlying demand.
And this article, by Chen Changhua writing in the Chinese newspaper, Cajing, includes the following point:
"How quickly a country can recover from an economic slump is determined by the productivity of the country. Japan has not been able to recover from the 1990s slump mainly because there are not enough competitive new-generation enterprises to replace old enterprises. "
He warns the same fate could befall China unless the state-owned enterprises, the beneficiaries of much of the huge amounts of new lending, face tougher competition from the private sector.
Never underestimate the power of vested interests.
"Reports of my death are greatly exaggerated," Mark Twain once famously said after his obituary was published before he had died.
Similarly, the US polypropylene (PP) industry had been virtually written off late last year after a calamitous collapse in pricing resulted in inventory losses totalling a staggering $700m in November alone.
But the day of reckoning has been postponed by numerous project delays and a big recovery in Chinese demand.
US PP exports to China more than tripled in the first five months of this year compared with January-May 2008, according to the US Department of Commerce.
Of the extra 2.77m tonnes/year of Middle East capacity due on stream by now, only around 1m tonnes/year has hit the market.
"What also happened from mid-November was that buyers globally, and particularly in China, recognised that prices had hit rock bottom," says Joe Congdon, a consultant with Townsend Solutions.
"And then you had the Chinese stimulus package boosting confidence with the recovery in oil prices from around February, adding extra momentum."
Other export markets were far weaker, however, for US producers - their shipments to Mexico were down by 20% and to Canada by 25%.
Not surprisingly, sales to Brazil tumbled by 43% as a result of a 350,000 tonne/year plant that started up there last year.
Total US PP exports in January-May of this year were 4% lower, and, as the accompanying chart from the American Chemistry Council (ACC) shows, production was substantially down during the whole of the first half of 2009.
But without the surge in shipments to China, which perhaps bought more time for some tough decisions, the overall picture might have been a lot worse.
Nobody had the luxury of time late last year when announcements were made about closing 500,000 tonnes/year of capacity in the first half of 2009. Some of the plants being shut down are part of integrated complexes that are not necessarily entirely loss-making.
Oversupply is still big. Consumption totalled just above 7.4m tonnes in 2008, which was 8% lower than the previous year, with capacity still at 9.4m tonnes.
No further announcements about capacity closures have been made so far this year.
"What needs to happen to bring supply more in line with demand is further closure announcements. Another 500,000 tonnes/year of shutdowns would bring capacity utilisation to 85%, Congdon added.
Townsend Solutions is currently forecasting North American rates at less than 80% for the next five years.
"We are predicting global growth of 3.7%/year in 2008-13 compared with last year's forecast of 4.9% for 2007-12. The future of PP has changed dramatically in just one year," Congdon added.
The US domestic market looks likely to be difficult. Exports will also be hit much harder as a result of the new capacity.
And as for the more immediate prospects, current exports were characterised as "lousy" by a US industry source - the result of the high cost of feedstock.
Monomer supply has been reduced by refinery operation rate cutbacks due to weak gasoline demand. Fluid catalytic crackers (FCCs) are running at around 85%.
But if PP export opportunities existed, enough propylene could be found, according to market sources.
"The market will pay maybe 47-48 cents/lb for bagged homopolymer free on board (FOB) exported from Houston," said a trader.
"But with a potential 4-cent spike in monomer contracts this month, PP producers are looking 53-54 cents/lb FOB Houston in a bag."
The US PP industry has become more heavily dependent on refineries for feedstock supply. Naphtha cracking has suffered as a result of the fall in natural gas prices relative to crude, and ethane cracking is now far more economic.
"Around 70% of C3s are being sourced from refineries and 30% from crackers. The split used to be 50/50," said a US PP producer.
Gasoline demand isn't expected to improve due to the weak US economy.
Another factor behind the weak PP export trade is a steep fall in buying interest in anticipation of the further new volumes.
These include the recent start-up of a 350,000 tonne/year line by PetroRabigh in Saudi Arabia, which is supplied by propylene from a deep catalytic cracker.
Output from Saudi Arabia's new propane dehydrogenation (PDH)-to-PP complexes is also expected to increase, with several start-ups set to take place in China during the second half of the year.
Mark Twain was twice feared dead before he finally passed away of a heart attack in 1910.
And, of course, the US PP industry isn't going to really expire. This is a huge market with very sophisticated distribution and marketing networks.
A lot of acquisition interest seems likely to emerge very soon.
David Barry contributed to this article.
Confidence along all the chemicals value chains is always a key issue because of the ability to aggressively manage inventories, according to the London-based chemicals analyst Paul Satchell.
So there's the ever-present risk of sudden and very disruptive de-stocking. The longer the current rallies in commodity prices and stock markets continue, the greater might be the risk that confidence becomes excessive and mistakes made last year are repeated.
If the events of last year have taught is anything it's that markets don't behave rationally.
Those who arrive late for the party just as the punch bowl is taken away might suffer the most - along with those who've been there for a while but don't make an exit before the bar closes.
Inventory rebuilding
There's plenty of evidence of inventory building in Asia which might not always in response to strong underlying demand. For example:
*Polyethylene (PE) inventories in China at the second and third distributor levels were at very high levels in June, according to one industry report. Polypropylene (PP) inventories were, however, at normal levels.
*Benzene, toluene and monoethylene glycol (MEG) inventories were said by several sources to be also very high in July. Hydro-dealkylation (HDA) and toluene disproportionation (TDP) operating rates were also reported to have been raised - a long with benzene production from coal-based steel plants. Strong overall reformer economics, up until the end of the first half of August, could have lead wrong decisions on production levels
Polyester operating rates were said to be on the rise from H2 July as producers tapped into ample bank lending in order to increase rates. This was on the assumption that the September buying season for textiles and garments would be strong, leading to a big improvement in exports. The next Canton Trade Fair will also be a major indicator (the textile and garments phase of the fair takes place between 31 October-4 November). But there are already signs of improvement: The textile and garment industry exported $14bn goods in June, up 13% from the previous month, said the National Development and Reform Commission. But this was still 10% down on a year ago.
A big influence on confidence will be whether China can be successful in taking the air out of its current real-estate and stock market bubbles.
Supply of new loans in July dropped to $52bn from $197.5b in June - a 77% reduction.
(China might not want to do anything more to spoil the mood of the party before the 60th anniversary of the Revolution, which takes place on the 1 October).
But this bubble has yet to reach the scale of the last one which went pop in October 2007.
At its peak so far this year the Shanghai Composite Index has traded at 3.8 times its book value, barely half the 7.2 book multiple in October 2007, according to the Financial Times newspaper.
There's also plenty of caution
The inventory building we talked about earlier only applies to China and traders in just about every commodity everywhere in the world.
Chemicals companies outside China seem to be exercising extreme caution because of the huge inventory losses incurred in Q4 last year.
"Inventories are being kept low because there is very little visibility down the value chains," said a UK-based chemicals consultant.
"The credit crunch means that it remains difficult to finance inventories.
"Chief financial officers have just spent months explaining away large inventory losses from the fourth quarter. They are unwilling from a career point of view to risk having to go through the same performance again. "
The focus is cost control with market share taking second place.
As one Asian industry source put it: "Sixty per cent of our focus used to be winning on business in a broad range of markets and 40% on cost efficiency; now these percentages have been reversed and we would rather lose sales than break our tighter budgets."
The same applies to operating rates. US and Europe have maintained deep operating rate cuts - and have idled or permanently closed many plants - with the Northeast Asians also said to be showing very good discipline at the cracker level.
Middle Eastern players were in contrast reported to be running flat out in August following production problems in H1. These prevented them from taking full advantage of strong Chinese import demand.
The main focus in polyolefins is on selecting which grades to be produced based on pure economics rather than, again, on winning or maintaining market share.
But will this type of caution be enough to prevent a sudden reversal in petrochemical pricing?
The Oil Factor
The big danger is that any retreat could be driven by an unwinding of heavy speculation in crude.
At the moment the market remains in full-carry contango, meaning the combined cost of storage and borrowing (the full-carry cost) is below the futures price.
If this changes - or quite simply storage space runs out - there could be a sudden stampede for the exit.
What seemed counter-intuitive is that oil prices were at mid-August levels when estimates of demand kept falling.
This is unless you accepted that the oil market was again being speculator-driven.
Petroleum demand would be 1.8m barrels of oil per day lower than it had forecast in June, said oil, gas and refining consultancy Purvin & Gertz.
OPEC said in a report in August that the "market remains fundamentally weak". And it noted that US consumption is "still showing a massive reduction."
Could it all happen at the same?
This big worry is that Chinese growth could fall on less economic stimulus as oil prices collapse and much-delayed new Middle East petrochemical capacity hits the markets.
China is also due to start-up several major cracker projects in the second half of this year.
But the first half of this year was far better than anyone dared to expect. There was a strong recovery in petrochemical pricing with some reasonable spreads at the polyethylene end of the chain as this chart shows (the same applied to PP)
View image
Let's just hope that the traders in all the commodities, including chemicals, don't spoil the recovery before real demand has the chance to catch up with the improved confidence.
Garbage out, garbage in
Source of Picture: The Daily Telegraph
Here goes for the second part of this series.
Is there anybody out there who can help?
How will the ongoing availability of recycled material affect the pricing power of virgin resins? (We have the data to show that imports of scrap polyethylene (PE) and polypropylene (PP) fell in Nov-Feb, but have since heard anecdotal evidence that they have increased again. If so why?
Questions worth asking on recycling:
a.) Has there been a recovery in availability of recycled material? If so why? Is this because of stronger demand in the West for durable consumer goods wrapped in plastics, which are recycled and sent back to China?
b.) And/or is this the result of the rise in virgin resins since March. Has this resulted in a much harder global search for and new sourcing of the scrap material that is available?
c.) And/or has there been a relaxation in the govt regulations covering recycled material that's made imports easier?
d.) If recycled material is now more readily available, has this set a new pricing cap on virgin resins? At what price is it now economic for converters to switch to recycled material?
e.) Has the rise in virgin resins also led to more fillers being used again?
f.) What's the current state of distribution networks for recycled material? We have heard that lots of traders in recycled material went bust during the big price collapse last year as they were left holding high stocks of material that was more expensive than virgin resin. We also understand that remaining traders in recycled material were interested in trading in virgin plastics in Jan-May because the profits were greater. A further factor to consider might be that the Dalian Commodity Exchange (where linear-low density PE and polyvinyl chloride futures are traded - see later notes) is a lot quicker and less risky way of making money than trading in scrap. This might have also hampered the rebuilding of the scrap-supplier network
g.) We have focused on China. Is recycling also a major issue outside China?
All the questions above could equally apply to some of the other polymers. PS is hard to recycle, but what about the impact on, say, PET resin water bottles? We are not sure if this has even been economic, but could this be a factor behind the lack of an automatic recycling price cap down the fibres chain - or any other chains for that matter?
Source of Picture: ChinaMonthlyReview.Org
Polyester operating rates in China have started to rise on anticipation that the global economic recovery has arrived, according to Leonard DeGuzman, chemicals consultant with DeWitt & Co.
Is this another example of a dangerous price bubble or further proof that we are really emerging from the woods?
"The impact of more plentiful lending only started to affect polyester markets from the second half of July when the synthetic fibre makers started tapping into extra credit lines," he said.
"It's the result of greater confidence that textile and garment exports to the West will rise because the economic recovery is really here."
Polyolefin resin converters have been taking advantage of the huge increase in bank loans since as early as the first quarter.
But their polyester counterparts have displayed more caution because of the textile and garment industry's bigger export dependence.
"You have to realise that it's not just clothing exports that have been affected. Non-apparel going into automobiles and housing have also been hit hard," said DeGuzman.
He warned that the poly-condensation players have yet to see any actual improvement in demand.
"They are just making the assumption that the next big order season from the West for textiles and garments, which begins in September, will be much better than in the spring season."
Another key measure will be the third phase of the next Canton Trade Fair, which includes textiles and garments. This takes place between 31 October and 4 November.
The recovery in pricing and confidence in upstream markets arrived a long time ago.
Benzene was trading at or below naphtha on several occasions late last year.
But prices soared to a ten-week high of $900/tonne FOB (free on board) Korea for the week ending 7 August, according to ICIS pricing - a $55/tonne increase. Naphtha was at $651-652/tonne CFR (cost and freight) Japan.
Overall, reformer margins looked very healthy with toluene at $905-915/tonne FOB Korea and mixed xylenes (MX) at $835-837/tonne FOB Korea.
"Target spreads are $150-180 and so this is a very good position," said DeGuzman.
"This is generally true when crude remains under $100/bbl. When WTI surpassed the $100/bbl mark, reformers expanded their target spreads to $200-220/tonne. They grew as high as $250-270/tonne when oil was above $130/bbl."
The rebound goes back to the deep refinery operating rate cutbacks in China in the fourth quarter of last year, which left the country short of benzene.
Imports, as a result, soared to approximately 507,933 tonnes in January-June compared with 327,982 tonnes for the whole of 2008, according to DeWitt.
Where is it all going? Could a substantial amount have gone into speculation and inventories given that the styrenics and phenol chains have been weak?
The phenol chain had improved in early August, however, although later fell back again on weaker crude prices, said DeGuzman.
"Total benzene inventories in China were at 43,500 tonnes in July which is considered extremely high," he said.
"At above 38,000 tonnes local producers started discounting ex-factory prices in order to move material. Prices start increasing when stocks are at 15,000-23,000 tonnes."
But as of the week starting 10 August, DeGuzman said that inventories had fallen to a "snug" level of 25,000 tonnes."
This is another example of persistently high levels of volatility and uncertainty, making operating rate and inventory mistakes all too easy.
A clear sign that confidence in benzene is high is that pricing is closely tracking crude, he said.
Hydrodealkylation and toluene disproportion units are running flat out in Asia, DeGuzman added.
China's economic recovery has also led to a big rise in coal-based benzene output - a co-product of steel production.
"Operating rates at the coal-based plants were 50-70% in March, but in May rose to 80-85%.
"Logistics have also improved because it's the summer season, making benzene buyers more willing to off-take from the steel producers."
Toluene inventories totalled around 95,000-100,000 tonnes in May and in June were at 90-95,000 tonnes.
At the beginning of August, however, they had fallen to 65,000 tonnes and last week to 53,000 tonnes. Normal inventories are 40,000 tonnes.
The drawdown could be because China's refineries are running harder on the July increases in domestic gasoline and diesel prices.
Moving back down the chain, the overall spreads between mixed MX and paraxylene (PX) look healthy
PX supply has also been tight on several delayed start-ups in China.
Japanese producers have been reluctant to raise PX rates on what they say are poor economics with availability from Japan further constrained by outages, said DeGuzman.
Purified terephthalic acid (PTA) producers seem to have had little trouble absorbing the cost push from PX.
PTA prices were $1,120-1,130/tonne CFR (cost and freight) China on 7 August, a $10/tonne increase over the previous week. Four weeks earlier they were at $1,085-1,095//tonne CFR China.
But, to repeat - what is the extent of the actual improvement in synthetic fibres demand?
There are genuine reasons to be a lot more cheerful than a few months ago.
Chinese manufacturers in general are seeing stronger orders from the West as global oil prices and stock markets remain infused with optimism.
But export improvements are on month-on-month bases.
The textile and garment industry, for example, exported $14bn goods in June, up 13% from the previous month but 10% down on a year ago, said the National Development and Reform Commission.
Positive comparisons are also being drawn with 2006.
This was before capacity in many product chains was ramped up in expectation that 2007 to first half 2008 demand-growth levels would be maintained; synthetic fibres were no exception to this.
The longer the commodity-price rallies continue the harder the potential hard landing.
The Canton Trade Fair
Source of picture: Blawg.lehman.com
This interesting article from Bloomberg says that while petrochemical output in China rose in August, textile production actually contracted.
We don't as yet have any breakdown for specific petrochemicals.
If the overall increase includes higher aromatics-to-synthetic fibres output then the gamble that the chain has taken on improved sales of textiles and garments will have so far failed to pay off.
As we discussed earlier on this blog, there is evidence of higher output down the entire synthetic fibres chain.
A key measure of improvement in exports to the West of textiles and garments will be the next Canton Trade Fair which takes place in October-November.
Source of picture: Wikipedia
Because benzene has so many end-uses it's widely seen as a pretty good barometer for the overall health of the industry.
As C6 led the recovery last time are recent declines a sign of another broad-based retreat?
See the slide below:
Or is it more the problems we highlighted earlier in the week that are specific to the aromatics and fibre-intermediate chains?
PX and PTA have also been on the retreat of late.
Before winding up for the weekend, see this report from the New York Times.
More later......
Deep in the heart of the great wealth gap
Source of picture: Blogmlive.com
....the more convincing seems to be the argument that financial and commodity markets have got way ahead of the recovery in the real economy.
Take a recent Credit Suisse report, for instance.
Its analysis of monthly apparent demand in China, up until June, for a few key commodities such as polyethylene (PE), asphalt, copper and iron ore show that they were above underlying real demand.
Are we about to be undone by what has undone is so often before, and as recently of course as Q4 last year?
By this I mean the banks and the speculators. Public money, used to bail out the banks, is being poured into oil and gas speculation, creating dangerous bubbles.
And to repeat yet again, there's all the hot money deceiving us over China. In this case its through state-owned banks which have been instructed to attempt to compensate for the mess made by Western lenders.
China, and indeed the rest of Asia, is busy trying to remake much of its economy in order to be less reliant on export trade which saw unsustainable growth.
The problem for the average worker in the US and Europe is that salaries have been stagnating, or even declining, in inflation-adjusted terms due to the great drift of manufacturing east.
Combine this with the loss of perceived wealth caused by recent harmful financial "innovation" (I'd say that's too flattering a word to use. How about manipulation or fraud now being paid for by the tax payer?), and real demand could take many years to recover to 2004-07 levels.
This article from the UK's Guardian newspaper asks whether we have learned anything from the financial crisis.
A new report from the United Nations Conference on Trade and Development (Unctad), referred to in the same article, concludes that we haven't.
"All these rises in markets are said to reflect economic recovery but it is just another bubble," Heiner Flassbeck, Unctad's chief economist, told the Guardian. "These markets are reflecting a recovery that is not there. Wage deflation is a huge danger everywhere and this is not being recognised.
"Banks have been rescued by the taxpayer and are just returning to casino-style speculation that brought us trouble in the first place. We need to focus banking on supporting investment in productive businesses."
This reminds me of a trip through rural Texas I made in March last year. No luxury condos, country-club memberships and multi-million dollar bonuses were evident there.
The US back-to-school buying season
Source of Picture: theglobeandmail.com
As regular readers will remember, last Friday I linked through to this article from the New York Times on the likelihood of a disappointing back-to-school sales season in the US.
I had promised some more thoughts on this article and so here goes....
......This is a sign of the belt-tightening in the US and Europe resulting from the long-term shift in consumer behaviour - as discussed before on this blog - which will lead to:
*Greater dominance of low-priced retailers such as Wal-Mart, which has started selling a Toshiba laptop for just $348. More outsourcing to the developing world seems inevitable as cost pressures increase. The squeeze will work its way up to marginally cost-efficient chemical and polymer producers
*A rise in protectionism: Western manufacturers are likely to respond with more anti-dumping petitions - and perhaps an increase in ex-WTO measures such as complaints over labour and environmental standards. If a cap-and-trade bill is passed in the US we could also see carbon-import taxes for imports from those countries with no comparable systems. Such measures can be politically popular
And what does a 17-inch laptop for $348 mean for innovation in the chemicals industry? Are companies going to bother with expensive R&D?
But to cut back on R&D would show a lack of vision by any company that cannot compete in pure commodities.
More rather than less differentiation is likely to be the key for survival as chemicals and polymers with marginal "added value" will face tougher scrutiny from buyers.
Goldman Sachs is talking about crude oil at $85 a barrel by the end of the year.
Sound familiar? Not quite forecasts of $200 a barrel, but is there a danger of repeating the mistake that the James A Baker III Institute on Public Policy claims was made in 2008?
In a new report, the institute claims that in the spring of that year financial speculators - out of touch with physical oil storage - missed the amount of floating storage that contributed to the subsequent collapse.
EF-pub-MedlockJaffeOilFuturesMarket-082609.pdf
Speculators don't care about the effect on the real economy, only in making money their money and getting out at the right time.
"In 2007-08 dramatically rising oil prices fed US indebtedness. This led to an even weaker dollar, driving oil prices even higher," write the authors of the report.
Index funds linked to the value of the greenback have increased their activity on the Nymex fourfold since January 2006, they add.
Non-commercial players as a whole have been lead indicators of pricing - again from January 2006 - thanks to market liberalisation introduced in 2000.
So do we need governments to use strategic petroleum reserves, as did President Clinton in the 1990s, and the use of spare capacity by producers to take the power away from the speculators?
Source of picture: rateyourmusic.com
...steal a lot and they make you a King," wrote the great Bob Dylan in A Sweetheart Like You on his great 1980s album, Infidels.
This seems appropriatea as we commemorate exactly 12 months to the day since the West's financial system imploded.
Obama is talking tough on new regulations - and I am sure he sincerely means it - but Wall Street seems to control the overall Washington agenda.
Why does it matter for the chemicals industry? Because the distortions in energy, other commodity and equity markets are creating a false impression for the industry.
As the president says: "It is neither right nor responsible after you've recovered with the help of your government to shirk your obligation to the goal of wider recovery, a more stable system and a more broadly-shared prosperity."
Hear, hear.
Source of picture: millermmccune.com
How quickly is China shifting its economy away from exports towards stronger domestic consumption?
The answer to this question is, of course, critical to the global chemicals industry.
On the surface it looks good: Retail sales grew by 16.6% in the first half of 2009 and by a slightly more modest 15.4% in the year-to-date.
The problem is how retail sales are calculated as they include government purchases and shipments to retailers before any sales to actual consumers (could these healthy figures include, therefore, lots of unsold washing machines, fridges etc? China's government has introduced a huge subsidy scheme aimed at encouraging rural residents to buy more white goods, but is unsure of its success).
Michael Pettis - on his always-pessimistic China Financial Markets blog - believes this leaves retail sales as a poor proxy for overall consumption.
He quotes Jim Walker's 14 September issue of Asianonomics, where Walker points out that retail sales have grown at 13-24% over the last six years - well in excess of the increases in GDP (gross domestic product).
Real consumption has, in fact, being growing at only 8-9% over the past few years, concludes Pettis.
This would mean consumption as an arithmetical share of GDP has fallen as GDP has been expanding by 10-12% per year.
A lot of money is going into investment in more surplus capacity, much of which might be inefficient because of the low cost of capital, he warns.
Consumers are subsidising lending costs through low-wage growth and low deposit rates, he adds.
Low-wage growth is obviously no good for encouraging greater, genuine domestic spending.
But low deposit rates versus better returns on local equities and the property market have been partly behind the recent booms in both.
Pettis is gloomy about the long-term ability of China's government to re-balance growth.
The Chinese Economic Quartely's view, however, is "worry - but don't kill yourself" over the pace of and extent to which re-balancing will occur.
Temporary setbacks are possible, but the CEQ believes the government has the financial muscle to get there.
China never gets any easier.
Forget supply and demand, just record the index cards....
Source of picture: Heatusa.com
This amateur pundit is beginning to think he got it very wrong.
"I've been thinking the same thing - I was as gloomy as you a few months ago," said an oil-and-gas consultant friend of mine this morning.
"The Singapore property market is close to its all-time highs of 1997.
"The consumer-confidence indices have seen a complete about-turn from 12 months ago.
"Could the improved sentiment itself result in this being a U rather than a W-shaped recovery?"
"Maybe the Chinese government will continue spending as much as it can to stimulate the economy as a hedge against the US dollars.
"Why buy more Treasuries when dollar weakness seems to be a long-term factor with the risk that the dollar might also be replaced as the reserve currency?
"It could well be in China's longer-term interests to keep investing heavily in moving the economy from an export to a domestic focus.
"This will need to involve winding down policies that have provided temporary relief from the global crisis (i.e. huge increases in bank lending and other stimulus policies) in favour of reforms that will boost the pace of genuine, underlying consumption growth.
"These need to include better healthcare and pension systems, financial sector liberalisation and deregulation of distribution and logistics."
"It seems amazing that only a year ago we were talking about something as bad the Great Depression of the 1930s.
"Perhaps the problem is that we've been looking too much at fundamentals - at supply and demand from oil down to finished goods.
"The focus instead should perhaps have been on international capital flows.
"We need to more carefully study how money flows between borders and between different equitiy markets, commodity futures markets and over-the-counter (OTC) trading,"
Here are my views...
Electronic trading systems have revolutionised the speed of capital flows.
The IntercontinentalExchange website, for example, says that transactions on its wide and ever-expanding range of markets each take only two milliseconds.
You have dollar and oil markets sitting on the same exchange. Movements in both markets are presented in real time.
Has this contributed to the correlation between a weaker dollar and higher crude prices -along with the rise of index funds linking the two?
Energy prices have been virtually divorced from stock levels since 2003 and so recent historic-high storage of oil, refined products and natural gas is nothing new.
The current bull-run in crude might well last until real demand catches up.
It seems unlikely that interest rates will rise before then. The US government will want to avoid banks - which are benefiting from public fundingand less competition - in trouble again.
Ironic, isn't it? Bail-out money is being used to make more bets. The bigger the bets the less the risk for a financial institution.
And maybe even the speculators have done us a favour by pricing in future tight supply now.
An issue for chemicals companies is controlling their production and stock levels to reflect the genuine needs of their customers.
The task of separating market froth real and immediate demand would surely benefit from some harder thinking.
MOVING IN THE RIGHT DIRECTION (SORRY, OUCH....!)
Source of Picture: www.autospies.com
The automobile industry in the West has been bought more time by economic stimulus, as this article in The Economist points out.
But some of the discussions at the Frankfurt International Motor Show, which takes place on 15-27 September, will be about the future of the industry over the next few decades.
Producers face big economic, demographic and fuel-efficiency challenges - and capacity is way ahead of current and projected demand. (separate leader from The Economist with some more useful numbers).
So what might this mean for the polymer industry? Here are a few thoughts:
*Demand for smaller cars will increase. Automakers will need to focus on either ferocious cost cutting and/or adding more sophisticated features if they want to achieve anywhere near the same returns for these smaller vehicles compared with big, luxury lines
*This creates a big opportunity for innovation through both lighter plastics (with stricter fuel-efficiency regulations another motive) and plastics which deliver other design benefits. Added value will no longer be defined by a little bit of extra customer service and the odd clever additive. Breakthrough products will be needed
*Feedstock-advantaged producers will be in an even stronger position to meet what commodity-polymer demand remains
*The Western polymer industry's own cost-cutting will have to be accelerated in the search for higher R&D funding, and as auto plants close down (since this recession started, there have been no closures in Europe, according to The Economist). Those with their own advantaged-feedstock positions in the Middle East and/or strong footholds in China will be in a better position to generate enough revenues
*The decline in US and European gasoline demand might lead to short-term feedstock advantages as the value of light-ends declines. Longer term, though, refineries will be shut down - potentially pulling the proverbial rug from beneath even those polymer producers with the right technologies (Note: Western gasoline demand is expected to keep falling after the economic crisis is over on tougher fuel-efficiency regulations and ageing populations, etc)
Source of picture: Chinaenvironmentallaw.com
Talk around the water-cooler in Shanghai offices at the moment is the fall in the cost of a car-license plate in September to a lowest bid of Yuan 27,000 ($3,953) from around Yuan 36,000 in August.
"It surprised everyone because the forecast had been for the price to actually go up to Yuan 42,000," said an ex-pat based in Shanghai.
This has created one of those agonising "if only" moments as he registered his car last month.
But more importantly, the surprise reduction might be an indication of softening auto demand after months of heady growth.
Domestic sales rose by 29.18% during the first seven months of this year over the same period in 2008 to 8.33m units, according to the China Association of Automobile Manufacturers.
The monthly price for license plates is set by auction so this could be an early pointer of the effect of reduced bank lending.
Instead, though, it might be merely a lull ahead of the long Chinese national holidays, which take place on 1-8 October.
"The decline in the price happened despite new regulations making it harder to buy a cheaper plate from outside Shanghai for use in the city," the ex-pat worker added.
"There were around 13,400 bidders for 8,500 license plates this month as against 18,000 for 8,000 plates in August."
Petrochemical prices are also on the slide, according to ICIS pricing.
Fibre intermediates had fallen for four weeks in a row as of last Friday.
Raffia-grade polypropylene (PP) was at $1080-1120/tonne CFR China main port compared with $1130-1200/tonne CFR China a month earlier.
Again, though, it's hard to discern to what extent these falls are due to a pre-holiday business wind-down against something much deeper and more fundamental.
"There are a lot of official statements in the local press about how too much lending went into speculation in real estate, in stock markets and in commodity markets in general. Lending rules are getting tougher," the office worker continued.
"I think there's also a danger of China following the US by enjoying a dangerous 'wealth-effect' from rising property prices. This seems unsustainable as real-estate costs are rising much faster than incomes.
"As was with the States again, leverage is on the rise through grey loans. State-owned enterprises (SOEs) borrow from the banks at preferential rates and then re-lend to less creditworthy companies and individuals."
Even pig farmers are involved in speculation through stockpiling copper and nickel, according to this article from Bloomberg.
Should we now be searching pig sties and farmers' fields for bags of polyethylene (PE) pellets?
Source of picture: zerohedge.blogspot.com
It might seem a little melodramatic (and it's a wonderfully melodramatic name), but what kind of threat do dark pools - and other off-exchange trading mechanisms - present to all our livelihoods?
You can see that the World Federation of Exchanges might have a financial motive in making their complaint to the G20 over the threat these mechanisms represent to their "macro-economic role".
But after the role that the shadow banking system played in the financial crisis you have to be worried.
The $64,000 dollar question has to be how you regulate dark pools etc.
And for the sake of melodrama: Unseen forces, unaccountable and anonymous, might start determining all our livelihoods.
Sudden and entirely unpredictable shifts in global commodity markets could push countries into financial ruin and even wars.
At least in the case of the exchanges, because pricing is transparent, you can challenge the logic of say the futures price of oil being way out of step with supply and demand fundamentals.
But the problem with these dark pools etc is that you won't have a clue on what might happen until it hits you.
SWIMMING IN OIL?
Source of Picture: fashionfunky.com
The threat posed by Iran test-firing its Shahab-3 missiles and a rally in US equities on increased M& activity in the drug and technology industries pushed crude slightly higher yesterday after last week's steep declines.
This is yet further evidence that the oil market is why out of sync with real demand for the black stuff and just about all its derivatives.
"July's Vehicle Miles Travelled (VMT) figures were released last week, with total miles driven clocking in at 263.4 billion miles, up 2.3% from July 2008," writes today's Schork Report, the daily online data and analysis service for energy and shipping markets.
"That is a solid increase but keep in mind: Gasoline prices have decreased by 38% since last year.
"Further, July 2008's VMT figure was 3.5% lower than July 2007. Therefore, this year's 'increase' was 1.3% below 2007 and 0.5% below the 2003-07 time-step, thereby continuing a steady VMT decline."
This is more evidence that we are miles away (excuse the pun) from the credit-fuelled demand levels of 2003-07 for everything from barrels of oil and gigajoules of natural gas to synthetic dog coats.
Chemicals demand in the UK might not return to pre-recession levels until as late as 2020, Oxford Economics has warned.
But don't bet against speculators pushing crude prices back up again, especially if conflict breaks out with Iran over the missile testing and the alleged development of nuclear-weapons capability.
This is despite weak demand, as the Schork Report has pointed out, and deeply oversupplied crude and crude products markets.
Such is the oversupply that even a disruption in Iranian production (Iran is the world's fourth-largest producer) might not make much of a difference, assuming that the conflict doesn't spread to elsewhere in the Middle East.
"Saudi Arabia was running just about flat out in 2007. Now it has 6m barrels a day of spare capacity," said an oil industry observer last week.
Recent falls in gasoline mean that its pricing could be close to "meltdown", according to this report from Bloomberg.
And as my fellow blogger Paul Hodges pointed out last week, the historically high amount of oil in floating storage is now being delivered to refiners due to a narrowing of the contango.
So I am with those who believe we are heading for $45 a barrel before the end of this year.
Still, a two-way bet might be advisable - just in case there is another rally.
.....said Mervyn King, governor of the Bank of England
Source of picture: northbriton45blogspot.com
ANY excitement over US house-price figures for July - which showed the biggest monthly gain for years when they were released yesterday - has to be put into the kind of context that undermines a lot of recent positive economic numbers.
The price recovery is partly the result of the $8,000 tax credit for first-time buyers and the Federal Reserve buying mortgage-backed securities. The tax credit expires at the end of November.
Inventory of unsold homes is at its lowest level in more than two years, according to The National Association of Realtors.
But there's a "shadow inventory" of delinquent or foreclosed mortgages of some 7m houses, according to Amherst Securities.
This matters to the global chemicals industry because of the large amount of chemicals and polymers which go into your average US home.
More importantly, without the return of some kind of "wealth effect" (this still seems a long way off in real-estate as the S&P Case Shiller Index is still 30% below its 2006 peak) it's hard to see a sustained rebound in US consumer spending.
"It's the level, stupid - it's not the growth rates. It's the levels that matter here," Mervyn King, governor of the Bank of England, was quoted as saying last month.
Levels to be concerned about include western consumer indebtedness that is still too-high relative to income expectations and credit availability, wrote Mohamed El-Erian in the FT yesterday. He is chief executive and co-chief investment officer of Pimco.
Bank balance sheets are also still too geared for the comfort of regulators and the managers of the banks, he added.
As my colleague Nigel Davis saidthis Insight article from ICIS news, real levels of lending to businesses, especially the small -and medium-sized ones, remain constrained.
Unemployment has also risen well beyond expectations and it will take years for the jobless rate in the US to return to its natural rate, El-Erian continued.
Yesterday I quoted the excellent Schork Report which put into context some more supposedly encouraging statistics: July's Vehicle Miles Travelled (VMT) figures were released last week, showing a 2.3% increase from July 2008.
But as the authors pointed out: "The July number was still down by 3.5% compared with July 2007."
This was a year when demand for just about everything under the sun was at historic highs.
Further - the modest improvement in July 2009 happened after a 38% year-on-year fall in gasoline prices.
Growth in urban VMT was less than that for rural travel, according to the latest statistics.
Urban driving is seen a stronger indicator of overall economic health as it includes travel work.
Unemployment was therefore a threat to the "nascent recovery", added the Schork Report.
The US Conference Board's latest index of consumer confidence, which was also released yesterday, seemed to support the Schork view: The index slid to 53.1 in September from 54.5% in August.
How should chemical companies respond to these challenges?
There will be more on this, and the implications for Asia, over the coming days and weeks.
Source of picture: Time.com
Yesterday I talked about lack of willingness by western banks to lend money because their focus was on rebuilding reserves.
But Steven Major, Global Head of HSBC's Fixed Income Strategy Team, puts a different spin on the problem.
In the Fragile Recovery video from the Financial Times' View From The Markets section, he said banks would dearly love to be earning 8-10% from loans rather than the paltry interest rates on leaving cash in reserves or on low-yield government bonds.
The demand for loans simply wasn't there because the "real economy" had yet to recover to the extent of financial markets, he added.
Stock markets have long been lead indicators, pricing in recoveries before they reach consumers and companies. The same has also become the case with energy markets where price discovery is now driven by futures contracts.
Equities had already priced in strong growth in consumption and company profitability in 2010-11, Major said.
Neither, of course, is guaranteed - meaning that investors entering markets now "are not being paid for the risk", he continued.
The same is true for oil, but fundamentals are set to catch up very soon with a dip to $45 a barrel on the cards before the end of the year.
Here are a couple of questions anybody attending this weekend's European Petrochemical Industry Association (EPCA) meeting in Berlin might want to put to chief executive and chief financial officers etc:
*How much of your recovery over the last few months has been the result of cost-cutting and restocking?
*When both come to an end (and this may well have already happened for restocking) how confident are you on a scale of 1-10 that you'll be able to continue delivering quarter-on-quarter improvements in 2010-11? In other words, can you grow volumes?
The answers could be very telling.
.....and a January collapse
PERHAPS commodity and equity markets will continue to keep denying the weak fundamentals until bonus cheques for fund managers etc have been signed and are in the bank.
Fund managers, because of the way they are benchmarked, will be desperate to stick close to the performance of stock market indices, said John Authers in this article from the Financial Times.
"It is a disincentive (the benchmarking) to making a big move either into our out of the market even if a fund manager has a strong view that we are heading for a rally or a fall," he wrote.
"This behaviour may yet allow the current stock rally to persist in spite of the disappointing economic data."
The same, I guess, could apply to crude - blowing the case for $45 a barrel by the end of the year out of the water.
Barclays Capital is, in fact, predicting a rise in oil to $70-80 a barrel over the next month with Goldman Sachs forecasting $85 a barrel by end-2009.
So once the bonus cheques have cleared, a combination of sobering economic facts and investors getting out while they are ahead could cause a steep dip in January.
Might we then see another temporary bottom to crude, equities etc and further buying opportunities?
This will depend on government cash remaining cheap and plentiful and an improvement in the real economic outlook.
My bet is on a prolonged trough because we are back to 2006 demand levels in chemicals and presumably lots of other stuff - before the credit-fuelled false-bottomed boom.
Britain's last generational shift: The 1980s Miners Strike:
Source of picture: www.wsws.org
My late parents hated even the concept of debt - let alone the insanely irresponsible error of actually borrowing money.
This is not surprising as my father could remember, when he was a boy, queuing for free food handouts during the Great Depression.
My mother was slightly less poor when she was a child (but still poor by any normal Western modern-day standards), but believed in thrift just as fervently.
Their attitudes were shaped both by the Great Depression and the deprivations of Great Britain during and immediately after the Second World War.
So when I ran up an overdraft of few hundred pounds Sterling when I was student they were less-than-impressed - especially as the bank manager phoned to ask for my cheque book and cheque-guarantee card back!
Their approach to debt, aside from an expensive passion for beer when I was a student, is ingrained.
Despite my fascination with commodity and financial markets, I would rather observe from the sidelines.
The question now - as the West still struggles to cope with high levels of personal debt left over from the current crisis - is whether we have undergone another generational shift.
Quite possibly, thinks Paul Hodges of International eChem.
A whole generation has grown up with easy and cheap money being the norm and markets and assets only heading, on the whole, in one direction - that's up, of course.
In Britain, the last big shift in attitudes to debt and spending began back in the 1980s with the Thatcher revolution.
Millions of council tenants started buying homes for the first time and dabbling in shares, as the very nature of British society moved away from collectivism towards a greater "me" culture.
Financial deregulation also took place on both sides of the Atlantic and bubbles were kept inflated by central banks.
The rest, as we know, is very painful recent history.
How will the children of parents now facing foreclosures, personal bankruptcies and long-term unemployment respond over the coming decades? Will they start keeping their money beneath the proverbial mattress?
Can we also expect a permanent shift to more prudent forms of banking?
What will this mean for growth in chemicals demand?
"THIS IS RIDICULOUS. I WAS SITTING AROUND UNSOLD FOR MONTHS AND THEN WAS FORCED TO JOIN A SANTA FLEET-HIRE SCHEME. HOW HUMILIATING"
Source of picture: www.diytrade.com
BEWARE the prophets of recovery in exports of Chinese manufactured goods during the current Christmas buying season.
Labour markets in the key export-processing provinces, such as Guangdong, are reported to be tight as production of everything from I-Pods to Barbie Dolls is ramped up.
It would be easy to misinterpret this as a recovery in Western demand, but how can this be when the real economic news remains bleak?
On a month-on-month basis there is bound to be an improvement because, of course, this is the Christmas buying season for the big retailers.
And any comparison with sales to the retailers in October-November is bound to look pretty stellar compared with the exceptionally bad same two months in 2008.
But will the retailers overstock only to find Western shoppers less-than-eager to empty the shelves? (Is this is a bigger-than-usual incentive to wait for the traditional January sales?).
And/or will too gung-ho manufactures in China be left with high inventories?
There have been plenty of extra incentives to import raw materials, including polymers and chemicals, to make finished goods in 2009 - from easy credit to increases in export-tax rebates.
This has contributed to the very high import volumes we've seen across a broad range of chemicals and polymers for the last 7-8 months.
China is in danger of only growing one export, therefore: Deflation.
At an investors conference call yesterday, Indira Nooyi, the chief executive of PepsiCo, said she expects the 'age of thrift' in consumer spending to continue into next year.
As consumers in the developed world are placing value at the top of their agendas, the company's efforts in the future will be on developing lower priced products. Pepsi has, in the past, been quick to spot and adapt consumer trends such as the introducing healthy snack food. And if it now believes that consumers will not be interested in pricey products, others too will follow.
So what does this mean for the chemical industry? Will companies such as Pepsi move to cheaper packaging formats? Will these companies be less interested in packaging innovations?
Picture source: PepsiCo
This will have implications for innovation in the chemicals industry - especially development of value added grades/products? Many of the leaders in the industry have been using innovation as a platform to differentiate themselves. Is it time to reconsider this strategy?
Or will consumer product companies simply use this trend to drive an even harder bargain when purchasing raw materials?
Flying the flag for Q3...
Source of picture: etftrends.com
Yes, Q3 earnings season is almost upon us with the usual headline-grabbing improvements in carefully selected reported numbers.
What this season might tell us about the overall direction of everything is, to start the week on yet another pessimistic note, hardly uplifting.
John Authers is once again worth quoting from his Long View column in this weekend's Financial Times.
The S&P 500 enjoyed bounces of 2-3% in 2000-2008 immediately after the first - to third quarter results were announced, according to a study by Andrew Lapthorne of Societe Generale in London.
But the index, when you take these increases out of the calculations, fell on an average annualised basis of 1.2% - suggesting some economy with the truth in company reporting.
This year's Q3 season might help to support equity markets until the end of the year if, again, the clever bean counters have been at work - and companies follow their usual practice of under-promising and therefore appearing to over-deliver.
Next year is the problem.
Price/earnings ratios on an operating profit basis are way ahead of where they were in any previous economic recovery since the Second World War, said David Rosenberg of Gluskin Sheff in Toronto.
In other words, companies will have to deliver spectacular profit and/or revenue growth next year to justify current valuations.
The mood in bond markets - where yields indicate expectation of a slow and non-inflationary recovery - is very different.
As we've said before on this blog, commodity and equity markets have priced in a recovery which might well not happen in 2010 or even 2011.
Companies across many industries, including chemicals, have made improvements mainly on re-stocking and cost-cutting this year.
It's hard to see how they can make similar gains in 2010 - particularly in commodity chemicals where we are only just beginning to reach the bottom of a prolonged supply-driven down cycle.
And when equities go in the New Year so could crude, potentially creating another mini de-stocking crisis. This will be nowhere the near the scale of Q4 2008, though, due to much-tighter inventory management policies.
Company performances might get worse never mind better, making current valuations seem far to premature.
"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).
Source of picture: www.textually.org
The political sensitivity surrounding Iran is so great that US-based companies are not even allowed to attend presentations by Iranian officials at conferences, a source said.
"I witnessed a recent walk-out during a presentation by the National Iranian Oil & Distribution Company (NIODC)," he said.
But a European office of a US company is able to do business with the Middle Eastern country, provided an entire technology and project is developed by that office.
"If as much as one email passes Europe and the US headquarters, that's enough for an investment to become technically in breach of sanctions," the source continued.
These nightmarishly difficult restrictions come as Iran attempts to build no less than seven grassroots refineries in a attempt to rectify deficits in fuel products - one each at Shahriar, Anahita, Caspian, Khuzestan and Pars and two at Hormuz.
Numerous other expansions at existing refineries are being planned with the likely investment costs running into many billions of Euros.
Scepticism is easy following big delays in previous natural grass processing, refining and petrochemical investments due to sanctions that limit financing and technology and skills transfer.
Doubts have also been raised over the level of investment in maintaining output from the oil fields that would supply this new refinery capacity.
In the case of the two crackers finally brought on-stream at Assaluyeh, the slow pace of growth in gas-processing means that they suffer operating rate cuts and even shutdowns during the winter.
All the gas being processed during the winter months has to be diverted to domestic use because of a big shortfall in supply.
Honest and hardworking company officials on both sides of the political divide deserve solutions.
"YES, I HEAR YOU - I'M LISTENING...."
Source of picture: New York Daily News
How ridiculous does crude-oil pricing have to become before regulatory reforms occur that limit the role of financial speculation in a helpful way?
This was the question being asked by a refining industry source today after he had read this story from the Financial Times.
Call options are about to kick in which could drive the price of oil even higher even though the fundamentals are "mildly bearish", according to the FT.
Put options, when they take effect in significant numbers, have the opposite effect.
Real demand is still a long way from catching up with oil markets so heavily influenced by the financial or non-commercial players.
"Whatever too ridiculous is, and I'd argue last year was a stupid as it can get, the Saudis are likely to get on the Bat Phone to the White House at some point and demand some changes. The US government will be obliged to listen," added the source.
Inability to plan an economy because oil is so out-of-sync with the fundamentals is playing havoc with the Saudi budget-planning process, he continued.
The same applies to every government. If the other major oil producers backed Saudi Arabia, we might seem some useful changes.
This year is a positive for the world's biggest crude producer - as we discussed on Monday. The Saudi government had budgeted for an average oil price in 2009 of $40 a barrel, but this is likely to be closer to $70 a barrel, giving more leeway for infrastructure spending.
But the unpredictability of a market skewed by short-term financial sector interests could just as easily work against the Saudis.
They are pursuing a hugely important economic and social agenda which requires constant and steady funding.
At a chemicals industry level, tracking activity on the Nymex, the International Continental Exchange and the Dubai Mercantile Exchange is critically important if you want to make meaningful financial forecasts.
These forecasts should influence chemicals pricing decisions. Why push for an increase that isn't in line with the fundamentals in your markets if you believe that a spike is entirely paper-trade driven and won't last?
The danger is that if you ignore what might be underlying weaknesses in your markets, you will suffer on the downslide as customers attempt to recover their losses.
I am still thinking, as we've also mentioned before, that this rally will continue until the New Year at least - when all the fund managers' bonuses will be in the bank.
Profit taking could take place in Q1. Positions could then be rebuilt when another bottom has been reached in crude and equities ahead of the 2010 bonus payouts!
Source of picture: www.msnbc.msn.com/id/23512037/
CHINA is making export gains at the expense of other higher-cost competitors that might not be sustainable because of reasons including rising trade protectionism and economic rebalancing.
Chemical companies need to factor in this risk - and take into account how overall demand might merely be shifting location rather than increasing.
Knit apparel is a good example where, according to this article by David Barboza in the New York Times, American imports from China jumped by 10% in July this year compared with the same months in 2008.
This was as US imports from Mexico, Honduras, Guatemala and El Salvador fell by 19-24%. Barboza was quoting data from Global Trade Information Services.
It is not just emerging markets that are suffering as a result of China's increasing dominance in textiles.
The beleaguered European industries are also in the firing line with the EU evaluating extending antidumping duties on imports of shoes from China and Vietnam.
"Reductions in raw-material import tariffs and increases in export-tax rebates have helped Chinese apparel producers push their prices down," said said Ying Min Ye, president of Beijing-based Chem1 Consulting at the Downstream Asia Roundtable Asia oil and gas event in Kuala Lumpur. Malaysia.
The conference, organised by the World Refining Association, took place earlier this month.
You can add to these advantages a Yuan which is now being pegged to the US dollar, resulting in steep depreciations against other Asian currencies. Between March and September, the Yuan had fallen in value by 10% against a basket of Asian currencies, said Barclays Capital.
A further huge advantage is, according to Nicholas Lardy of the Peterson Institute for International Economics (quoted in the same Barboza article), flexibility in labour markets.
This means the ability to cut wages without worrying about troublesome trade unions or restrictive employment legislation.
The biggest comparative boost of all might well be the flood of cheap lending. China has pump-primed its economy through a huge increase in bank loans.
The US removed safeguard duties against imports of several categories of Chinese clothing last December, according to a new report from Textiles Intelligence, providing China with another edge.
The EU removed similar safeguard duties in December 2007.
Both sets of duties were the result of damage caused to local industries when The Agreement on Textiles and Clothing (ATC) came into effect on 1 January 2005
Here, therefore, could end some of the head-scratching over steep increases in fibre-intermediate pricing in 2009.
Restocking and crude oil have been important factors.
What might have also benefited the market are China's gains at the expense of others.
The country's yarn output grew by 9% in the six months to June 2009 over the same period last year, Yin added at the same event.
Fibre output rose by 10% and polyester production by 13%. Click here for a copy of his full presentation - .5 Yingmin Ye 1.pdf
It's not just in low-end clothing where China is making gains, but also in electronic goods - at the expense largely of the Japanese.
Japan has seen its share of electronic-good exports to the US fall by 18% in 1999 to 7%, added Barboza.
In the last year alone, China's market share of the US electronics goods market has doubled from 10% to 20%.
Sales of electronic materials to China were up by 15% in Q3 over the second quarter, said Andrew Liveris, CEO of Dow Chemical, when the company's third-quarter results were released last week.
Coatings and infrastructure sales rose by 16%, polyethylene (PE) 10% by and the automatic sector 5%, he added.
From a Dow perspective, if it's taking sales away from Japanese electronic chemicals companies all well and good.
But displaced demand doesn't necessarily add up to greater overall demand.
Another important point is that when all is said and done, China's exports as a whole are still down on the first half of 2008.
China exported $521 billion worth of clothes, toys, electronics, grains and other commodities in H1 2009, according Barboza.
Although lower than declines suffered by other exporters such as Japan and Germany, this figure still represented a 22% fall over the first half of last year.
Returning to the theme of winners and losers from China's boom, Australia - despite seeing its currency rise in value by 40% against the Yuan in March-September - has made big net gains through a surge in commodity exports.
It's the same story for Indonesia.
"Commodities and high-tech goods have gained [because of the recovery in China]. But anything in between, China can often produce itself, so countries in these areas are under more pressure," said Tai Hui, an economist at Standard Chartered in Singapore in this article from the Financial Times.
Malaysia and the Philippines were losing out because they competed directly with China in many export markets, he added.
"Market stability has improved, but we continue to remain cautious about the ability of some economies to sustain growth," continued Liveris when the Q3 results came out.
"This is especially true of the US and Europe, and until these economies return to 'normal', we believe global growth will be muted."
This is also especially true of China.
Last week we discussed how domestic consumption was much less than investment as a driver of January-September GDP (gross domestic product) growth.
The relatively high investment component of GDP points to several risks and concerns:
*An increase in export-based industrial capacity. Now that it's on the ground, China will be tempted and able to keep this capacity running, even in very weak market conditions
*At the moment the US seems to be more worried over China's willingness to keep on funding its huge deficits than damage to jobs caused by aggressively cheap imports. But how long will this last as unemployment climbs towards 10%? Could we see a big increase in trade protectionism?
*Bubbles in real estate and equities. Real-estate prices have risen by 73% so far this year. Confusing signals are emerging from the government over whether or not monetary tightening will occur in 2010. Leave it too late and these bubbles could get more out of hand; act too hastily and the economic rebound will be set back
*Assuming that the investment number reported for Q1-Q3 also includes money spent on stockpiling oil and other commodities, will the high levels of imports continue? Monetary tightening is a threat along with sudden dips in import demand as China starts running off inventories
*Meagre underlying growth in domestic consumption. Nominal GDP only increased by 4.7% in the first nine months of this year, indicating that deflation was behind the higher headline number of 7.7% Although a lot of people might have made theoretical and real money out of real estate and equities, this doesn't suggest a healthy state of affairs for the average worker.
A weaker currency, import tariff rebates, increases in export taxes and soft and plentiful bank loans for new capacity hardly suggest rapid economic rebalancing towards domestic growth.
Has China put in place the right policies to move quickly enough towards this rebalancing to keep the rest of the world happy?
Can it move any quicker given the country's social and economic pressures?
More of the cheap stuff?
Source of picture: www.thelocal.de
Some of the China import data for September is now available - showing record-high imports of monoethylene glycol (MEG), ethylene vinyl acetate (EVA), polyacetal, polycarbonate (PC).
"I have given up trying to figure this out. There is not sufficient accurate information anywhere to read a trend. Reality is that they continue to buy to put SOMEWHERE," said a senior polyolefin industry source last week.
"Physical and future markets are continuing to show strength, but export and domestic consumption data continues to be weak."
Now he is beginning to think, like this blog, that a lot of these extraordinary volumes have to do with China making gains in specific finished-goods export markets. A lot more data-crunching is needed to stand this up.
A note of caution and context - a lot of these September imports might have been booked in July/August before the recent price declines.
There could have also been some stock building ahead of the long October holidays (when we get the October figures any dips will also need to take into account the holidays).
If China is making big gains in finished-goods export markets thanks to all of its competitive advantages, you can read the latest US Conference Board confidence index results either way.
The failure of US consumers to respond to better equity and housing markets could indicate a deeper shift in the way Americans spend, said Ian Shepherdson, chief economist at High Frequency Economics - in this FT article on the last Conference index.
More thrift might give the Chinese the ability to cost-cut their way into bigger slices of export markets.
Such a weak level of confidence, though, points to a poor Christmas sales season. This would leave a lot of goods left stacked on US shop shelves, pointing to a big New Year dip in commodity chemical exports to China.
But again - this would have to be put in the context of the Chinese New Year in February!
Source of picture: Businesweek
More evidence is emerging of the big rebound in Chinese exports resulting from government subsidies, including a Yuan now pegged to the dollar, soft and plentiful bank loans and export-tax rebates.
More than 9,000 quality control inspections of goods set for overseas shipment took place in Q3 this year - a 32% increase over the same quarter last year, said AsiaInspection, which carries out monitors these inspections.
Book and stationery inspections were up by 24%, toys 32%, shoes and fashion accessories 58% and textile apparel 63%, according to this news report on the latest AsiaInspection findings.
A further boost to China's textiles industry was the EU's removal of restrictions requiring companies to source a percentage of their textile business from within the EU in January 2009, the report added
.
But Q3 2008 saw the collapse of Lehman Bros and the virtual grinding to a halt of the global economy, so comparisons with the third quarter of this year were always likely to appear good.
Export trade has bounced back from its low point. It is widely recognised, though, that it could be a very long time before shipments to Western markets return to 2007 levels.
Still, the October Canton Trade Fair reported a 20% increase in electronics, hardware, tools, transport vehicle and building material exports orders from overseas buyers as against the April Canton Fair.
Together, these products account for around 60% of China's total exports.
And the damage done to China by the crisis is far less than elsewhere.
For example, the country's semiconductor market is expected to fall 6.5% by value to $68bn in 2009, down from $72.9bn last year, according to this report, quoting iSuppli.
This compares with a forecast 16.5% fall in the global chip industry.
Consumer electronics exports by volume are, however, expected to be down by 10% to 30% in all categories except LCD-TVs and Set-Top Boxes, where growth is expected.
What on earth does this all add up to then?
Here's what I think:
*China's exports have rebounded from their low points more quickly than other countries due to all the government support.
*Because of its ability to aggressively discount, China is gaining bigger market shares from other countries in certain export sectors - most notably textiles and garments.
*China is likely to be able to grow market share even further as it can cut costs by even more, notwithstanding a big increase in trade protectionism
But, as we have already said, demand in the West is unlikely to return to 2007 levels for a very long time and so China is only gaining bigger slices of a much smaller overall pie.
The country's export trade has also been boosted by cheaper raw materials as result of import tax cuts and lower pricing.
The dramatic increase in chemical import volumes is partly due to both the above factors - and, of course, stronger domestic demand.
Take methyl methacrylate (MMA) and polymethly methacrylate (PMMA) as examples. Pricing remains way down on its July 2008 peak, as this graph MMAPPMAPricing200809.ppt from ICIS pricing shows.
MMA imports have risen by 293% in January-September over the same month last year, according to China customs. In September, overseas shipments increased by 87% to 16,309 tonnes.
PMMA imports were up by 67% in January-September with September cargoes totalling 20,829 tonnes - a 22% increase.
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 John Richardson
Manufacturers yesterday reported rising output and improved employment prospects in the US, Europe and Asia.
China's Purchasing Managers' Index (PMI), involving a survey of more than 700 manufacturers, increased for the eighth straight month in a row - and is now back to where it was in May 2008. This is exactly the same length of time that China's chemical imports have been booming.
In the US, too, the Institute of Supply Management (ISM) survey for October showed that the employment index had expanded for the first time in a year.
But dig a little deeper and the same old doubts and muddle re-emerge.
New orders rose at a slower pace in October than in September, added the ISM. This could be an indication that the process of re-stocking is coming to an end, points out the Short View in the Financial Times.
The rate of bank lending to private companies has turned negative in the Euro Zone for the first time since the data was first gathered, according to this post on The Economist's Buttonwood blog.
Nobody in the chemicals industry is getting excited about the prospects for 2010, least of Jurgen Hambrecht of BASf on the release of the German giant's Q3 results..
He warned of the need for more concerted efforts by governments and industries, as there was no easy way out of the crisis.
One easy way might be China. But as we keep going on and on about, what are all the chemicals being shipped to China going into?
As long as this uncertainty lingers, so will the fear that it will come to a sorry and sudden end.
If you're selling in China and merely looking towards your year-end bonus, this endless head-scratching might not matter if China can hold its ground until end-December.
But anyone with a slightly longer-term perspective needs to be a little more worried.
Source of picture: www.prisonplanet.com
Misleading perceptions can be very dangerous - especially when they apply to the crude-oil futures markets.
"The price has more than doubled this year partly because of the belief that the recovery in Chinese oil-import demand is all about booming local consumption" said a source on the sidelines of this week's APPEC oil and gas conference in Singapore.
But China is adding around 25m tonne/year of refinery capacity in 2009, which, of course, requires a lot more oil to operate.
Liberalisation of fuel-price controls has raised refinery profitability, resulting in recent operating rates of more than 80%.
This high throughput hasn't been matched by an equivalent increase in gasoline consumption, despite the humongous increase in vehicle sales.
"People seem to be buying lots of new cars, driving them home to impress the neighbours but not driving them much after that," said Jason Feer, vice-president and general manager, Asia Pacific, of the Argus Media Group in a speech at the conference
Fuel-price liberalisation has pushed the cost of gasoline close to US levels, he added afterwards.
This miss-match between supply and demand could be a factor behind China becoming a bigger exporter of gasoline and diesel.
China exported 505,505 tonnes of gasoline in September - 153% higher than a year earlier, according to China Customs.
Diesel exports have also risen, reaching close to 400,000 tonnes in August and 293,759 tonnes in September.
This led to talk of overseas refinery margins being put under pressure for the long-term by China's exports.
But another source said: "This is just one of those conspiracy theories about China. Any company will export when it makes more economic sense.
"China's refiners are listed, remember, and so operate like listed companies. Exports are not a long-term strategic objective."
Another factor behind the rise in fuel exports was unwinding of big inventories built ahead of last year's Beijing Olympics, he said.
What's clear is that the rise in oil imports this year - expected to be around 5% - isn't just a sign of an immediate surge in domestic consumption.
And as we've already covered on this blog, China's overall growth story is not as straightforward as crude and equity markets appear to believe - another nail in the bull's coffin.
A further misleading view was that we were already in a V-shaped recovery, believed a number of delegates.
"I expect the recovery to be W-shaped," said Gati Al-Jebouri ,Chief Executive Officer of Lukoil, in a speech to the conference.
One of the economic threats he highlighted was fiscal tightening.
Australia has twice raised interest rates over the past few weeks, Norway recently raised rates and India has tightened reserve requirements for the country's banks because of inflation concerns.
A string of comments from US Fed hawks indicate a possible change in direction.
If fiscal tightening isn't timed properly, it might come too soon for a fragile recovery.
Higher interest rates could narrow the contango that's helped make storing crude, gasoline and diesel etc a low-risk option.
Very high storage levels don't fit with current crude prices.
On the New York Mercantile Exchange, light, sweet crude futures for delivery in December traded at $79.71 a barrel this morning, down 69 cents in the Globex electronic session.
December Brent crude on London's ICE Futures exchange fell 70 cents to $78.19 a barrel.
I found it hard to find any delegate who found much logic in today's price of oil.
"It could easily more or less half to $40 a barrel in the New Year. That's where it should logically be," said one delegate.
Admittedly, though, one tends to seek out those who support your biases - and I could be described as a tad pessimistic about this recovery.
Buy now, pay later....
Source: www.examiner.com
Note: There is a special prize for the first blog reader who can explain the above headline.
In the 2001 recession, US consumer spending slowed but did not fall, and picked up again very quickly.
In the early 1990s, it dipped a bit but returned to pre-recession levels in a few quarters.
But this recovery is different because of the long-term changes in consumer behaviour in the West, which we've talked about before.
Unemployment in the States is nearing 10% with consumer spending falling in September after four months of improvements.
These gains look as if they came at the expense of savings as people, quite sensibly, took advantage of cash for Clunkers and other government-backed spending schemes.
Cash for Clunkers is over, but Cash for Appliances is about to begin.
However, the government needs to rebalance its budget and fulfil its pledges to rebalance the economy away from over-reliance on consumption.
So can consumer spending continue to be propped up in 2010? If not, what will this mean for chemicals exports to China re-exported as finished goods to the States?
The gap between the real economy in the developed world and the commodity and equity markets remains as wide as ever.
For example, here are the opening lines from an Associated Press story this morning: "Oil prices rose above $78 a barrel Monday in Asia as a weaker U.S. dollar offset signs of slumping consumer demand.
"Benchmark crude for December delivery was up 94 cents to $78.37 a barrel at midday Singapore time in electronic trading on the New York Mercantile Exchange".
Some delegates at last week's APPEC oil and gas conference in Singapore believed crude could be overvalued by as much as 50%, based on the fundamentals.
"I expect the recovery to be W-shaped," said Gati Al-Jebouri, Chief Executive Officer of Lukoil, in a speech to the conference.
The upward curve of the W might last for some time longer, he added - but Al-Jebouri had no doubts whatsoever that fiscal tightening would be a major factor in preventing a U-shaped rebound.
If oil does decline next year - when reduced quantitative easing makes speculation less attractive, forcing the market to finally catch up with the prospects for real demand - a flight to the dollar is inevitable.
This is hardly going to help the US government's need to make the economy more export-based.
But with the finance industry so well-embedded in Washington, it's hard to envisage legislation that will make financial markets more helpful to the real economy.
It seems as if Lex of the Financial Times is finally catching up with this blog by questioning the validity of some of the official data coming out of China. We take this as a compliment.
In today's column it talks about how the total for first-half Gross Domestic Product (GDP) growth numbers for China's 31 provinces was almost 10% higher than the overall figure put out by the National Bureau of Statistics.
This suggests that provincial officials are being encouraged to report high numbers to help create the impression that everything is coming up roses. How can we trust micro numbers, on chemicals production and consumption, for example, if distortions in big headline numbers are taking place?
Retail sales growth of 16.2% in October was also questioned by Lex. These numbers are not a good proxy for real consumption growth because they include shipments to retailers and various types of corporate and government spending.
Strong year-on-year petrochemical production growth recorded for September might be believable because in the same month last year the world economy came to a halt as Lehman Bros folded. Ethylene output grew by 29.4% and polyester production by 33.9%.
The polyester sector might have benefited from market-share gains made in export markets as a result of the 2009 depreciation of the Yuan against other developing-world currencies.
This is the result of a re-pegging of the Yuan to the US dollar, which on Wednesday hit a 15-month low against a basket of trade-weighted currencies.
But China's Central Bank, ahead of a visit to China by President Obama, yesterday acknowledged there was a case for a stronger Yuan.
As if often the chase with the Chinese government, though, only a few days earlier commerce minister Chen Deming had called for the creation of currency stability in order to protect exports.
So it's far from clear if and when China will let the Yuan rise in value, which would likely reduce the volume of chemical imported to be re-exported as finished goods.
As we've said before, lack of clarity on real over apparent domestic demand-growth continues to prompt a nagging suspicion that re-exports are more important than some people think in the recovery story.
The International Monetary Fund (IMF) said at the weekend that the Yuan had become "significantly undervalued" since it was linked again to the dollar.
If insufficient ground isn't given on the Yuan to satisfy the West, how long before politicians start targeting other "unfair" advantages such as this year's reductions in raw-material import tariffs and increases in export-tax rebates?
On an individual industry level, pressure for anti-dumping and other trade measures is likely to only grow - a long with measures outside the control of the World Trade Organisation (WTO) such as safety and environmental standards - if developed economies don't achieve sustained recoveries.
Shelf-space to be in short supply again?
Source of picture: www.zrdata.com
ASIAN naphtha prices hit their highest level for more than a year yesterday - reaching $701/tonne CFR Japan for second-half December open-spec material on "improved market conditions".
Earlier this week we picked up more reports of bleak demand in styrenics and fibre intermediates that countered continued optimism in equities and crude markets.
This is also usually the quiet season as petrohemical production declines on weak seasonal demand.
Is the Asian petrochemicals industry ramping up production because it thinks crude is going to get stronger and the real economy is set to improve?
Oil fell to below $77 a barrel yesterday on evidence that US motorists and businesses were cutting back on energy use, according to this Associated Press report.
Have we returned to the demand destruction which caused the economic downturn in the first place?
Despite soaring auto sales in China, there are reports that gasoline consumption is being affected by higher crude, the impact of which is being more keenly felt this year as a result of fuel-price liberalisation.
The Energy Information Administration (EIA) said in its weekly report that US oil and gas supplies grew more than expected last week, even though many oil companies have shuttered refineries as fuel consumption slumps.
US refineries had slowed production to the lowest levels since September 2008 and they were importing nearly 15% less crude than last year, the report added.
This is worying when you think of the state of the economy this time last year. Most other comparative numbers are showing improvements.
What perhaps helps to explain the 15% decline is big new refinery capacities in India and China etc putting pressure the developed-world players.
With refinery runs reduced everywhere in the world except China (where the Chinese refineries are enjoying improved profitability as a result of the fuel-price liberalisation), reduced supply could be another factor behind the rise in naphtha.
But let's take it as read that better demand from petrochemicals is the main driver behind the increase in naphtha.
It would be a very risky business to build inventories right at this moment - given all these uncertainties and the big surge in new petrochemicals capacity.
Stay cool and don't panic!
Source of picture: www.wired.com
By John Richardson
THE growth of the carry trade US dollars - leading to a sharp depreciation of the greenback and possibly of many other unintended consequences - represents a major threat to the chemicals industry in 2010.
Any corporate planner with her or his salt should factoring in, and hedging against, the danger that the many warnings about the damage from this trade come true.
Warnings have been issued over the last few weeks by the Chinese government, the International Monetary Fund (IMF), Hong Kong chief executive Donald Tsang and Dallas Fed chairman Richard Fisher.
Economist Nouriel Roubini, who accurately predicted the current economic crisis, has been proclaiming loudly from every available rooftop that this is the "mother of all of carry trades".
He believes that, potentially, it could cause even more damage to the financial system than the crisis from which are still struggling to recover.
But this blog was able to find two people who disagreed: A UBS analyst and a hedge-fund trader. Nothing to worry about, then!
Just as a reminder, the carry trade involves borrowing at zero interest rates in dollars (because of the ultra-loose Fed monetary policy) - and also shorting the US currency on the assumption that it will depreciate.
As the dollar has tumbled - creating extremely good returns - investors have also piled into equities and commodities, incurring very high leverage.
Oil increasingly moves in inverse correlation to the dollar these days so, I suppose, this whole business has gained its own self-perpetuating momentum: The more that investors short the dollar, the more it goes down and the more crude goes up. Sounds like daylight robbery.
Stronger crude - which we've frequently said doesn't reflect current supply and demand - is seen as a false sign that the world economy is in firm recovery.
And so, hey presto, equities rise in response to higher oil prices, resulting in yet more fat profits for the speculators.
The dollar could appreciate by as much as 25% if, all of a sudden, traders are forced to cover their shorts (a phrase that, I am afraid never ceases to appeal to my puerile sense of humour), warns Roubini.
He predicts that one of four events could trigger this new financial calamity:
*The dollar value cannot fall to zero and at some point it will stabilise. The cost of carry would then become zero rather than negative (no more money being made on shorting the greenback)
*The Fed cannot suppress volatility forever. Its $1,800bn purchase plan of mortgage-backed securities and government agency debt such as Fannie Mae's etc will be over by the Spring
*If growth is on the upside in the third and fourth quarters, markets may start to expect Fed tightening sooner rather than later
*A flight from risk could occur due to concerns over a double-dip recession or a geopolitical crisis - e.g. a US/Israel and Iran conflict
Before listing some of the possible implications for chemicals, it's worth adding the following context.
Big increases in Asian property prices (for example, Hong Kong's are up by 28% this year) start to add up in light of the Fed's ultra-loose monetary policy that's prompted the carry trade.
Asian countries have been forced to follow the Fed in order to prevent their currencies from appreciating too much.
This is creating dangerous real-estate bubbles in Singapore and South Korea as well as Hong Kong, with all the associated higher levels of consumption which come with the property wealth-effect.
China is different as it's re-pegged the Yuan to the dollar.
But the country's huge economic stimulus package has created the well-documented big rise in property prices and a boom in auto, home appliance and other retail sales.
Meanwhile, China is also benefiting from improved export competitiveness as a result of its currency being reconnected to the weaker greenback.
So those chemicals corporate planners worth their salt should be worrying about:
*The risk of being on the wrong side of overbuilt inventories, or even just the normal 45-60 days of working capital tied up in raw materials, when and if crude takes a tumble
*Confusion over sustainable levels of chemicals demand-growth in housing, autos etc in Asia. If the Fed tightens in response to worries over the impact of excess liquidity so will the rest of the world
*Damage to underlying, or fundamental, demand caused by crude being too high at this point in the economic recovery. My fellow blogger, Paul Hodges, points out that this concern is high within OPEC.
*Chemicals import volumes into China destined for re-exports as finished goods have been supported by the weaker Yuan. These imports could obviously decline if the dollar lurches upwards
*US petrochemicals producers have benefited from dollar weakness and the fall in natural-gas prices relative to crude (70% of US ethylene is derived from natural-gas liquids). Thermoplastic exports are up 16% in the year-to-date with domestic sales down nearly 14%, according to the latest American Chemistry Council (ACC) weekly report. So, again a surge in the greenback would threaten this much-needed compensation for a weak home market.
When might the carry trade unwind? Nouriel Roubini is not prepared to offer any prediction, but warns that the longer this bubble inflates the worst the consequences will be when it deflates.
Source of picture: www.walletpop.com
By John Richardson
In his own words Paul Hodges of International e-Chem - and also a fellow blogger - puts in a nutshell some of the dangers confronting the chemicals industry as we approach the New Year, with a few interspersed further thoughts from this blog:
"If crude were to fall back to $40 a barrel - where based on fundamentals it should be - this would further cloud visibility about the real state of end-user demand. It would become hard to distinguish between a fall in demand down the chain because of de-stocking and greater caution, and a fall in the final consumption of chemicals.
"Oil at its current price is hindering rather than helping the recovery because we are seeing demand destruction again. This is because we are already seeing greater caution on the part of those companies that recognise the risks of lower demand for chemicals. "For example, as the gasoline price has gone up, people are driving less to the shopping malls in order to buy stuff made from plastics - i.e. discretionary spending."
There are even reports of this happening in China as a result of higher crude and fuel-price liberalisation.
"In Our Feedstocks for Profit Study, and I think this still holds, we saw a green light for growth was $25 a barrel, an amber light $50 a barrel and red at $75-80 a barrel.
"It's generally accepted that demand destruction occurs at $80-100 a barrel."
The last US recession began in December 2007 when crude touched $100 a barrel. This came at the same time as the sub-prime crisis. An important question now is with real wages in the West in decline and unemployment rising are we talking about demand destruction much closer to the $80 a barrel level?
"The crude price is being driven by irresponsible bankers, who are simply focused on generating maximum short-term trading profits (and personal bonuses for themselves). The money to support these trading activities is effectively being provided by taxpayers, as a result of the bailouts that have taken place," continued Hodges.
"The strength in crude oil is directly correlated to movements in the value of the US$, often on a minute by minute basis. This is not about free markets. It is about bankers using the low interest rates now on offer in the US, caused by their earlier greed and reckless lending, to once again bite the hand that feeds them.
"Bankers need to behave more responsibly, especially at a time of crisis such as today. If they are not prepared to do so of their own will, we need effective legislation.
"When this unwinds you could see a big return to dollars, strengthening the currency significantly," Hodges continued.
"This is hardly going to help progress in the US government's effort to make the economy more export-based - part of the global rebalancing efforts."
"Today's oil prices are not the fault of chemicals companies, but they will suffer as a result."
The risk is that the unwinding of these trades causes further disruption. As oil prices fall, so will chemical volumes as everyone de-stocks.
"This is why chemicals companies need good hedging strategies," said Hodges.
"Another problem is the cost in terms of working capital. This will lead to a further problem as demand recovers. When demand is really weak, it's possible to conserve working capital by cutting operating rates and other costs - hunkering down until the recovery arrives.
"But when the recovery does arrive, the difficulty is estimating how much to ramp up rates at the expense of working-capital preservation.
"Demand visibility - even without as yet a collapse in crude - is already extremely poor, making planning very difficult. "
"More companies go bust in an upturn than a downturn, because of the inevitable increase in working capital. This is a major risk in 2010, given the fragile state of the financial system, and banks' unwillingness to lend."
"They are so cheap, I might even buy one as a hedge against global warming"
Source of picture: www.formalwilderness.blogspot.com
This blog has spent a lot of time tormenting itself over the sustainability of China's extraordinary economic rebound during 2009.
"Just where are all those imports of chemicals and polymers (polymers up 50% year-to-date) going?" we keep on asking.
Perhaps we've got completely the wrong end of the stick, a source politely suggests.
"There's no real need to worry about where this stuff goes because as long as the government is solvent - and it still has massive cash reserves - it will keep GDP (gross domestic product) growth at a minimum of 8-9% per year. The reason is the need to create enough jobs to maintain social stability.
"Quite frankly, if they had to they had to bury polymers and unsold washing machines, fridges and autos etc in landfills, they would do it to keep industrial production moving along at the right level.
"And quicker than you imagine, they will wean the country off too much depedence on industrial production and exports towards better local consumption."
But in the meantime, he has heard of Chinese refrigerators, which contain polymers including polycarbonate (PC), acrylonitrile butadiene styrene (ABS) and polypropylene (PP), flooding export markets.
"It seems that some refrigerators were manufactured for domestic sales and so benefited from government subsidies - but still found their way on to container ships."
Abu Dhabi ahead in the race?
Source of picture: www.gulftrackservices.com
By John Richardson
The global basic chemicals industry is likely to end up under the dominant control of the Middle East, and possibly Asia, within the next 3-5 years, a senior chemicals industry source told this blog.
"We have known for a long time that the centre of gravity is shifting from West to East, but the economic crisis has accelerated this whole process.
"It was easy credit that enabled the West to keep on growing despite high oil prices with some of that credit going into speculation that helped drive energy costs higher.
"Now that the credit bubble has burst we are left with deeply entrenched and very long-term problems, while the Middle East is sitting on a hydrocarbons cash-pile thanks to the extraordinary global economic growth of 2005-2008."
The only barrier to acquisition of a lot more Western assets - including quite possibly high-value technology positions that have to date remained off the table - was politics, he said.
But a second source added: "While I agree that the shifting of ownership has been speeded up by the crisis, I think the West will keep hold of technology positions - especially in downstream specialities.
"Chief executive officers (CEOs) of US and European countries are under pressure to move away from basis chemicals, and so differentiation needs to be preserved.
"But it is true that we have already seen transfer of very valuable polymer technologies."
SABIC's acquisition of GE Plastics was one such transfer with the renamed SABIC Innovative Plastics now seeking to buy high-end polycarbonate (PC) technologies.
The economic recovery, which the second source believed would be sustained, would also give the CEOs some breathing space to negotiate better terms with prospective buyers of basic petrochemicals.
These comments came after ICIS reported that the Abu Dhabi-based International Petroleum Investment Co (IPIC) was in talks with Bayer MaterialScience and four other global petrochemical groups.
But an IPIC spokesman later said: "At present there are no firm plans to do anything with Bayer MaterialScience, or any other chemical company. A number of initiatives are under consideration internally, but nothing has been decided."
IPIC has already acquired Canadian-based polyolefin major Nova Chemicals and is planning the huge Chemaweyaat chemical city in the new Mina Khalifa Industrial Zone.
It also has a 64% of Austria-based polyolefins group Borealis.
"What's interesting about the Chemaweyaat project is, first of all, its sheer scale (it includes several crackers, including a 1.45m tonne/year one due to start-up in 2012) and the fact that the range of derivatives downstream will be more diversified than is already common in the Middle East," the first source added.
"On a straight cost competitiveness basis, you might think that liquids cracking, which is going to happen at Chemaweyaat, doesn't make sense. But this is more than being about straight economics - it's about economic development and job creation."
And my colleague, Nigel Davis, recently wrote: "Dow Chemical on 12 November laid its cards on the table regarding its so-called 'asset light' strategy.
Dow is working through an arbitration process following its failed deal in Kuwait. The company says it is now talking to two potential partners for a proportion of it olefins assets and its polyethylene business. "
The future ownership of US petrochemicals assets in the US is also attracting a great deal of interest because, despite what could be deeply ingrained economic problems, it's a huge polymer and chemicals market.
And as Nubuo Tanaka - executive director of the International Energy Agency (IEA) - said in a presentation in Singapore earlier this week, shale gas had resulted in a "silent revolution" in US natural-gas supply since 2007.
With 70% of US ethylene production based on natural-gas liquids, according to the American Chemistry Council (ACC), the ground has shifted thanks to this unconventional shale-gas supply.
"Gas supply has become tight in the Middle East and abundant in the US perhaps for the long term, meaning that US petrochemicals is not dead and buried," claimed the first source.
"I expect export competitiveness from the US to be strong for at least the next three years on the comparatively low prices of natural gas over naphtha."
Thermoplastic exports from the US rose by 16% in the year-to-date as a against a 14% decline in domestic sales, said the ACC in its latest weekly report.
SABIC's GE Plastics acquisition gave the Saudi giant a foothold in this huge market, where handling and distribution costs can act as an effective trade barrier.
There have also been unconfirmed reports of Reliance Industries being interested in acquiring LyondellBasell.
Source of picture: www.managingthedragon.com
By John Richardson
I love the phrase used by Andrew Peaple of the Wall Street Journal in this article on China's property "bubble": Getting a straight answer is like "nailing jelly to a wall", in other words xxxxxx impossible. I will be in Shanghai next week on a business trip so will attempt to do some first-hand nailing.
The World Bank, Peaple points out, says that income growth in China is keeping up with price rises. This is a view supported by the China Economic Quarterly, which also makes the point that there remains a lot of pent-up demand for housing.
Property prices rose by 3.9% in 70 of China's large and medium-sized cities, but there does seem to be the possibility that highly localised much bigger bubbles are being inflated. Housing affordability in Beijing looks to stretched and prices in October rose by 13.8% in Shenzhen.
Still, in three of the 70 cities surveyed property prices actually fell.
The again, though, Zhang Xin, chief executive of Soho China - one of the country's most successful privately owned property developers - was quoted in several media reports as saying that a big bubble was, indeed, being pumped up. She blamed this on the big increase in bank lending, the cornerstone of the government's economic stimulus.
"Real estate prices should only go up because people want to actually use the space, but at the moment we can see more and more empty buildings across the whole country and in every real-estate segment," she was quoted as saying.
Vacancy rates in the Pudong district of Shanghai are as high as 50% as more buildings keep going up, Zhang added.
"In Manhattan they have vacancy rates of 10-15% and they feel like the sky is falling."
The danger for chemicals consumption is that changes in government policy for the property sector could have a big detrimental effect.
Tax breaks, low interest rates and smaller down-payment requirements have fuelled this year's boom - along with the plentiful bank lending.
Another connected issue is assessing how much chemistry goes into China's construction sector.
In the US, for example, the American Chemistry Council (ACC) assesses that the construction sector purchases $8 of every $1,000 of chemicals output.
"A big problem in China is the huge variance on what people do to their homes, from very basic equipping of steel and concrete box-like apartments to, of course, the super-rich who are ripping out tiles and refitting kitchens almost as often they change their underwear," said a Shanghai-based office worker.
Nailing jelly to the wall would no doubt have been a fair description of getting reliable data out of the US economy during the early part of the last century.
But back then it mattered far less to the rest of the world.
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.
Reliance, it appears, is evaluating other opportunities too
in its core businesses.
Reliance Industries - which is attempting to buy LyondellBasell - is offering $10-12bn, according to this report from Reuters quoting two sources with direct knowledge of the deal.
This would be one of the biggest-ever acquisitions by an Indian company. In 2007, Tata Steel bought Corus for $13bn.
Reliance raised $660m through a share sale in September.
It has $4bn in cash, $8bn in treasury stock that can be sold and if it doubles its current net debt-to-equity of 0.35x it can borrow another $10bn, the Reuters report adds - quoting a recent Macquarie research note.
He's not bad at making money
Source of picture: www.dealbreaker.com
SOME of the logic behind Reliance Industries' bid for LyondellBasell could be a recognition that the globalisation of petrochemicals markets may have gone into partial reverse.
A climate bill passed by the House of Representatives has a provision for taxing imports from countries where emissions standards are more lax than the US.
This defensive measure, no doubt the result of pressure from heavily polluting industries such as refining and chemicals, recognises that the business-as-usual scenario outlined by the International Energy Agency in its World Energy Report 2009 won't come true.
The scenario involves no significant improvements in energy conservation and no great shift to renewables, leading to a rise in global temperatures of 6 C.
Even if an international carbon tax and/or cap-and-trade system isn't established, individual countries seem likely to step up their efforts to lower hydrocarbons consumption.
Whether or not global warming is man-made, energy security is by itself a big enough reason to boost energy efficiency and develop green technologies.
Then there is what Nubuo Tanaka, Executive Director of the IEA, calls "the silent revolution" since 2007 of increasing US gas supply.
Breakthroughs in shale-gas technology and very long global liquefied natural gas (LNG) supply are contributing to what the IEA describes as a worldwide supply glut that could have "far-reaching consequences for the structure of gas markets".
This will put LyondellBasell's US polyethylene (PE) assets in a strong position in the medium and possibly even the long term.
It has long been assumed that when the US polyolefin market is eventually in deficit, the shortfalls will be supplied by the Middle East and Latin America - notwithstanding extra logistics costs that amount to effective trade barriers.
But a sufficiently high price on carbon would undermine this assumption, along with cheap US natural gas.
This is still the world's biggest economy and therefore the world's biggest chemicals and polymer market when all the hot air about China has been expelled.
What was right for Warren Buffett could prove to be right for Reliance.
By Malini Hariharan (Malini is now joint blogger for Asian Chemical Connections)
Reliance's bid for LyondellBasell is likely to be a long drawn out affair with potential for complications from competitive bids.
I talked to some sources familiar with the transaction and they say that Reliance is unlikely to be the only company interested in LyondellBasell. There is no official confirmation yet but some obvious names are being suggested -IPIC, Sinopec and Saudi Aramco.
One source says that the strongest contender would be Len Blavatnik of Access Industries who is trying to regain control of LyondellBasell.
This report also talks of offers by private equity players too though these are in the form of equity financing proposals to LyondellBasell's plan of a rights issue and not a cash offer like Reliance. The rights issue is part of the company's proposed reorganisation plan.
But Reliance still stands a good chance as some of the other probable contenders are likely to be busy working on other acquisition opportunities, he adds.
One opportunity is Dow Chemical's basic chemicals and plastics unit. Andrew Liveris, CEO of Dow, recently said that the company is in talks with two potential partners, although no timeframe has been set for striking a deal.
Dow's senior vice-president of hydrocarbons and basic plastics has also said that Dow's partner would have substantial hydrocarbon and refining assets.
Any company that is successful in partnering Dow would have to forego the LyondellBasell opportunity because of antitrust issues in the US and Europe. It would not be possible for a single company to own all the assets of Dow and LyondellBasell.
Then there is IPIC's stated interest in Bayer MaterialScience. Although the company has said that it is evaluating other opportunities it might be preoccupied in seeing this through, says the source.
He also adds that there are not too many companies globally that can prove that they have the capacity to run LyondellBasell.
Meanwhile, there are already indications that the transaction could stretch through 2010. LyondellBasell asked the bankruptcy court yesterday for time until 6 September 2010 to get sufficient creditors to vote for its reorganisation plan. The current deadline is 15 December.
Until the deadline, LyondellBasell has sole right to file a reorganisation plan. Once it expires, creditors can file their own reorganisation plans for the company.
Creditors, who are keen to recover as much money as possible, would be keen to see alternatives to the company's plan.
Will growth spread quickly enough?
Source of picture: www.oraclemarketplace.co.uk
By John Richardson
Global chemicals production had returned to 2006 levels by October of this year, according to this slide ACCProduction09Versus06.ppt from the American Chemistry Council (ACC).
Worldwide chemicals growth rates might not return to 2008 levels until 2012, Jurgen Hambrecht, CEO of BASF, warned on the release of the company's Q3 results.
The overall picture is being made to look bad by structural overcapacities and deep-seated economic problems in Europe and the US.
Booming emerging markets, particularly China, matter more than ever to Western chemicals producers.
So the big question being asked as we approach the New Year is whether China's almost hard-to-believe growth in chemicals demand in 2009 - reflected in a big surge in imports - can be maintained.
High-density polyethylene (HPDPE imports rose by 73% with low-density (LDPE) imports up by 85% in January-September, according to Shanghai-based commodities information service CBI.
Total PE imports in 2008 were 4.5m tonnes, but had China imported 3.75m tonnes by the end of H1 of this year alone, added CBI.
"China will enter a long period of slower and more volatile growth in probably 2-3 years when fiscal stimulus runs out", warned Michael Pettis, former Wall Street trader and professor at Peking University's Guanghua School of Management
This would force the country to make adjustments it had so far tried to avoid, added Pettis on his blog, China Financial Markets.
These adjustments, accordinng to a Shanghai-based expatriate, involve a major shift away from export and industrial investment-led growth to a more broad-based rise in consumer spending.
"What's holding back consumption is the lack of a decent welfare system, forcing people to maintain high savings levels to cover education and health costs," he added.
A lot of the wealth generated by China's growth was concentrated in the hands of the state-owned enterprises, Pettis added.
Higher dividend payments to company shareholders (sometimes no dividends are paid at all) and broader financial sector liberalisation were needed, said the professor.
China's critics argue that the response to the global economic crisis has so far been mainly more of the same: Providing a huge increase in funding for a big build-up industrial capacity and infrastructure.
The infrastructure, including 120,000 kilometres in high-speed rail lines, has the potential to accelerate urbanisation.
"There is little doubt that China's hope for prosperity in the long run lies in transferring the majority of farmers into higher-productivity jobs in the cities," wrote the well-respected Beijing-based economic research publication, the China Economic Quarterly, in an article earlier this year
"But simply moving a farmer into a city does not make him an economically significant consumer."
Chinese households with annual expenditure of below $5,000 - i.e. about 90% of the population - spent most of their money on housing, food and clothing, the CEQ added.
Those with income levels high enough to be able to spend more than $5,000 per year, the so-called "consumption households", mainly live in three regions - the Yangtze River Delta, The Pearl River Delta and the Beijing-Tianjin corridor, the article continued.
Each of these regions surrounds megacities, whereas other "consumption households" are more thinly scattered across the rest of China.
"Although there are a growing number of these households dispersed across the rest of the country, they are not concentrated enough to justify a sales and distribution presence for many products and services," the research publication added.
"Research my MasterCard suggests that multinational consumer-goods companies require a concentration of at least 20,000 consumption households to establish a viable market."
Distribution costs remain a barrier for setting up in the hinterland, despite big improvements in transportation over the last decade, said the CEQ.
"Logistics costs account for 20% of average goods prices in China compared to 10% in the US, according to the US Department of Commerce," the CEQ added.
Plenty of reasons, perhaps, for chemicals companies to be a little cautious over their forecasted growth rates in China over the next few years.
On A Very Sticky Wicket
By John Richardson
As one my colleagues said - it's a good job the US stock markets were closed for Thanksgiving.
Lots of efforts are being made to talk the Dubai World crisis and down - and despite drops in Middle East market equities - Asian markets rallied today.
But the next few days could still be important with a lot depending on how neighbouring governments respond.
Oil markets have been pretty much out-of-sync with real demand since 2003.
But with the rise in the US dollar carry trade and Western growth so fragile, the risk of another sharp correction is higher now than when the world economy was in good shape. Such a collapse would be a mini version of what happened in Q4 last year.
I did a very unscientific survey of 30 traders, producers, buyers and logistics people at the APPEC oil and gas conference in Singapore a few weeks ago.
Twenty three said oil prices, based on fundamentals, should be $40-50 a barrel (three of those who disagreed and thought should be where they are now were financial analysts!).
So perhaps the biggest immediate risk from Dubai is a big strengthening of the dollar and a connected drop in equities and crude.
As I mentioned in my previoust post, I was in Shanghai last week. The local linear-low density polyethylene (LLDPE) polyvinyl chloride (PVC) and purified terephthalic acid (PTA) futures contracts all dipped sharply when the Dubai news broke.
My colleagues at CBI China said that because of the dip in these contracts, very few buyers were willing to acquire physical cargoes on Thursday and Friday.
This could continue as long as the markets worry that this might be another Lehman Bros (fortunately, this seems very unlikely at the moment).
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.
More buying of junk in H1 next year that nobody really needs?
Source: www.blogcleveland.com
By John Richardson
TWO theories about growth in China next year revolve around either an appreciation or devaluation of the Yuan.
The appreciation theory is far more widespread as it assumes no global double-dip economic recession.
It's assumed that by mid-2010 inflationary pressures will be build to the point where fiscal tightening will be needed, through, for instance, a cut in new loans and a rise in interest rates.
Part of this tightening would also include a long-awaited appreciation of the Yuan from around 6.8 to the US dollar, where it is at the moment, to 4.8.
Until and if this happens we could continue to see hot money pouring into and around China's economy as everyone tries to maximise Yuan revenue ahead any appreciation.
Weird and wonderful speculation
This has led to all sorts of weird and wonderful examples of speculation this year, including in chemicals markets.
My very able colleagues at CBI tell me, for example, that cargoes are sometimes being bought for the sake of the credit that is then used to punt in another commodity - for instance, equities.
There was one case of an ethylene dichloride (EDC) shipment that was sold at below raw material costs because the trader had used his credit to make a fortune from speculating elsewhere.
More such speculation will happen in H1 next year if the motive to gamble in order to make a currency gain remains high, particularly if economic policy stays broadly on the same expansionary track.
Yesterday, the State Council announced that economic policy would stay mainly unchanged for the time being because of a continued focus on boosting domestic consumption.
Some new pro-consumption measures are to be introduced, such as increasing cash-for-clunker car rebates.
Trying to let the air out gently
But two measures were also announced yesterday that might slightly deflate very bubbly auto and housing markets. As we reported yesterday, auto sales in November increased by 96% year-on-year.
The air-sucking steps are:
*The purchase tax on cars with engine sizes of 1.6 litres or less will be raised to 7.5 percent from 5 percent, though that is still lower than the 10 percent tax rate for most other cars
*Individuals must own their homes for five years to be eligible for sales tax exemption, up from the previous minimum of two years. In July, the China Banking Regulatory Commission decided to tighten mortgage conditions for second-time homeowners and big banks announced that they would start to offer discounts on mortgages only to selected qualified applicants
Government policy makers have a poor record of implementing the right housing policies at the right time, says Rosealea Yao of the Beijing-based online economics research publication, The China Economic Quarterly (CEQ).
The reason is that data on the property market can be misleading.
For example, there's recent evidence that stocks of unsold homes are increasing in several local markets, such as Beijing, Shenzhen and Hangzhou, whereas year-on-year nationwide sales accelerated by 48% in October.
A heavy-handed approach in 2007, involving interest rate rises and a reduction in credit to developers, caused the last collapse in China's property markets.
So the point she makes that if further measures are needed to cool the housing market and the overall economy down from mid-2010 - which the CEQ believes will be the case - the central government needs to tread very carefully.
The dilemma for China is that while a healthy construction sector is crucial for the economy, so is making sure that property prices don't increase out of the range of average earners.
Expect even more chemicals volatility
It seems very possible, therefore, that if inflationary pressures do start to build, chemicals pricing could become even more volatile and unpredictable ahead of any new government measures.
"There have been much closer links this year between overall economic sentiment, reflected in global and local equity markets, and what's happening in polyolefin pricing and trading patterns," said an industry source.
So when the rumour-mill starts churning about fiscal tightening, expect to see polyolefin markets - and perhaps chemicals markets in general - responding to fluctuations in share prices.
These fluctuations might, of course, have no relevance whatsoever to the underlying fundamentals of chemicals supply and demand.
What about the other theory?
We have long-argued on this blog that oil prices are way out-of-kilter with immediate demand.
They have been this way since 2006, but right now the fragile global economic recovery has increased the risk of a sudden and sharp correction.
Some unforeseen crisis, more globally systemic than Dubai World, could result in a retreat to the US dollar and a collapse in crude back to $30-40 a barrel (where some believe it should be based on the physical market fundamentals).
This would result in the Yuan appreciating much faster than the Chinese want - because of its link to the dollar - as they try to gradually rebalance their economy away from exports and towards more domestic consumption.
A competitive devaluation of the Yuan might then take place in order to protect export trade, leading to deflationary pressures from Chinese exporters. We could then be in the middle of major global trade war.
Let's hope for a more benign outcome!!
Looking pretty - the new Shell plant at night:
Sourceof picture: Shell Chemicals
By John Richardson
WHEN Shell Chemicals officially opened its OMEGA process 750,000 tonne/year monoethylene glycol (MEG) plant in Singapore today, it mentioned how its global production share of the fibre intermediate was only 7%.
One might wonder how effective this is against the dominance of SABIC and MEGlobal in what is a highly commoditised game where final success could hinge on market muscle and economies of scale.
But the new plant at Jurong Island in Singapore is one of the biggest - if not the biggest - in the world.
Plus, Shell claims that its OMEGA process is cheaper on capital and running costs and produces far less diethylene glycol (DEG and triethylene glycol (TEG) by or co-products than conventional processes (in fact, virtually none).
Another advantage will be from the new Shell cracker under construction on neighbouring island Pulau Bukom, from which ethylene will be fed by an undersea pipeline.
"It (the cracker) will run on a full range of feedstocks from heavy paraffin wax to liquefied petroleum gas (LPG) supplied by our existing refinery," said Peter Eijsberg, Deputy Venture Director for Shell Eastern Petrochemicals Complex (SEPC).
SEPC is the wholly-owned Shell subsidiary operating the MEG plant which came on-stream last month.
It will run the 800,000 tonne/year cracker and a 175,000 tonne/year butadiene plant due on-stream in Q1 next year.
The existing refinery is being upgraded to meet the cracker's feedstock needs,
It would be possible in certain market conditions for 100% of the cracker's feedstock needs to be met by the refinery, Eijsberg added.
"We can crack vacuum-gas oil (VGO) from our vacuum distillation column, hydrowax from our hydrocracker, naphtha, of course, and LPG from various units in the refinery," he added.
So how does this compare with an ethane-based cracker and worldscale MEG plant in the Middle East?
"When your gas is practically free, the Middle East is very competitive indeed, but we do have the logistics advantage of being closer to the biggest customers in China. We can also move cargoes smaller than the 50,000 tonnes which typically come from the Middle East."
Shell, though, has made the decision to licence OMEGA. By so doing, is it in danger of undermining its competitiveness?
"I believe this isn't a challenge to our competitive position," said Iain Lo, Vice-President, New Business Development Ventures, for Shell.
Five licenses have been granted for OMEGA, - but only two officially announced, which are to Lotte Daesan in South Korea and PetroRabigh in Saudi Arabia. Both companies are already operating OMEGA plants.
Success in petrochemicals has to eventually always be about being big or getting out if you are at the commodity end of the game, is one argument.
But there is an awful lot of money to be made out of licensing.
And licensing doesn't mean you give away all the your advantages, especially if you are a company like Shell with its refinery-cracker integration and its experience in running plants.
By Malini Hariharan
Reliance Industries' bid to acquire LyondellBasell is progressing quite rapidly. I am told that a team of top executives from the company is in the US holding discussions with LyondellBasell.
And according to this report in the Houston Chronicle, the team has also been enjoying Indian food in Houston.
My source tells me that Reliance is also is talks with LyondellBasell's creditors about rescheduling debt repayments. But the company has denied an Indian media repot that it would buy out a fifth of LyondellBasell's $27bn debt.
"Why do this? Creditors would have more confidence if Reliance takes on LyondellBasell. And so debt can be rescheduled," says the source.
Another Reliance team is also said to be visited LyondellBasell's plant sites in the US.
Everyone is now waiting for 15th December when the bankruptcy court is due to hear LyondellBasell's petition to extend the deadline until 6 September 2010 for discussing its reorganization plan with creditors. Reliance is likely to make a binding offer depending on how this court hearing goes.
What has surprised many is that no new names have emerged for LyondellBasell. It was widely expected that Reliance would face competition from other competing bidders. Have the complexities associated with LyondellBasell deterred others?
By Malini Hariharan
Reliance Industries will take a call today on submitting a final bid for LyondellBasell, says this report from CNBC TV18.
The report, quoting unnamed sources, adds that Reliance may be having second thoughts about the acquisition. Key concerns are said to be LyondellBasell's high debt, potential liabilities if it tries to shut some older facilities and integration and management issues.
Some of the concerns appear surprising. LyondellBasell was known to have a high debt burden though it is possible that due diligence has thrown up some previously unknown facts. Closure of any plant in the US would be expensive and time consuming. And integration should have been a worry right from the start especially as LyondellBasell has been put together through so many mergers and acquisitions over the years.
By Malini Hariharan
Yesterday's media report about Reliance Industries on the verge of taking a final decision on LyondellBasell appears to have been a little premature. My sources say that a decision will be made only after the US bankruptcy court decides on a restructuring plan put forward by LyondellBasell.
The company filed a revised plan last Friday. The court is due to hear today a petition filed by LyondellBasell asking for an extension until 6 September for the exclusive right to propose a reorganization plan.
The court's decision will give more clarity to Reliance, says a source familiar with developments. If the revised plan is approved then Reliance does not have much of a chance to participate in LyondellBasell's restructuring unless invited by the current management.
But the source said that as creditors are not happy with the revised plan, Reliance has a good chance. However, Reliance still needs to do a full due diligence and only then can it take a call on whether to submit its own plan for reorganizing LyondellBasell.
The source also said that last week's meetings in the US were 'not very fruitful' as not much information was shared. 'The [LyodellBasell] management is keen on keeping control," he added.
Yesterday's crucial court hearing to determine whether LyondellBasell would have until 6 September 2010 to solicit votes for its reorganization plan has been adjourned to 12 January.
It means some more waiting for Reliance Industries which is said to be seeking greater clarity from the court before it decides on a final bid for LyondellBasell.
A LyondellBasell's spokesman said that the company wants the 6 September deadline to get maximum time to solicit votes.
By John Richardson
ExxonMobil's purchase of XTO Energy for US$41bn seems to support the widely-held view that natural gas is the fuel for the future.
XTO specialises in the technology necessary to exploit shale gas and other hard-to-get-at unconventional gas reserves, including the large amounts of shale gas in the US - one of the reasons why the States has gone from natural gas feast to famine.
ExxonMobil will establish a separate division to manage production of both oil and gas from unconventional reserves.
This suggests, perhaps, that the focus and incentives created by setting up such a division will lead to XTO Energy and other breakthrough technologies being employed throughout the world.
Europe has unconventional reserves, which perhaps if successfully exploited could provide an alternative - a long with liquefied natural gas (LNG) - to sometimes politically-fraught pipeline reserves.
Easy-to-get-at gas in the Gulf Cooperation Council region of the Middle East is also becoming increasingly scarce, leading to evaluation of exploiting shale and tight gas.
The energy of the future argument rests both on concerns over Peak Oil and gas's lower carbon footprint.
The International Energy Authority (IEA), in its World Energy Outlook 2009 report launched last month, described natural gas as a "bridging fuel" until even greener alternatives become viable.
Still too crowded...
Source of picture:www.tripadvisor.com
By John Richardson
Dear Readers - Welcome Back.
Having spent the last two weeks lying on Western Australian beaches, drinking beer and reading books on European history - while also building sand castles etc with my three-year-old son - I have given little thought to chemicals.
But here's to another year and another dollar - or quite possibly a lot less dollars if the forecasts of excess petrochemicals supply prove to be correct.
On the big-picture macroeconomic front these area few of the things we should also be worrying about:
*Global demand being too tied to government economic stimulus packages (Western governments will have to at some point ease back on stimulus to cut back on deficits in order to avoid credit downgrades leading to higher borrowing costs, or perhaps even defaults on debt; China has dollops more cash to spend on boosting the economy, but needs to worry about inflation)
*Consumer debt levels and unemployment in the developed world will remain high and so a big recovery in consumer spending seems very unlikely
*Restocking has come to an end across many industries including chemicals
The question is whether we will see a sustained V-shaped global recovery or a long period where global demand for everything, including chemicals, will remain much-below 2007 levels for many years to come.
My betting is firmly on the latter scenario.
Cash won't be as tight as early 2009, but some of the hype of H2 last year needs to be put into the context of all that restocking - plus the fact that numerous project delays have postponed the inevitable impact of a flood of new capacity. Even though more delays are likely, the amount of new volumes suggests a tough second half of 2010
The emerging markets story remains exciting, but demand growth in China, India and Indonesia (Indonesia being probably a much under-rated source of demand last year) won't be enough to return us to 2007.
Commodity chemicals companies that have made big-enough shifts to developing markets and/or to where the cheap feedstock is located should be OK - as long as tight inventory management, and therefore cash preservation, continues.
Stop complaining - it's actually colder inside!
Source of picture: www.gulfnews.com
By John Richardson
As northern China shivers from the coldest temperatures in decades, one Western ex-pat based in the country vented his spleen on cultural impediments which cause huge energy wastage - and prevent everyone from keeping a little bit warmer.
"My colleagues keep their coats on while at their desks so they can open windows to circulate fresh air.
"Our cleaners and security guards do exactly the same - they open windows in corridors no matter how many times you tell them not to.
"For a long time there's been a lot of talk about 'American Exceptionalism', the concept of how we view our way of life as distinct and unique and one that shouldn't be messed with or criticised.
"I think this increasingly applies to China and the attitude towards energy conservation is one small example."
Also at the heart of the problem is very low electricity costs compared with the developed world, the ex-pat continues.
And buildings are 6-10 times less well-insulated than those in America, he adds, creating a huge demand-growth opportunity for the polymers used in the insulation - including polystyrene (PS), polyurethane (PU) and phenolic resins.
But, sadly, the nature of building construction in China seems to be holding back progress: Typical apartments are mass-manufactured as concrete and solid-walled boxes with therefore no cavities in which insulation material can be inserted, he says.
The other extreme is in summer where, if you have the misfortune to be wearing a suit and tie working in an office in China, it can be akin to a visit to the sauna - again because of insufficient use of insulating materials and poor ventilation.
So if you visit northern China while this cold spell continues make sure you pack a thick coat, scarves and gloves etc - to wear in as well as outside the office.
By Malini Hariharan
The Wednesday post on this blog highlighted some of the unexpected turns that the Asian polyolefins market has been taking.
There have been more developments over the last two days that are likely to influence markets in the short term.
• ICIS news reports that Sabic will significantly cut its January and February polyethylene (PE) allocations to China and Southeast Asia due to some production problems. The company's buyers have confirmed this. One Chinese buyer said that his allocation has been cut by as much as 60-70%. PE prices had not reacted to this news today and were still weighed down by Thursday's sharp fall in lldPE futures on the Dalian Commodity Exchange, said traders.
• Ineos was forced to shut its 320,000 tonnes/year lldPE plant in the UK due to problems caused by cold weather. This could further tighten the European market.
• An explosion in a naphtha storage tank at Lanzhou Petrochemical killed five people. The company, a subsidiary of PetroChina, has shut down a 240,000 tonnes/year cracker and associated PE and PP plants at the site as a precautionary measure. Its other 460,000 tonnes/year cracker, in the same area but at another site, has not been affected.
Pic Source: Xinhuanet
• And petrochemical production at Texas in the US could be affected by unusually cold weather. Temperatures in the region have hit a 14-year low and are expected to remain at current level for the next three days. Companies have started taking precautionary measures but some traders fear the weather could trigger outages.
By Malini Hariharan
LyondellBasell's aggressive moves to convince creditors to approve its own reorganisation plan have drawn a reaction from Reliance Industries.
A source familiar with developments confirms that Reliance has raised its valuation of LyondellBasell to $13.5bn, up from $12bn and a letter has been sent to LyondellBasell.
But the Wall Street Journal reports that the LyondellBasell's board has rejected Reliance's latest offer as they deem it to be too low. LyondellBasell's own reorganisation plan has valued the enterprise at $15.5bn.
"Reliance has a valuation in mind and there is no point in quoting this on day one. The strategy is to start low and see what happens," says the source.
Reliance is also looking at participating in a $2.8bn equity issue that LyondellBasell has outlined as part of its reorganisation plan.
Does this then mean that Reliance would be willing to join hands with Access Industries and/or settle for a minority stake?
The source would only say that it is a fluid situation. " Reliance will be playing it by the ear," he says.
LyondellBasell has said that it has received substantial creditor support for its plan to reorganise the company and come out of US bankruptcy protection.
But the source stresses that unsecured creditors are not happy as they are getting virtually nothing.
By John Richardson
THE BIG gap in credit growth between China and the developed world has been thrown into further relief by recently released data - raising inflationary concerns in the world's most important economy, while emphasising how rich-world countries remain on government life-support systems.
Broad money supply growth was a huge 30% in China in the ten months to November 2009, according to The Economist.
This compares with a fall in money in supply in the Euro area over the past year with US money supply only increasing by 1.2% in the six months to November last year.
In Australia, lending to the business sector declined by 8.2% in November 2009 year-on-year, said the Reserve Bank of Australia (RBS).
A strong indication of the importance of government life-support is that thanks to low interest rates and Canberra's tax credits for first-time buyers, credit to the real-estate sector grew by 8.2% in November over the same month in 2008, the RBS added.
This supports the anecdotal stories I keep picking up of credit remaining very tight in the developed world, particularly for small -to medium-sized chemicals companies, end-users and traders. While banking systems might have been rescued from financial collapse, the surviving banks are too busy rebuilding capital to take the risk of increasing lending to businesses - and perhaps also because they fear another bust could be around the corner.
It also seems likely that even where banks are more relaxed about credit, rich-world companies in certain sectors - certainly including chemicals - are maintaining very tight cash-management policies because of this same fear of another bust.
"In this financial environment no-one is holding more than 2-3 weeks inventory cover," said an Australian plastics processor.
"Who could finance it and take the risk in (such) a volatile market?"
Some converters have, according to one Singapore-based polyolefins trader, been constantly caught out by new supply that hasn't arrived due to all the project delays -and now most recently production problems in Saudi Arabia.
This forced them to restock when low inventory levels became quickly depleted during several supply-side shocks in 2009 and into the first weeks of this year. This has made an awful lot of money for the traders.
The converters - and also many of their suppliers who also continue to exercise careful cash-management - appear to be aware of the risk of a sudden collapse in crude and other commodity prices.
The danger of a mini-repeat of H2 2008 lingers. Everyone down all the chemicals chains could again be left with big inventory losses if the bull-runs in crude, commodity and equity markets suddenly come to an end at a time when stocks are high.
But as Paul Hodges, chemicals consultant with International eChem has pointed out, rising crude and chemicals prices automatically increase potential losses - no matter how strict your inventory management.
Watch out for much more on all these themes (and a great deal more) throughout this week.
Sky-high living costs?
Source of picture: www.shanghaiist.com
By John Richardson
CHINA'S imports surged by 55.9 per cent last December, raising concerns among chemicals traders and producers that this points to increasing inflationary pressure and a possible interest-rate hike later this year.
The country's current official borrowing rate stands at 5.31%.
"The government has indicated in several official statements that it's concerned about inflation. If borrowing costs go up we would very likely see a dip in activity in sectors such as real estate that hugely buoyed chemicals and polymers demand in 2009," said a Singapore-based source with a leading global polyolefin producer.
"Pro-active" fiscal policies and "moderately loose" monetary policies would, however, be maintained in the near-term said China's president Hu Jintao at the weekend.
Real-estate construction is nevertheless up by more than 50% from a year ago, according to the same article from the Sydney Morning Herald which we quoted in our blog post earlier today.
Property prices have surged over the last 12 months, raising apparent government concerns over an asset bubble and affordability for average earners.
The same article, quoting the Beijing-based Institute of Population and Labour Market Economics at the Chinese Academy of Social Sciences, said that the labour markets were now once again tight after the big migrant-worker layoffs in 2008 and early 2009.
So is inflation really that much of a threat?
Expectations of inflation matter a lot as these drive consumer behaviour, leading to pre-buying of everything from oil and chemicals to food.
Prices of garlic and dried chili peppers have already been driven up in China by speculators anticipating price rises, said Alaistair Chan, Sydney-based associate economist for Moody's Economy.com, in this Los Angeles Times blog piece.
The price of food is vital for social stability in China. The wider threat of rising food prices across Asia - because of poor harvests and increasing energy costs - is a subject we will revisit in more detail in later posts on this blog.
The same LA Times blog posting - and again the article in the Herald - point out that The People's Bank of China began selling its three-month bills at a slightly higher interest rate last Thursday for the first time since August.
This was aimed at mopping up excess liquidity brought on by the $1.35 trillion in new loans issued between January and November last year - and could indicate less new loan-growth in 2010 as part of efforts to tackle inflation, the blog added.
"There is good reason to view the rise (in the sale price for the three-month bills) as a precursor to further tightening," said Ben Simpfendorfer, chief China economist for the Royal Bank of Scotland in the same posting.
Consumer price index inflation (CPI) reversed from a 2.0% drop year-on-year to a 0.5% increase during the first three quarters of last year, he added.
But Morgan Stanley argues in this article in Finance Asia that while the CPI and the production price index are likely to rise early in 2010, China's year's average inflation rate will only be 2.5%.
Inflationary pressure will not be as great as some market participants expect because the growth in money supply - which we referred to earlier today as proxy for credit and spending growth - is to some extent misleading, the bank added.
Strong M2 growth failed to take into account the change in M2 caused by the shift in asset allocation by households between cash and stocks, said Morgan Stanley.
As equities or so unstable, therefore, a rise in share prices won't necessarily mean a big jump in consumer spending.
The other reason given by Morgan Stanley for inflation remaining under control as current conditions stand - meaning a low risk of an interest rate hike later this year - is what it forecasts will be a weak export market in 2010.
In the same set of official government data that indicated the steep rise in December 2009 imports, a 17.7% rise in exports was reported for the same month.
This was the first time in 14 months that China's exports had increased, according to this piece from the Financial Times.
If a strong export recovery is sustained during the next few months, this might raise pressure on the Chinese government to return to its policy of gradual Yuan appreciation, said Andy Rothman, CLSA's chief China economist, in the same article. CLSA is a Hong Kong-headquartered investment and brokerage firm
He believes a sustained recovery would give China's government the political cover to raise the value of the Yuan against the dollar by 3% in 2010.
A real recovery in exports would be a return to the volumes China enjoyed in 2007 and the first half of 2008.
(A return to dollar values wouldn't be necessary as China's exporters have received boosts from tax rebates and the fall the value of the Yuan against currencies other than the dollar because its been re-pegged to the greenback)
I am with Morgan Stanley on this as I cannot see how China's exports can recover to pre-crisis levels in 2010 because of deep-seated problems with Western economies.
So the odds seem to be long on a rate rise.
But if loan growth is reduced this year, this will still have a negative effect on chemicals demand.
What's hard to gauge is the impact on chemicals of a widespread belief that Yuan appreciation will not take place this year - the result of exports failing to rebound sufficiently.
(The more that exports recover the greater the pressure from the West on China to raise the value of the Yuan. Higher interest rates - the result of the inflation we've been talking about - might also be accompanied by a stronger local currency)
As we've written about before, the prospect of a 2010 appreciation led to lots of strange speculative trading in chemicals in 2009.
This added to the optimistic mood, but didn't always necessarily represent real (whatever "real" means!) demand growth.
Yuan appreciation will have to resume at some point.
So those in for the long term would continue to maximise their local currency revenues, while those with a shorter horizon would cut back on their exposure.
By John Richardson
CHINA'S decision yesterday to increase the amount banks must set aside as reserves and two interbank interest rate rises in the space of a week are designed to tighten monetary conditions as worries grow over overheating and inflation.
Lending reached Yuan 600bn ($88bn) in the first week of this year, not far short of the full-month average last year.
The New Year fresh-loans surge was noted by a Singapore-based source with a North American polyolefin producer earlier this week, when he commented that recent price rises were partly the result of "an even greater ability by traders to speculate".
We pointed out last year that easy credit appeared to be enabling China's many thousands of traders and distributors to buy, hold and sell stock - distorting the true demand picture.
This could have been a significant factor behind the big increases in polyolefin imports, despite an overall demand picture that should have been weaker when you took into account the decline in re-exports.
The credit surge has made it easier to trade not only in chemicals and polymers but also in other commodities, real estate and equities during a period when maximising Yuan revenue has been the focus - ahead of a possible revaluation of the currency at some point this year.
"There's a lot of talk about hot money flowing in from overseas, but most of this is locally-held money being shifted from dollars into Yuan," said a Shanghai-based US expat.
"Because bank deposit rates are negative in real terms and financial markets are undeveloped, the only ways to make money are in real estate, equities and commodities."
And amazingly, we also discovered that the same trader can switch between chemicals, polymers, real estate and equities with such carefree abandon that the underlying motive for a purchase can be obscured.
Sometimes buying a chemicals cargo is all about getting the 90 days' credit to gamble and make money somewhere else, for example, in the stock market. If the resulting profits are big enough a trader can be quite happy to dump a chemicals cargo at a loss.
The easy credit might well have also encouraged overproduction of finished goods with reports that textile mills were told to keep operating via soft loans in order to keep people in jobs.
True, growth in retail sales seemed spectacular. But a Singapore-based oil and gas consultant told me this today: "What's going on? I still don't get. Despite the record-high auto sales in China last year gasoline and diesel demand only increased slightly and so are a lot of new vehicles that have been recorded as sales actually sitting in showrooms somewhere?"
This would be consistent with the analysis of one of the China sceptics, Michael Pettis - and also the China Economic Quarterly which tends to take a more positive view.
Both told this blog last September that retail sales were a bad proxy for real consumption growth because China's retail sales figures include government purchases and shipments to shopkeepers.
If the steps taken by the government to reduce credit are successful, chemicals demand will therefore go down as speculation abates and surplus industrial production is reduced.
But these measures might not be enough to take the air out of frighteningly big asset bubbles.
"The average real-estate price in Beijing is Yuan 20,000/sq metre. That is a 30% increase in one year," said a Beijing-based chemicals consultant.
"But if you look at salaries, a fresh graduate gets Rmb2000-3000/month. This is causing a social problem.
"Shenzhen (in southern China) has seen a 90% increase house prices."
And the Shanghai- based US expat added: "It doesn't feel right - it still feels like a bubble economy.
"I have an apartment on the outer ring road of Beijing which is 130 square metres and is right on the flight path from the airport and yet it's more expensive than downtown loft apartments in many US cities.
"With property so expensive here average salaries are still only a quarter of US levels in major wealthy cities such as Shanghai, and even less elsewhere as you move further inland.
"A lot is made of the fact that the average price of an auto is only $17,000 here compared with $30,000 in the US, but direct comparisons are not valued because very cheap local cars - some of which might come with brakes as optional extras - drag the average price down. Foreign-branded autos in China cost 50% more than in the US.
"Gasoline prices are now only $3.71 a gallon as against $2.54 a gallon because of fuel-price liberalisation and there are other signs of inflation. This place is getting expensive."
The danger is that if further measures are taken to deflate the economy, the end-result could be the same as in December 2007 - a housing slump with an overall severe economic decline.
Such is the delicate state of the world's recovery with the rest of Asia increasingly dependent on trade with China ("the second decoupling"), that decisions taken in Beijing over the next few months are going to be of huge importance.
Or, perhaps, the momentum generated by policy steps already taken means that bubbles will keep on inflating and inflating - making the disaster, when it comes, of even greater magnitude
As famous investor James Chanos, who is shorting China, is quoted as saying: "This could be "Dubai 1,000 times over".
By Malini Hariharan
Reliance's bid to acquire LyondellBasell has taken an interesting turn after yesterday's court ruling.
The US bankruptcy court has allowed Lyondell Chemical, the US arm of LyondellBasell, time until 15 April to file a reorganisation plan. During that time, no other competing reorganisation plans can be filed with the court.
"... With so much going on, I'm not of a mind to open up exclusivity to anybody other than the debtors," the judge Robert Gerber is reported to have said at the hearing. He was referring to the complexity and antagonistic nature of the case.
The court also rejected a request by unsecured creditors to expand the scope of an examiner to review how Lyondell was evaluating Reliance's offer.
Gerber said it would be inappropriate for him to look to an examiner to do his job.
"While I may growl and grimace with the (number) of those issues, I will do my job."
A source familiar with developments says the ruling was not a setback and that Reliance will have to re-evaluate its strategy.
"The unsecured creditors' bid [to include the Reliance offer] has been rejected. That route is closed.
"Reliance can still make a binding bid to the LyondellBasell management and then they can take it to court; it can also increase its offer. Reliance will have to evaluate [options]," says the source.
Reliance is clearly keen on pushing ahead.
By Malini Hariharan
After overcoming legal objections, Braskem took the final step late last week to announce the merger of the petrochemical operations of Petrobras, Odebrecht and Quattor, to create not only Brazil's largest petrochemical company but also America's largest polymer producer.
The plan now is to develop the company to become one of the world's five largest producers, said Bernardo Gradin, Braskem's ceo at a press meeting. "The future is soon," he said.
Braskem is in talks with U.S. companies, Gradin said but declined to give more information.
"Since last year, we've wanted to acquire a company in the U.S.," Gradin said. "We've had talks, but for now we have nothing to announce. With the financial crisis, a lot of interesting opportunities appeared, but the improvement in the markets has reduced this."
The company may seek assets from Dow Chemical, Sunoco or Ineos Group Holdings, says this report.
Braskem has also charted out "aggressive growth plans" in Mexico and Venezuela.
Completion of the deal, which effectively nationalises Brazil's petrochemicals industry, gives Braskem a capacity of 3.04m tonnes/year of polyethylene (PE), 1.97m tonnes/year of polypropylene (PP) and 510,000 tonnes/year of polyvinyl chloride (PVC). With a total capacity of 5.51m tonnes/year, the merged company would he ahead of ExxonMobil (5.31m tonnes/year) and Dow Chemical (4.83m tonnes/year).
The deal is unlikely to face regulatory hurdles despite the new company's domination of the local market. The Brazilian government reportedly considers the petrochemical market as a global one and the deal gives Braskem only a 3% share of the global market.
By John Richardson
IT is always useful to make a note of both what economists are saying and where they are coming from.
To give you an example, I was at a conference last year when I heard a ridiculously rosy outlook for both emerging and developed economies, delivered by an economist working for a certain bank.
This bullishness remains in stark contrast with a refinery industry grappling with overcapacity in the US, for example, resulting in the need to close operations down.
The same will eventually have to happen in petrochemicals in higher-cost countries such as Japan and South Korea when big volumes of much-delayed polyolefin capacity finally hits the market, according to Mazlan Razak, Kuala Lumpur-based petrochemicals consultant with DeWitt & Co.
True, returns from petrochemicals - a very real industry that makes stuff that is tangible and worthwhile (quite often a perquisite in recent times for actually losing money) - were much better in 2009 than anyone had expected.
How good margins exactly were on a genuinely-valid comparative basis (with 2007 during the economic boom) is something we will look at on this blog a little later.
What we can say for certain right now, though, is that volumes on a global basis were way down as Western companies kept overall operating rates at very low levels. I suspect that those who made the best returns were the chemicals traders who guessed the right way during an unexpectedly strong rebound.
Back to my original point, the banks and other financial institutions have a vested interest in talking up this recovery, potentially creating false and harmful optimism among chemicals and other manufacturing companies.
The weight of evidence remains overwhelming to support the view that in the developed world, recovery is anaemic and far from complete.
China is another story which we have dealt with many times before on this blog. It emerged more clearly last week that inflation followed by interest-rate rises are big threats to China maintaining the sort of growth we saw in 2009.
Back the developed world and a new report from the McKinsey Global Institute (see chart below) - Debt and De-leveraging: The Global Credit Bubble and its Economic Consequences.
Most rich countries have seen huge increases in their ratios of debt to GDP (gross domestic product) over the last ten year, according to a summary of the report in The Economist.
Britain and France are the most extreme with increases in their ratios by more than 150 percentage points each, to 465% and 365% respectively.
Financial sector debt increased hugely, in line with the big rise in household debt (it was all the exotic financial instruments which caused the economic crisis that enabled household debt to increase so sharply).
In America middle-income families built up most of the debt whereas in Spain it was poorer families, an example of a lack of uniformity in how household debt was built up across the developed world.
Deleveraging has barely started.
The composition of debt has shifted, however, from the private sector to governments with the financial sector cutting back the most.
Half of the ten rich countries in the survey have one or more sectors that are "highly" vulnerable to debt reduction.
These include households in America, Britain and Spain and to a lesser degree, Canada and South Korea - as well as commercial property in America, Britain and Spain.
The survey looked at 32 examples of sustained deleveraging in the past where the debt/GDP ratios have fallen by at least 10% after financial crises.
Typically, deleveraging began two years after the beginning of a financial crisis and lasted six-to-seven years.
In almost every case, output shrank for the first two or three years of the process.
McKinsey identified reasons why this current period of deleveraging could be more protracted than in the past, which include:
*The scale of indebtedness is higher. The highest previous ratio was Britain at 286% after the Second World War, but on this occasion more than half the countries in the McKinsey survey have debt totalling more than 300% of GDP
*The number of countries afflicted simultaneously is a lot greater, meaning that rapid expansions of output through exports is not easy on this occasion (plus, the export competition from China has increased enormously since the 1980s and 1990s recessions)
*Big increases in public debt, while cushioning the declines in demand in the short term, increase the overall debt reduction that will eventually have to take place. Once private sector deleveraging is done then the public-sector wind-down will have to begin
A further problem is that investors might worry about public-sector debt levels before the private sector deleveraging has been completed, pushing up bond yields - for example, the recent concerns over Greece.
The result could be a cut back in public debt before the private sector has completed its own reduction, damaging growth by far more than if an orderly wind-down takes place.
By John Richardson
CHINA'S capacity expansions in industries including steel, aluminium and petrochemicals continue to astound.
Take polyvinyl chloride (PVC) for example., where, according to a new report by ChemSystems, "capacity (in China) has expanded from 5m tonne/year in 2003 to over 15m tonne/year in 2009, almost 90 percent of total global capacity expansion over the period.
"Despite legitimate environmental concerns, relating both to massive carbon emissions and mercury pollution, the development of acetylene-based capacity in China shows no sign of slowing.
"The government's effort to restrict the construction and expansion of less efficient, environmentally hazardous plants has had little impact on the overall pace of development, although has perhaps prevented some sub-scale projects from moving ahead."
This makes one wonder whether the huge increase in bank lending in 2009 and the first few weeks of this year has further added to the capacity-building momentum.
As China's coal/acetylene feedstock advantage is mainly located in under-developed Western China, it hardly requires an enormous leap of imagination to figure out that local authorities will have cashed-in on the opportunity while they had the chance.
Regional PVC Capacity Additions
.
Source of graph: ChemSystems
The consequences of big feedstock and capital-cost advantages will be felt very keenly in Japan, South Korea and Taiwan. If these projects in China couldn't repay their loans would anyone have the ability or desire to attempt foreclosures?
Japan, South Korea and Taiwan have a collective PVC surplus of 2.4m tonne/year which used to be shipped to China, said ChemSystems.
The search for other overseas markets - where greater distance is likely to create freight-cost and delivery-time disadvantages - could be made extra difficult by ongoing North American capacity expansions.
New projects in North America will be targeted for exported as, of course, the region's construction industry is in major crisis, the consultancy added.
Shintech, part of Japan's Shin-etsu Group, Westlake Chemical and Georgia Gulf were all scheduled to have expanded capacity by this year, according to ICIS news.
Taiwan's Formosa Plastics Corp is due to bring on-stream an 180,000 tonne/year capacity increase in Point Comfort Texas in Q1 2010, says the ICIS Plants & Projects database.
US PVC exports were 202,438 tonnes in November, more than double the 91,859 tonnes a year earlier, ICIS news reported yesterday - quoting the United States International Trade Commission (ITC).
For the first 11 months of 2009, US PVC exports were up 54% from the year-earlier period at 1.914m tonnes, the ITC added.
There are yet more problems for Japan, South Korea and Taiwan: Natural gas prices which remain very low relative to naphtha could give ethane-based US ethylene-to-PVC producers an export edge, along with further weakness in the US dollar.
"Any Old Iron?"
Source of picture: http://www.investorfsbo.com/refinery.html
By John Richardson
A LONG-TERM shift in refinery economics is posing a major threat to petrochemical margins - along with the delayed supply crisis that's likely to hit the industry at some point over the next year.
"Refiners, when the global economy was booming and particularly after the Hurricane Katrina gasoline supply shock, were pushing out naphtha to achieve balance across the barrel," said Paul Hodges, chemicals consultant with the UK-based International eChem.
"But now you have worldwide oversupply in refining with US gasoline demand peaking in 2007.
"You have ethanol as a percentage of total fuel consumption in the States already having doubled from 5% to around 10% and likely to go to 15%.
"The new auto fuel-efficiency regulations, announced last year, require big improvements in vehicle efficiency - another drag on demand."
And then there is the US economy, which, as we've said before on this blog, faces deep-seated long-term problems, including a far-from-complete deleveraging process.
US refineries ran at 78.4% of capacity in the week ended 22 January, steady with the prior week but down from 82.5% a year earlier, according to data from the Energy Information Administration (EIA), which was reported by ICIS news yesterday.
In the US, naphtha supply is unlikely to be the main issue for petrochemical producers as the big natural gas advantage over naphtha has led to a heavy switch to gas cracking. Instead, it's the availability of propylene from Fluid Catalytic Crackers (FCC) that's the big issue
Proof of this pudding came yesterday when US propylene producers nominated increases of up to 14% for February contracts on lack of availability from refineries, according to the same report already linked to above from ICIS news.
"In Asia, where gasoline demand growth is stronger, refiners outside China are being squeezed by the Chinese who have added so much capacity that they have swung into a gasoline export position," continued Hodges - a fellow blogger.
N Ravivenkatesh, Singapore-based consultant with Purvin & Gertz, agrees.
Low refinery operating rates on poor gasoline and middle distillate markets - along with high Asian cracker operating rates - were likely to increase the East of Suez naphtha deficit in March and April, he recently predicted.
"A couple of recent, seemingly incongruous, headlines caught our eye," wrote the authors of the daily energy and shipping report, The Schork Report, yesterday.
They were referring to the Bloomberg story on January 24 - headlined "Morgan Stanley Expects Oil to Rise to $95 (in 2010) on Demand" and one the next day on the same wire service, which was titled: "Refining Profit Stays Weak on Overcapacity, Ernst & Young says".
"Ninety-five dollars on 'strong demand'....huh? Did anyone on Wall Street see Valero's earnings yesterday," continued yesterday's Schork Report.
But as we pointed earlier this week, you have to be aware of why someone might be making bullish growth forecasts.
"Ernst & Young is telling us about overcapacity in the refining sector. We suppose that is why 446mbbl/d of European and North American refining capacity was closed permanently in the fourth quarter (2009) and why another 663m bbl/d was shut down indefinitely and 560m bb/d partially shut down," the report added.
This amounted to lost oil demand of 1.7m bbl/d by the end of last year, the Schork Report calculates.
But this doesn't mean it's ruling out the possibility of $95/bbl by the end of this year.
If the financial speculators continue to spin their "sustained global economy recovery" story successfully while credit remains cheap and plentiful on continued strong worldwide government stimulus and China doesn't come off the rails, conceivably, yes. Why not?
But this would mean more pressure on refiners margins because even crude around $70/bbl is too expensive given the current economic fundamentals, never mind $95/bbl.
Petrochemicals would be squeezed from both ends of the product chain as refiners cut back even further, thereby reducing feedstock availability - with the firmer crude setting a higher floor for raw material costs.
Producers could also soon face, as we've already said, the long-awaited petrochemicals supply surge and damage to economic growth caused by the higher crude.
I am often accused of being overly pessimistic, but I really do believe petrochemical and chemical companies in general need to plan for a very difficult few years. It would be in everyone's best interests to plan prudently.
We should have originally written 'integrated low-density polyethylene (LDPE) in paragraphsix, but instead wrote linear-low density PE (LLDPE). It's now been corrected and apologies for the error - we will be buying some better glasses (less of this "we" - it's actually "me"!)
By John Richardson
The rise in ethylene prices to what ICIS pricing says is a 17-month-high has created the widest spread between naphtha and ethylene since 2007.
As of last Friday (29 January), the spread was $620/tonne, based on ethylene at $1,310/tonne FOB Korea -and naphtha at $690/tonne CFR Japan. This compares with a spread of $627/tonne on 17 August 2007 and a tremendous $667/tonne on 5 January of the same year.
In 2007, the world was vastly different as it was in the midst of the highest economic growth in a generation.
Interestingly, despite the inevitable complaints of squeezed margins by PE producers - and anecdotal reports of market-driven rate cuts and plant-idling - the latest weekly ICIS pricing margin reports tell a more nuanced story.
"Naphtha-based ethylene margins in Northeast Asia rose by $37/tonne due to weaker naphtha prices," said The Ethylene Asia Margin report for 29 January.
Naphtha costs had fallen by 4.8%, offsetting a 4.6% dip in co-product values, the report continued.
Integrated low density PE (LDPE) and high-density PE (HDPE) margins also increased - by $30/tonne and $39/tonne respectively - said The Weekly Margin - PE Asia report.
And so the incentive for integrated producers to increase ethylene sales at the expense of PE didn't seem to be that strong as of last week, despite reports to the contrary.
On a non-integrated basis, however, standalone LDPE margins fell to their lowest level since July 2008, the report continued.
Average January HDPE margins were the worst since way back in September 2004, it added.
I would strongly suspect that converters, who, like the standalone PE producers, lack market muscle because of their scale, are also being squeezed; the few who I have spoken to since the start of the year certainly claim this.
Ethylene-PE margins have been strong because of temporary supply issues.
"Some ethylene traders have a sense that C2 prices will decline from March because of increased supply," said an industry source today.
"For example, a large amount of ethylene is expected to hit the market when the 800,000 tonne/year Shell cracker in Singapore starts up."
Shell is expected to have 180,000-200,000 tonne/year of ethylene to export when its cracker is commissioned in Q1.
The remaining surplus from its cracker (it's only associated plant is the 750,000 tonne/year Shell monoethylene glycol plant which came on-stream late last year) will be sold to other producers on Jurong Island, say market sources. How this will affect the market's net balance is uncertain.
"Another factor to consider is that Shell has actually been buying ethylene in order to run its MEG plant. So you have a buyer who helped tighten the market becoming a significant seller of ethylene," the source continued.
A further reason for the ethylene rally has apparently been tight supply from Iran as a result of unconfirmed cracker outages.
Polyolefin supply has also been immensely tight since December on a host of production problems.
Recent supply issues seem likely to be resolved over the next few months with a great deal of new capacity yet to come on-stream.
By Malini Hariharan
Less then a week after the blog had highlighted Braskem's plans for global growth through acquisitions the company has announced that it will buy the polypropylene (PP) assets of US-based Sunoco.
The $350m deal, still subject to regulatory approvals, gives Braskem 950,000 tonnes/year of US capacity and makes it the third largest PP producer globally, ahead of Asian heavyweights such as Reliance Industries Formosa and PetroChina. Reliance is of course looking to become the largest PP producer by acquiring LyondellBasell.
Returning to Braskem, its chief financial officer Carlos Fadigas said that the acqusition makes the company the eighth largest resins producer globally and the aim is to be among the top five producers by 2010.
He also highlighted that the Sunoco deal was aimed at opening doors for other acquisitions in the U.S. Analysts expect Braskem to be looking at more PP and also PE assets in the US.
And analysts see Braskem using US plants to tap Asian markets.
In an ICIS news report Walter de Vitto, oil and gas analyst for Tendencias Consultoriaa said: "Braskem's strategy is to use Brazil as its base and produce resins in the US at lower costs compared with Brazil, which would make its products more competitive in the international market and could open other doors in Asia."
"By entering the US market, Braskem would have cheaper natural gas as feedstock, which would make access to Asian markets more feasible," de Vitto said.
Braskem did point out yesterday that the Sunoco buy makes it one of the most competitive PP producers in the US as two of Sunoco's plants are located outside the US Gulf giving it access to refinery propylene at a discount.
The feedstock advantage stems from reduced logistics costs, said Fadigas, adding that 60% of US refineries are located outside the US Gulf area.
Sunoco has 70% of its feedstocks on contract and relies on the spot market for the remaining 30%, reports ICIS news.
"Hello everybody - welcome to the island of Sodor. Time to flip your positions'
Source of picture: www.dragoart.com
By John Richardson
MY three-year-old son has, quite rightly, an incredibly short attention span. A child of that age should be overwhelmed with the excitement of lots of wonderful experiences and possibilities.
But I would argue that some of those who write about and analyse financial and commodity markets should be able to retain a consistent thread of thought for slightly longer than it takes my son to switch from wanting to play Thomas The Tank Engine train tracks to screaming, stamping his foot and demanding a splash-around in the swimming pool.
There's a lot more money riding on effectively playing the deception game these days, though - for example, $20bn was invested in the oil futures markets in the first half of last year compared with $8bn in H1 2008, according to a commodities consultant.
So the motive to talk up good news or amplify bad news from one day to the next is incredibly strong, thanks to a ludicrous waste of government money that should have gone into creating real jobs in real and worthwhile industries.
To give you an example, the world was all doom and gloom late last week on tightening credit in China, poor economic news out of the US and the wider implications of Greece's government-debt crisis. Commodities prices across-the-board had been softening for several weeks.
And then on Tuesday of this week, whoosh - we had been saved by bullish global manufacturing data and manufacturers' sentiment indices.
Oil prices, as a result, had bounced back by earlier today to $76-77/bbl from around $73/bbl late last week.
Benzene bids for March loading were at $965/tonne FOB Korea and offers for April material at $980/tonne FOB Korea at noon today, according to ICIS news.
Benzene had been assessed at $910-935/tonne FOB Korea by ICIS pricing on 29 January, $115/tonne lower than the week before.
This is not a criticism, by the way, of my colleagues at ICIS pricing as their job - and it's a very difficult one - is to reflect the day-to-day shifts in sentiment in highly liquid markets such as benzene.
Short-term benzene price direction is increasingly being driven by erratic intra-day movements in crude - reflecting the huge capacity to gamble in oil futures. Every scrap of contradictory macroeconomic news and trade data is being seized upon to make a fast buck.
Perspective is what's needed and a big, deep proverbial breath, provided by journalists such as those who write the excellent Lex column in the Financial Times.
In Tuesday's column - on the release of all that bullish trade data etc - Lex wrote: "Surveys can be disconnected from reality. In the US, for example, the Institute of Supply Manager's survey (the latest figures from which were very strong) excludes small companies and therefore half the workforce."
If only all the front-page headlines on that same day had read something like "Surveys Can Be Disconnected From Reality".
One can but dream....
By Malini Hariharan
I have been reading a transcript of Dow Chemical's Q4 2009 earnings call and here are some interesting comments made by Andrew Liveris, the company's ceo.
Despite recording revenue and volume growth in 2009 Liveris was cautious on the outlook for 2010 citing an uncertain economic environment.
But constraints in Middle East supplies could lead to an early recovery.
"Even though there will be capacity adds, it won't come on when people think it will come on. We are one of the best operators out there and we had a slow start up of our Kuwait assets and we are very good at this. So I would tell you, you have not as much supply coming on as people think."
On the demand side, if global GDP expands at around 3% this year it would result in polyethylene (PE) demand growth of 4.5%. As global inventories are low across the chain restocking would push growth above this level, he said
Add to this 6-9m tonnes of high cost liquids cracking capacity rationalisation, 3m of which is already permanently down, gas not as freely available in the Middle East as people think and ethane cost advantage in the US which is now the second lowest cost producer on ethane.
Pic source: ICIS
"So when you put all that together, I think there is a case for a trough-like environment in 2010 with the excess capacity, a recovery in 2011 and a peak environment in the 2013 timeframe," he said.
He pointed out that Dow had effectively capitalised on its flexi-feed crackers and 20% of its US production in Q4 2009 was exported to China.
On implementing the asset-light strategy for basic chemicals, Liveris stressed that he was "not in a hurry to get it done at the wrong valuation" especially as the business generated an EBITDA of 1.7 last year.
"That is in a trough, demand led trough and great recession of all time. So we know we have a very high performing asset. The partners we are talking to are all strategic. There is three of them," he said.
And Dow was keen to implement the asset-light strategy for its chlorine business after completing ethylene-PE and styrenics.
"Today a good chunk of our chlorine capacity in Louisiana and Texas will feed our downstream chlorine envelope for performance businesses and be advantaged because it is integrated. You can expect us though to continue to find meaningful partnerships with people who want to be in PVC. So in essence, we will use our competitive advantage to partner with others because you have to have scale in the chlorine side. That should help us create an asset-light strategy for chlorine. We are determined to do that."
ICIS news also reports that Dow still plans to start up the first units at its Ras Tanura joint venture with Saudi Aramco in 2014 or 2015.
Prices have fallen for Middle Eastern engineering, procurement and construction (EPC) contracts and this has given a reason for Dow to delay releasing contracts.
But Liveris said Ras Tanura was moving ahead 'nicely on its milestones" and Dow would have more to say on the project by the middle of the year.
A Ring of Truth?
Source of picture: http://web.pdx.edu/~nathanh/benzene/benzene2.gif
By John Richardson
TUMBLING Asian benzene prices are being blamed on weaker crude, itself a reflection of macro-economic worries over higher-than-expected US jobless figures, government debt problems in the Euro zone and tighter credit in China.
"It's not a question of whether, but when the secon dip in this duuble-dip recession occurs. We are going through a transition period of lower global growth but the financial markets don't reflect this," said a lawyer friend of mine this morning.
"So you have crude overvalued thanks to all the free government money being used for speculation, along with other unrealistic pricing of other commodities and equities."
Hear, hear.
But as we said on Wednesday, financial-market players have big incentives to feed gullible journalists with constantly shifting economic outlooks.
The muddle in newspaper headlines is quite extraordinary at the moment as only on Tuesday of this week, crude rallied on strong manufacturing data and rising manufacturers' sentiment indices.
So benzene could be back up again by Monday lunchtime.
But while the benzene traders are blaming the collapse of C6s on crude, overproduction on over-confidence in downstream chemicals demand that might not be there post-Chinese New Year has to also be a factor.
This suggest that there is a lot more to do this can merely volatile crude.
The fantastic spreads between naphtha and benzene of late must have also been a factor in higher operating rates.(click on link below with data from ICIS pricing ). Spreads were boosted in late December and early January on naphtha-delivery issues and benzene plant operating problems which tightened supply.
A separate point is that the benzene traders might have been playing their usual games - a further reason for the price declines.
"One particular trader recently sold large quantities of benzene in order to drive down the price of paraxylene (PX), as it needed to cover short positions on PX," alleged a source earlier this week.
A benzene cargo can change hands as much as six times before it's even loaded, and so it's devilishly difficult to separate the underlying fundamentals from the speculative claims.
But this gets away from the main point: The recent declines in benzene might just be an indication of the begining of the double-dip in this recession.
Mind you, I have said this many times before over the last 12 months
By John Richardson
The start of the next dip in what this blog has long thought would be a double-dip economic crisis looks as if it could have begun.
If not now, it's going to happen at some point because of major global imbalances.
What's worrying right now is the combination of:
*Potentially weaker demand from Chinas as credit is tightened due to inflation concerns
*Government debt crises in Europe
*More negative than positive news on employment from the US
Further evidence of China's inflation challenge has emerged with the announcement that Jiangsu province, in eastern China, is to raise its minimum wage by at least 12% . Other major exporting and manufacturing provinces are expected to follow.
Concerns over Greece's ability to fund its budget deficit - along with other Euro zone countries such as Spain and Portugal - has been the main reason for the sharp fall in global equity and commodity markets over the last two weeks, according to the Financial Times.
Darius Kowalcyk, chief investment strategist at SJC Markets in Hong Kong, was quoted in the FT as saying that contagion thinking was behind the sell-off as concerns grew over a new global downturn.
"Asia continues to be so dependent on exports to the developed world, that if these developed market governments cannot fund their stimulus spending, then they will not grow and Asian exports will suffer," he added.
The across-the-broad collapse in markets is being partly blamed on exchange-traded funds - for example, the US dollar/crude funds. These operate via highly complex super-fast computer programmes that can move hundreds of millions of dollars within a fraction of a second.
The greenback has rallied as a shelter in the new economic storm, forcing crude down - revealing the lie that the rebound in oil was mainly due to stronger macroeconomic fundamentals.
Last year was a story of huge global economic stimulus with little or no focus on when this spending would have to be reduced.
"It seems the market (now) wants to accelerate an issue (winding down this spending) that the authorities were hoping that time would heal," Jim Reid, strategist at Deutsche Bank was quoted as saying in the FT.
A McKinsey report on Western debt - released last month - warned that investors might worry about public debt before private sector deleveraging had been completed.
The result could be a cut back in public debt before the private sector had completed its own reduction, damaging growth by far more than if an orderly wind-down took place, the report added.
Even with an orderly wind-down it could take a further six-to-seven years for the West to bring debt down to sustainable levels, said the study.
Worries over public debt in the Euro zone has caused a sharp fall in the shares of European banks with big exposure to weaker economies such as Greece, Spain, Portugal - and also Ireland and the UK (see table below from the European Commission, via The Economist, of the world's biggest national debtors measured as percentage of GDP).
The full article in The Economist where this table was drawn from is well worth a read.
Logically, therefore these European banks might have to tighten lending - stifling finance to companies, particularly the medium and small-sized.
As for US unemployment, the overall jobless rate had fallen to 9.7% from 10% in January, with the retail and manufacturing sectors gaining 42,000 and 11,000 new jobs respectively.
But 8.4m jobs have been lost since the crisis began, 1m higher than previously estimated.
And most disturbingly of all, long-term unemployment - those without a job for 27 weeks - jumped to 6.3m from 2.7m a year earlier in January!!!
We'll be looking at the effect that these macro issues will have on chemicals over the next week or so.
By John Richardson
MORE evidence that China will not remain as easy a sink for surplus polyolefin volumes - especially in the case of the higher-cost importers - is emerging.
"There are plans to open a bonded warehouse in Guangdong province to sell RMB material converted into US dollar product," a Singapore-based polyolefin trader told me yesterday.
Those who want to buy polyolefins for re-export as finished goods always prefer to buy overseas material priced in US dollars, as this is exempt from the full 17.5% rate of value-added tax (VAT).
The importers deliver this stuff into bonded warehouses ahead of collection for processing and re-export.
"If the manufacturers involved in the re-export trade were to buy RMB material they would only be exempt from 13 percentage points of the VAT," the trader added.
"As a result, it's always more expensive to buy local material for this purpose."
But if there are now plans to deliver Sinopec and PetroChina-sourced product into a bonded warehouse, the competitive landscape might have started to shift.
"How it works is once you have converted RMB-priced product into resin priced in US dollars, which has to involve the use of a bonded warehouse, it becomes exempt from the full rate of VAT - the same as the imports," continued the trader.
"The only drawback is that you cannot then re-price the polymer back into RMB."
China is rapidly increasing its polyolefin capacity, therefore making the option to supply into this re-export market more viable as it is no longer as dependent on overseas suppliers.
The country's polyethylene (PE) capacity is due to increase by 1.99m tonne/year in 2010 to 11.1m tonne/year, while its ability to produce polypropylene (PP) is to set to rise by 2.74m tonne/year to 12.7m tonne/year, according to Shanghai-based commodity information service, CBI.
It's easy to imagine much more local volume being delivered into bonded warehouses as China's capability to produce polyolefins continues to improve.
China's producers are able to minimise costs in ways not open to some of the higher-cost importers, such as those in South Korea and Japan who operate sub-world-scale naphtha-based cracker and derivative complexes.
Some exporters from Europe would also be vulnerable, while the US ethane gas advantage might be able to buy a number of its PE players a little more time.
The commodity-grade end of the business could end up even more firmly in the hands of the local Chinese producers and the Middle East players.
By Malini Hariharan
India will soon initiate an anti-dumping investigation into polypropylene (PP) imports from South Korea, Taiwan and the US. This follows an application made by Indian PP producers last year.
A couple of market sources have forwarded the letter that has been issued to the embassies of the three countries and a government notification will be issued soon.
PP imports during July 2008-June 2009 will be investigated.
Meanwhile, the Indian government has yet to present its final findings on an anti-dumping case that was launched last year on PP imports from Saudi Arabia, Singapore and Oman.
Provisional duties for six months were announced in July last year.
"Technically there should be no provisional duties; but the final findings are likely to be presented only in mid-March," said a trader.
He also highlighted that importers were facing problems in clearing material sourced from producers hit by provisional anti-dumping duties.
"The customs department is not releasing material and asking for a bond," he said.
A second market source said a notification on extension of provisional duties by two months was likely to be released soon.
A post-Chinese New Year dream....
Source of picture: http://www.scsa.net.au/
By John Richardson
The large amount of polyolefins delivered to China over the past few months is causing further head-scratching and anxiety among producers and traders.
One view, well rehearsed previously on this blog, is that this is further evidence of a speculative bubble that will pop as a result of tighter bank lending in China.
There might be even more pressure on this "bubble" following China's 12 February decision to raise bank-reserve requirements for the second time in a month.
However, some economists argue that was only to be expected, and is a regular tightening exercise that takes place post Chinese New Year (CNY) to even-out lending. There is traditionally a surge in lending ahead of the CNY.
The big anti-inflationary step, which has yet to happen, would be to raise deposit and/or lending rates, they argue.
Returning to polyolefin markets, the optimistic view is that widely reported high inventory levels will be quickly absorbed when CNY comes to an end (the official holidays in China run from 14-19 February).
High stocks are being reported both in bonded warehouses (for imported US dollar-priced material) and in other warehouses (for locally, yuan-priced product).
"Around 1.3m-1.4m tonnes of polyolefins were delivered to China in December and a further 1.3m-1.4m tonnes in January, according to our analysis," said a Singapore-based trader, who is among the optimists.
"Although China's imports of many products are generally high in December, prior to a slowdown for the [Lunar New Year holidays] in January/February, the volumes this December were exceptionally high," said Jean Sudol, president of US-based trade-data analysis service, International Trader Publications.
This suggests that there might be inventory pressures in China in more than just polyolefins, given that January is always a quiet time for demand across the board.
So what drove reports of in the context of what is already going to be a stellar year for shipments to China?
"In early November, linear low density polyethylene (LLDPE) prices for physical cargoes were below those on [the] Dalian for the settlement month of May 2010 and beyond," said the trader.
(China's Dalian Commodity Exchange offers monthly futures contracts in LLDPE film up to a year ahead. The contracts have become an important indicator of sentiment and therefore physical price direction).
"The stronger futures pricing in early November reflected crude increasing to around $82/bbl and forecasts from banks that it would reach $95-100/tonne in 2010," he added.
"It was also down to confidence that Chinese growth would remain very robust in 2010.
"[The] Dalian is used as a proxy for the direction of all physical polyolefin pricing, and so we saw a lot of interest from traders in acquiring all grades of PE and polypropylene (PP) to ship to China, after this early November turning point."
Low density PE (LDPE) was also buoyed by very tight supply due to outages, he said.
This analysis of what drove increased imports and prices in November-January was supported by a source with a major global polyolefin producer.
"It's easy to assume high inventories in China indicate a bubble, but I am not that sure," said the source.
"On the growth side, yes, measures have already been taken to cool the property sector. There might also be a little less easy money available to fund speculation and discretionary spending on consumer goods.
"But I think this will be replaced by further strong consumption growth in less-developed regions, and huge government infrastructure spending throughout China.
"Infrastructure projects launched last year have yet to be completed with more spending on roads, railways etc still to come."
The Singapore-based trader and the source with the producer both point to the absence of panic among the Chinese traders and distributors holding high stocks.
"Nobody is in a rush to liquidate. The reason is that despite the credit tightening, possible US restrictions on proprietary trading by banks and more anxiety over European government debt problems, polyolefin pricing has only edged down since late January," said the trader.
Prices for several grades of PE in Asia fell by $10-50/tonne for the week ending 5 February, according to ICIS pricing. PP remained either stable or increased by $20-30/tonne, depending on the grade.
Both PE and PP pricing were reported to be stable for the week ending 12 February as the Asian market was closed for the Lunar New Year holidays.
One might well ask what on earth the connection is between a possible US clampdown on investment banks, sovereign debt issues in southern Europe and polyolefin pricing.
"The link is that on a day-to-day basis at least, sentiment in wider commodity and equity markets is playing an increasing role in what people are prepared to pay for polyolefins," said the producer.
Low producer inventories outside China are a big factor behind why pricing has only eased slightly since the gloomy macroeconomic news broke, said the trader.
"Producers have managed their stocks so well that they can afford not to budge on what is pretty much theoretical pricing at the moment, as the market is so quiet ahead of the [Lunar New Year]."
Concurring with the producer's view on continued strong economic growth in China during 2010, the trader added: "As early as the first week of March, we should begin to see the strength of demand after the New Year.
"I think we will see these high polyolefin inventories easily absorbed as Chinese buying picks up ahead of the peak season for manufacturing finished goods, which occurs during the summer months."
Let's hope for everyone's sake that he proves to be right, as further strong support from China is crucial for the survival of this tentative, very nervy and very patchy recovery.
By Malini Hariharan
It is not surprising to read that Reliance Industries has raised its offer for LyondellBasell by $1bn to $14.5bn. The blog had been told last month that a higher offer was one of the strategic moves that Reliance would have to make.
The Wall Street Journal reports the new Reliance offer would give some creditors a chance to get cash for their claims. "Creditors could also choose to receive stock in the restructured Lyondell under the new offer. A third option would allow some creditors to receive stock and also purchase additional Lyondell stock in a rights offering," it states.
And the revised offer would give Reliance only a minority stake in the company but also a supervoting power to control Lyondell's board.
A source close to developments had earlier told the blog that Reliance would not be interested in a small stake.
"Anything less than 26% would not be acceptable; [with 26%] there is a possibility of a board seat; there is some legal standing," he had said.
The source was, however, unwilling to comment today on the latest move and would only say that the deal was at a sensitive stage.
The Wall Street Journal also reports that Reliance has been attempting to persuade LyondellBasell to accept its offer as "a tie-up would create up to $1 billion in cost savings from synergies between the two companies".
But will this coupled with the $14.5bn offer be enough to tempt a reluctant LyondellBasell management? Maybe not as the company's own restructuring plan is said to value LyondellBasell at $15.5bn.
The company's recent announcement that it has reached a $450m settlement to satisfy a dispute with unsecured creditors indicates that it is making good progress on its own.
Is it time for Reliance to be more aggressive or is bumping up the offer a billion dollars at a time a better gameplan?
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.
Source of picture: http://www.infiniteunknown.net/
By John Richardson
CORE consumer prices in the US declined for the first time in December since 1982, according to the latest American Chemistry Council (ACC) Weekl;y Chemistry and Economic Trends report.
And the ACC's latest monthly set of forecasts - compiled through averaging the predictions of "a number of economic professionals who have a track record for accuracy and expert knowledge of manufacturing" - point to a weak recovery.
"Average unemployment expectations slipped 0.1 percentage points to 9.2%, reflecting the expectations of a jobless recovery," continued the report.
The 2010 estimate for light vehicle sales remained unchanged this month compared with January at 11.7m. This would be a big improvement on last year's actual sales of 10.4m, but a big distance from the 2005 total of 17m.
Expectations for housing starts slipped by 12,000 units to 778,000 for 2010, which again would be a considerable pick-up over last year's 556,000. But in 2007, housing starts totalled 1.76m.
New home sales fell by 11.2% in January to annual rate of 309,000, according to data released separately by the US Commerce Department.
Weak auto, housing and other consumer-goods markets have led to a great deal of lost chemicals and polymers demand.
Exports to China and other emerging markets are now more important than ever.
However, the same ACC report recorded a seventh consecutive weekly gain in industrial production with the most recent data representing the first positive year-on-year gain for two years.
"The strong V-shaped recovery in the industrial sector seems to have retained its momentum as lean inventories across the supply chain have spurred restocking, and greater confidence in the recovery has emerged," the report said.
A couple of key manufacturing indices quoted by the ACC - the Empire State Manufacturing Survey prepared by the New York Federal Reserve and the Business Outlook Survey prepared by the Philadelphia Fed - also point to restocking.
But how excited we should get about this restocking process remains to be seen.
It seems to be from an incredibly low base resulting from late 2008 inventory losses, which forced manufacturers up and down every supply chain to run on exceptionally lean stock levels.
Once manufacturers have finished edging up their production and storage levels, further improvements in industrial output are surely going to depend on what's happening in the High Street.
Source of picture: http://www.referenceforbusiness.com/
By John Richardson
GROWTH in Europe isn't going to return to 2008 levels before 2012, said BASF CEO Jurgen Hambrecht on the release of the German diversified chemical giant's financial results for last year."
Overall, there are no signs of a self-sustaining, long-term recovery. We are still significantly below the capacity utilisation rates that were seen ahead of the crisis," he added.
"(We expect) the majority of growth to come from the emerging economies in Asia, especially China, and from South America.
Stimulus programmes are being wound down, credit is becoming tighter, excessive national debt is leading to austerity measures, the number of jobs is falling and overcapacities still exist.
"There are further risks associated with geopolitical tensions and a trend towards protectionism."
Whenever anybody tries to talk-up the recovery story over the next year, these words will be worth returning to as a crucial reality check.
By Malini Hariharan
LyondellBasell's board is reported to have rejected Reliance Industries' revised $14.5bn buyout offer.
The rejection is not surprising as LyondellBasell is said to have valued itself at $15.5bn in its restructuring plan.
Reliance still has room to up its offer although financial analysts are worried that a high-priced deal would not be favourable to shareholders. And this was evident in the stock market today with Reliance shares moving up in reaction to the latest news reports. Investors perceived the rejection to be positive as it saves Reliance from making an expensive buy.
But if an acquisition makes sense then it is probably time for Reliance to be more aggressive and place an offer that LyondellBasell would find difficult to reject.
Meanwhile in another interesting twist to the story, the New York Post says that Apollo Management, the private equity company which is one of LyondellBasell's key creditors is looking at merging the company with Hexion Speciality Chemicals. Apollo has an investment in Hexion.
By John Richardson
THE current glum mood in the Asian fibre intermediates chain is in stark contrast to the optimism in polyolefin and other petrochemical markets.
A broad-based price rally has occurred following the end of the Chinese New Year (CNY) holidays belying fears, for the time being at least, that China's credit tightening will force a decline in pricing.
But the contrasting misery in paraxylene (PX) through to bottle and fibre-grade synthetic resins serves as a warning of how overconfidence can be a dangerous thing in this exceptionally uncertain economic environment.
Back in early November it was assumed that Chinese textile and garment manufacturers would - as they have nearly always done in recent history -benefit from a pick-up in orders from the US.
So stocks of paraxylene (PX), purified terephthalic acid (PTA) and synthetic fibres began to build up.
"What also led to the inventory build at a time when business would normally be fairly quiet were expectations of higher crude prices," said Leonard De Guzman, Philippine-based petrochemicals consultant with DeWitt & Co.
The US orders didn't come in because textile and garment business was lost to Brazilian, Mexican and other non-Asian competitors, and oil prices didn't go up.
"The cost-consciousness of the Western retailers, such as Wal-Mart and JC Penney, is getting even more ferocious, meaning even Chinese garment manufacturers are not cheap enough," De Guzman added.
"I just don't see a quick recovery on the High Street in the US and Europe and this will continue to place pressure on the Asian apparel and non-apparel industries.
"Despite all the talk of rapidly rising domestic consumption in countries such as China, this is still a heavily export-dependent region and so trade with the West remains crucial."
This trade needs a kick-start ahead of the crucial March-to-May production and sales season.
"What's stopping this from happening at the moment is cotton prices," continued De Guzman.
"Very poor harvests in Q4 2009 in China and the US led to the China and New York futures markets registering steep rises over the CNY week."
Bumper harvests were reported in India, Bangladesh and Pakistan but this had no effect on the cotton price as none of these countries had futures markets, explained De Guzman
"And so now we have synthetic fibre prices being supported by cotton. The textile mills in China, which are running at average operating rates of 60%, need a break from cheaper raw materials.
"The price of cotton is keeping synthetic fibers high as fibre makers are linking their prices to cotton rather than raw materials."
Fibre economics were very good with staple filament yarn at more than $1500 and raw material costs at $1130, said De Guzman
"This link to cotton is the reason why their customers - the textiles and garment manufacturers - lost orders, and so this could be the wrong decision.
Polyethylene terephthalate (PET) bottle chip economics were very different as producers were struggling to keep their heads above water, he added.
Further upstream from naphtha, margins are being squeezed.
"Naphtha was at $730/tonne CFR Japan recently which compared with spot PX at $1,000-1,020/tonne CFR China," said De Guzman.
"The PTA producers are on paper actually doing alright. With PX at around $1,000 tonne the minimum needed to cover production costs is $830/tonne CFR China, and so the current PTA price of $950/tonne CFR China is very comfortable.
"But sales or transaction volumes are likely to be very low at the moment, which is why the PTA price hasn't budged for some time.
"It should fall, but when a PTA producer asks his customer 'If I cut my price would you buy more?' the usual answer is no, so there is no incentive to do so."
Despite the broad-based post-CNY price rallies, De Guzman worries that too many buyers in too many product chains are chasing higher oil prices rather than responding to stronger demand.
"I just don't see the demand there, not in the fibre chains, not in styrenics - not anywhere in fact."
Source of picture: Dachangplastic.com
By John Richardson
WHAT a difference ten years have made in the plastics processing industry, according to a Southeast Asian converter who sees China's machinery=manufacturing prowess as an opportunity and threat.
"Ten years ago I considered buying a process machine from the US for $300,000 but it was just too expensive," said the processor.
"I recently purchased two machines from China - which are of better quality than the one I could have bought ten years ago -for only $100,000. This is great news for me.
"But I think the ease of availability of capital combined with the big improvements in China's capability to build processing machines for certain plastics processing sectors is contributing to the strong demand growth.
"It has been easy, particularly over the last year, to add processing capacity on the assumption that strong continued government stimulus will mean a sufficiently strong market."
So if the government withdraws stimulus in the wrong kind of ways as it tries to cool the economy down, the processing sector could be one more industry in China increasing its exports of surpluses. We are already seeing this in finished baxially oriented (BOPP) film.
By Malini Hariharan
Reliance Industries appears to have hit the end of the road in its quest for LyondellBasell which has filed its own restructuring plan, rejecting a $14.5bn Reliance offer.
LyondellBasell has said the Reliance offer was not "sufficiently valuable to abandon" its amended reorganisation plan.
"The proposal...did not assure a higher overall value for LyondellBasell than that upon which the [reorganisation] plan is based; it continued to provide Reliance with effective control over LyondellBasell, even if it owned only minority position and did not pay a premium," LyondellBasell said in its court filing.
"It [Reliance] did not put any Reliance assets at risk should a transaction be pursued and fail," LyondellBasell added.
It is not surprising to read that Reliance has distanced its Indian assets. The Basell and Lyondell merger has clearly revealed the risks of failing to do so.
LyondellBasell is now waiting for the court to approve its plan and hopes to emerge from bankruptcy by the end of the year.
Media reports say that Reliance will not be increasing its offer although the company has yet to confirm this.
But analysts, who think anything over $14.5bn would be too expensive, have already started suggesting that it is time for Reliance to look at other acquisitions.
One analyst suggests that Dow Chemical's commodity chemical assets would be a better fit. Dow had attempted to spin off into a joint venture with Kuwait's Petrochemical Industries Co (PIC) but the deal was called off at the last minute.
The analyst suggests that Reliance could look at a similar joint venture or even an outright purchase and this would be cheaper than LyondellBasell as Dow has indicated that it is looking for $8-12bn while LyondellBasell is unlikely to come to the negotiating table for anything less than $16bn.
But Reliance had tried for Dow's assets and lost out to PIC. Dow recently confirmed that it is in talks with three companies for a divestment. And industry sources say that a deal with PIC could still be possible.
By Malini Hariharan
Many Asian aromatics producers are optimistic that the worst is over and a gradual improvement in global demand coupled with firm Chinese demand will help them through 2009.
There is also the expectation that a pressure on refining margins will lead to more plant closures which would also help the aromatics business.
A source at an integrated refinery and aromatics producer points out that nearly 2m bbls/day of refining capacity addition took place last year and another 800,000 bbls/day of capacity is due by next year.
"This will be offset by reduction in capacity in Europe and the US. We have seen reports that suggest that nearly 7m bbls/day of capacity will have to close," he says.
"In the future the refining industry needs more investment to meet environmental regulations. Investment at old plants this investment is not justified and they will have to close," he adds.
An industry analyst says that every refiner talks of closures but wants another company to implement them.
Refiners with high cost facilities in the West are the ones under greatest pressure but pushing through a capacity reduction programme is not always easy as Total's experience in France shows.
The company confirmed on 8 March that it would permanently shut down its Dunkirk operations due to a collapse in demand. The refinery had been idled in September last year.
Despite assurances of zero job losses unions were quick to call for a new strike.
The first source says that some refineries may limp along for a year or two. But eventually poor profitability will force a shutdown although governments may have to step in to help companies close plants.
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.
China's migrant workers - a risky game...
Source of picture: China Daily
By John Richardson
THIS very disturbing Op-Ed piece by Paul Krugman in the New York Times argues that the US needs to impose a 25% tariff on Chinese imports in response to the value of the Yuan being held at an artificially low level.
In 1971, the States placed a 10% tariff on Germany and Japan, forcing both to revalue their currencies.
As one of the comments posted in response to the piece points out, such a high tariff would leave millions of migrant workers in China out of work, thereby creating the potential for politically de-stabilising social unrest. China, unlike the US, doesn't have an unemployment benefits system that would keep people above the bread, or rather rice, line.
The Krugman piece suggests - if his figures about the swelling China current account surplus are to be believed - that it's the country's ability to export its surpluses which is providing perhaps the biggest support to the economy.
In other words, China's recovery, and the corresponding rise in chemical and polymer imports, might be more the result of an export boom than strong local growth
When I say export boom, this has to be qualified by the likely deflationary impact of the recovery in China's exports. Pricing per unit is liikely to be down, but volumes are up. This is a trend being encouraged by the big Western retailers in response to weak consumer spending.
And, ironically, as Western chemicals and polymer producers export every one of their spare molecules to China as welcome relief from moribund home markets, they could well be further damaging customers back home - their local manufacturers!
The article also points to rising trade tensions and an increase in protectionism.
A date to watch is 15 April, when the US Treasury Department is scheduled to announce whether it has classified China as a currency manipulator.
Source of picture: www.theage.com.au
By John Richardson
A good friend of mine, working for a Singapore-based chemical company, recently had a discussion about a new office seating plan with her company's human (????) resources manager.
"I have decided not to sit you next to xxxxx because, as both of you are so fat, you won't fit into the space we've got available," she was told. I told a former colleague about how I was adopting a child a few years ago, to which the colleague responded: "What's the point of that?"
These are true stories, I am afraid, which help make me think the world is getting ruder, or more stupid, perhaps, particularly when I am in a bleak mood. The declining standard of driving sends me potty, whether it's taxi drivers in Beijing deliberately accelerating toward pedestrians, or the terrible waste of yellow paint in Singapore, where yellow-box junctions are hardly ever clear of traffic.
But it's amazing how manners change when money's at stake - for example, the graciousness and charm of a group of polyolefin traders I met up with a couple of weeks ago. They were very busy networking with potential customers and propagating the story, maybe in an attempt to convince a gullible journalist, that all was well with the China market.
And then you go to a different level, to that of an effective general manager, vice president or upwards. One of my hobbies is to stand back and observe how well they charm their way across a room full of conference delegates. I have rated the performances of senior chemical company executives in just these circumstances over the last decade on a scale of one to 10 and keep a private record of all the scores.
Take this even further - to the level of China's government. Just as every word of Fed statements is studied, so have recent comments by top Beijing officials on efforts to cool the economy down. As much analysis seems to be going into how these words are being expressed as to their actual meaning, for example, how demeanour indicates ability to cope with potential crises.
Perhaps the real test of strength and depth of character should be an assessment of how company executives at all levels behave out of the spotlight. We could fit hidden cameras to their cars and observe how well they drive to and from work. If they fail to come up to the mark they should be sacked, no matter how good their last set of quarterly results.
By Malini Hariharan
The blog has recently written about gas availability in the Middle East and upcoming changes to pricing which have big implications for the petrochemicals business.
But the global gas market is seeing wider changes and these have been excellently summarised by The Economist.
The key development has been the rise of shale gas in the US which now meets about half of the country's demand.
The fall in gas prices has already improved the competitiveness of US petrochemical producers. And analysts are predicting that this advantage will continue.
There is plenty of shale gas around the world. According to the Economist article, the International Energy Agency (IEA) has estimated the global total to be 921 tcf ,more than five times proven conventional reserves. But a clearer picture will emerge only after exploration and drilling starts.
Source: The Economist
Meanwhile, rising production in the US coupled with a drop in demand, as a result of the economic slowdown, has already resulted in a global gas glut. And the situation has been exacerbated by greater availability of liquefied natural gas (LNG).
The rise of shale gas has implications for countries like Qatar that has developed its LNG industry to meet US demand.
"That now looks like a blunder. America is still taking some of this LNG, but the exporters' bonanza is over before it ever really began," says The Economist.
LNG prices are likely to come under downward pressure as new projects scheduled to come on stream this year would add another 80m tonnes to annual supply, almost 50% more than in 2008.
Qatar would still make money because of its low production costs but there are many others who would not as they are extracting gas from remote fields.
A question worth asking is whether Qatar turn to petrochemicals if returns on LNG diminish?
The developments in the US market also has implications for Canada. The ceo of Nova Chemicals recently said that the growth of US natural gas capacity may make natural gas production in Canada less economical, which in turn could lead to a feedstock shortage for Canadian petrochemicals producers.
"We are clearly seeing some degree of decline in the west [Canada], and as a result of that, overall ethane supply is down. There is definitely a real structural concern for producers and consumers over the short-to-medium term," he said.
NOVA has expressed its concerns to the Alberta government authorities and is seeking additional incentives for investments in ethane extraction.
The Economist says that while an age of plenty appears to be on its way there are two factors that could reverse the picture.
The first is the uncertainty about how the success of shale gas exploration outside North America. And the second is the concerns voiced by environmentalists about spoiling landscapes and contaminating water supplies.
The US government recently announced that it would begin a two-year study to determine if hydraulic fracturing, a technique used to produce shale gas, threatens water quality and water health.
There are differing views on how long the surplus situation will continue.
Companies that have invested in LNG believe that there is room for both shale gas and LNG in the US market.
Sceptics point out that shale gas is expensive to produce. With gas futures prices stuck below $5/MMBtu - and breakeven prices anywhere from $3-6/MMBtu - they are questioning how long shale producers will run rigs.
The Economist quotes predictions by experts that the LNG glut is likely to ease by 2014 as low prices would force some projects to be abandoned. France's Total is of the opinion that demand recovery would require more LNG projects while the Energy Information Administration (EIA) predicts decades of relatively weak prices.
A complicated picture but certainly one that needs to be unravelled.
Source of picture: The China Daily
By John Richardson
THE outcome of the row between the US and China over the value of the Yuan has the potential to bring to an end a tentative and highly unbalanced global economic recovery, economists and chemicals industry sources have told the blog.
If the US and China cannot reach a compromise on the dispute over the Yuan's strength against the US dollar, an all-out trade war could erupt, which could in the end prove highly counterproductive, they warned.
"Obama is at heart a Union man - he is from the mid-west - and so I think he will succumb to domestic political pressure and introduce measures to protect jobs," said a UK based chemicals industry consultant.
Back in 1971, as Paul Krugman pointed out in an article we commented on last week, emergency import tariffs of 10% were placed on Japan and Germany because of a similar row over the strength of their currencies.
The Nobel Prize-winning economist believes a 25% tariff should be imposed on Chinese imports.
He argues that China's huge holding of Treasury Bills is in America's favour rather than the other way round, which is the conventional view.
Any sudden liquidation of these reserves would drive the value of US government bonds down, thereby reducing China's financial strength, while at the same time pushing down the value of the greenback. This would make it easier for the US to export its way to recovery (provided, of course, there isn't the very likely response of trade barriers springing up around the world).
The weakness in Krugman's argument is, as we said last week, the effect on migrant workers in China's export processing zones and what this would mean for the global economy. A tariff of anywhere close to 25% would leave millions of these migrants of work, creating huge social and political pressure.
An import tariff of this size, hopefully, won't happen, but whether the expected gradual appreciation of the Yuan will appease US public opinion remains to be seen.
Offshore trading contracts are now anticipating a 2.4% rise in the value of China's currency later this year, down from 3%, following recent comments by Premier Wen Jiabao that the Yuan was not undervalued, according to this article in Business Week.
CEOs of Chinese companies have come down on the side of a revaluation, adds the same article.
Financial analysts expect the Yuan's value to increase by between 2-5% during each of the next few years as the main focus in China is on protecting growth rather than controlling inflation.
"This might not be enough for the US as they are in the midst of a jobless recovery. During the 2004-7 boom period it didn't matter that employment was drifting to China because consumer credit was abundant and jobs in the US were being created in sectors such as housing. We are now in a very different place," the chemicals consultant continued.
In its Q1 2010 Situation & Outlook report released earlier this month, the American Chemistry Council wrote that while the US was enjoying a V-shaped rebound, "The weak consumer sector and continued high unemployment will constrain the strength of the recovery."
And the report adds that "with significant declines in household wealth over the past two years, consumers are working to pay down debt and have become cautious in their spending."
Big US retailers are reportedly squeezing more costs out of procurement in order to meet the needs of this more cautious US consumer.
The retailers appear to be getting a lot of help from Chinese manufacturers thanks to the undervalued Yuan and the re-imposition of export tax subsidies.
In other words, China is in a stronger position to export lower-priced goods and by so doing, drive US unemployment even higher.
Further adding to the deflationary impetus is that a big quantity of China's huge economic stimulus seems to have gone into fixed asset investment.
New industrial capacity appears to have been a no-brainer for the big state-owned enterprises.
They received a flood of soft loans from the state-owned banks, perhaps under the assumption that - because both the banks and companies are owned by the government - foreclosure was unlikely if investments failed.
So what could this mean for chemicals demand?
"The strong import volumes we saw for a wide range of chemicals and polymers in 2009 were partly the result of this rise in fixed-asset investments," said a second UK-based chemicals consultant.
"As big amounts of new industrial capacity came on-stream, inventories had to be filled with raw materials, including chemicals and polymers."
Western chemicals companies benefited from this inventory building. For example, US Linear-Low Density Polyethylene (LLDPE) exports to China rose to 318,369 tonnes in 2009 from 183, 293 tonnes the previous year, according to data from China Customs. Polypropylene (PP) exports rose to 493, 381 tonnes from 117,673 tonnes.
But the irony is that as they made export gains, Western chemicals companies could have been further undermining their domestic manufacturing industries through migrating more jobs to China, as we pointed out last week.
If the value of the Yuan is increased, even by only a few percentage points a year, lower-value manufacturing in China - such as textiles and garments - will suffer. Margins at this end of manufacturing in China are razor-thin and therefore dependent on today's currency advantage.
This is another reason to believe that a repeat of last year's extraordinary chemicals and polymer import volumes is unlikely.
A high chance of more showers
Source of picture: www.stuff.co.zn
By John Richardson
A closer look at last year's polyolefin trade flows illustrates just how vulnerable European producers will be over the next few years to rising pressure from Middle East imports.
"The volume of trade in Western Europe (intra-regional plus imports) for all the grades of polyolefins and polyvinyl chloride (PVC) fell by between 3% and 18% in 2009," said Jean Sudol, president of International Trader, the New York-based trade-data analysis service.
"But at the same time imports from the Middle East actually increased."
A slowdown of imports into China seems inevitable this year after the staggering increases seen in 2009. For example, low-density polyethylene (LDPE) imports rose by 90% over the previous year to 1.34m tonnes and polypropylene shipments were up by 49% at 4.2m tonnes.
"A reduction in government stimulus, new capacity in China and the difficulty in repeating the sheer size of imports in 2009 points to a slowdown in 2010," added Sudol.
"My guess is that imports won't fall back to 2007/2008 levels and will still be high in 2010, but not as high as in 2009."
So the Middle East producers, as they ramp-up capacity this year and in 2011, will be searching for other destinations to compensate for a dip in demand from China. Europe is an obvious port of call.
ICIS pricing's Worldwide ethylene plant report shows that in the five years from 2008 to 2012, around 29m tonnes/year of new ethylene capacity will be added.
Nearly 16m tonnes/year will be added in the Middle East and around 14m tonnes/year in Asia, of which China accounts for nearly 7m tonnes/year, says the report.
This has partly been offset by the 2m tonnes/year that has closed in North America.
However, some 16m tonnes/year of this capacity growth was still to become operational as of the end of February 2010, the report adds.
"Ethylene demand actually fell in 2008, as economies crashed and extensive de-stocking took place throughout the value chains," wrote my colleagues Paul Ray and Peter Taffe in a recent article on our magazine, ICIS Chemical Business.
"In 2009, demand recovery has been weak. In normal market conditions, a rule of thumb indicates that ethylene demand globally grows at 5m tonnes/year. "
Paul Hodges, UK-based consultant with International e-Chem, added: "These new Middle East plants are going to run at close to the optimum rate of 93%, regardless of market conditions, because of their feedstock advantages,"
A painful reckoning is clearly at hand with restructuring likely to be given some extra impetus by problems in the European refinery industry.
Here's a post from a guest blogger, my good colleague Prema Viswanathan - Deputy Managing Editor of ICIS pricing in Asia.
Ras Tanura and Al-Jubail
Source of picture: www.absoluteastastronomy.com
By Prema Viswanathan
A Saudi Aramco official has confirmed a Reuters report earlier this week that a change of location for the giant Ras Tanura petrochemicals project is under consideration. The project would be a joint venture between Aramco and Dow Chemical.
Al-Jubail is one alternative location being evaluated, which, like Ras Tanura, is a port city on the Saudi east coast (see map above). Other media reports suggest that Ras al-Zour is also being looked into, which is 80km north of Al-Jubai.
The Aramco official told us that the review into where to build the complex would only result in a slight delay to the start-up - currently targeted for 2014 - and not five years, as was suggested by the Reuters report. He added that this review would lead to the project being improved.
Sources we spoke to in Saudi Arabia this week nevertheless claim that it won't be easy to sort out either keeping the planned complex at Ras Tanura or shifting it elsewhere.
"The project would have to be reconfigured if they shift it to Al-Jubail or any other destination, as it would be very expensive to bring refinery feeds to the facility via pipeline from Ras Tanura," said one source.
But the dilemma is that if the project stays at Ras Tanura heavy investment would also be needed in infrastructure, he added.
"The proposed shift of location makes no sense, as the integration with Saudi Aramco's Ras Tanura refinery is the main impetus behind the project," said a second source.
"This would be negated if they shift it to Al Jubail, which is already clogged with projects."
Upon completion, the complex is projected to produce 8m tonne/year of petrochemicals and gasoline products.
The current plan is for feedstock to be at least partly provided by the expansion of Aramco's existing Ras Tanura refinery, which will add 400,000 bbl/day of capacity.
The blog also understands that the project may have received an ethane gas allocation.
The refinery and petrochemical projects are expected to cost around $25bn and Dow's involvement would be the biggest foreign investment ever to take place in the Kingdom.
By Malini Hariharan
The Asian olefin and polyolefin markets have softened in recent weeks but the US market remains on a different track, as seen in these reports filed by my colleagues on ICIS news.
Ethylene prices are still firm on tight supplies. Spot ethylene for March/April was at 61-63 cents/lb, up from 42.5-43.0 in January. Availability has been hit as a result of a number of unexpected cracker shutdowns which started in early January after Texas experienced unusually cold weather.
The high prices mean that US PE exports are likely to drop in the coming months. A trader estimated that ethylene would have to drop to 40cents/lb for PE to be competitive in the export market.
Ethylene prices are expected to correct in the coming months as the supply situation is easing with crackers resuming operations. But one producer was not too worried and said that margins would be at acceptable levels even if ethylene dropped by 20cents/lb as ethane prices were also weakening, said one producer.
Many of the US companies including Shell, have prepared themselves for an extended period of low ethane prices. An executive from the company said that investments made at its crackers in the US over the last few years have given Shell the capability to crack 70% gas feedstock. The earlier configuration was 70-75% liquid cracking.
The shift to a lighter feedstock slate has been one of the factors supporting a surge in propylene prices. The situation has also been aggravated by unexpected cracker shutdowns and a decline in US operating rates due to weak demand for fuels.
Around two-thirds of US propylene now comes from refineries, due to declining output from crackers.
Meanwhile, Nova expected the second quarter to remain strong with continued growth in PE demand. And although the US-Asia arbitrage window has closed, Nova has been able to export from its Joffre operations in Canada because of freight advantage. PE is put in bulk rail containers and sent to Vancouver port from where it is shipped to Asia.
By John Richardson
The chairman of China Construction Bank has spoken about the dangers created by China's GDP (gross domestic product) expanding by more than 9.5% in 2010, which, according to many analysts, seems highly likely: GDP is estimated to have risen by 11-12% in Q1.
"It (too-rapid growth) will mean more duplication of construction, more excess capacity and higher waste of capital," the bank's chairman, Guo Shuqing, is reported to have added.
Oversupply of money and increased liquidity leading to inflation and asset-price bubbles were further problems he identified.
New bank lending amounted to one-third of China's GDP in 2009 - and at Yuan9,600bn ($1,400bn) was double the amount leant the previous year.
This latest official warning about overheating - a concern long-expressed by this blog - might indicate that further economic tightening measures are being considered.
Basic chemicals and plastics exporters to China, as we also keep repeating, are therefore going to need to budget for the possibility of a sharp dip in business during the rest of 2010.
We keep saying these things because we continue to be fed the same bland public-relations speak from chemical company officials.
They keep insisting that China will continue to deliver stellar growth, both in the short and long-term (we'll revisit the longer-term issues later this week).
If this vacuous nonsense is just for the consumption of the odd gullible journalist perhaps that's fine, as maybe beyond our view some sensible scenario planning is taking place.
But at the very least what journalists write about is being read by investors, meaning over-expectations could be followed by a sharp drop in share prices.
Source of picture: www.destination360.com
Dear Reader
Please click here - ChinaChems2009AndOutlook.doc for my review of what happened in China last year and Q1 2010 and for some pointers for the rest of this year.
All the best
John Richardson
Flagging Recovery
Source of picture: www.guardian.co.uk
By John Richardson
THE latest US Institute of Supply Management survey signalled a buoyant manufacturing sector, in line with likely Q1 GDP (gross domestic product) growth of 5%, says the latest Weekly Chemistry and Economic Trends report from the American Chemistry Council.
"Consumer spending is expanding and this continued into March as evidenced by light vehicle sales. Moreover, consumers appear to be regaining some degree of confidence," continued the report.
Light vehicle sales rose from an annualised 10.4m units in the year to February to 11.8m in March with the Conference Board's latest consumer confidence index showing a strong increase.
But as fellow blogger Paul Hodges points out light vehicle sales were 15-17m per year in 1995-2007.
"With each auto using $2973 of chemicals, according to the ACC, this means the market is currently worth just $35bn versus its peak of over $50bn," writes Hodges.
And the 162,000 improvement in non-farm payrolls - announced late last week which has contributed to this week's rallies in equity and crude prices - was placed into context by the excellent Lex Column in the Financial Times over the weekend.
"Recruiting for the census and a rebound from snow-hit February boosted the count, but clearly more people were hired than fired," writes Lex.
"The problem, however, is that the job market is unlikely to stick to the recovery script from here.
"Natural workforce growth is one impediment, as is return of the discouraged. The broadest measure of unemployment, capturing those who give up or take part-time work, stands at 18 per cent. Moderate economic growth will keep headline unemployment frustratingly close to double digits.
"From where will a strong rebound in demand for US goods and services come? China is tightening and Europe is moribund. US states must rein in spending. Inventory restocking is largely complete, so businesses need higher sales to generate activity.
"Ample spare capacity means industry can survive with little investment. Small businesses, responsible for almost half of recession job losses, need to seek credit from regional banks feeling nervous about commercial real estate exposure."
Hear, hear. From a chemicals-industry perspective, there's clearly a risk of mistaking restocking from historically-low inventory levels for a solid recovery.
Source of picture: www.thewecc.com
By John Richardson
Confusing messages continue to emerge from Beijing over whether a revaluation of the Yuan is imminent, a debate that has major implications for the chemicals industry.
The Financial Times reported this morning that senior government economist Ba Shusong had said that China could widen the currency's daily trading band and allow it to resume its gradual appreciation that was halted in July 2008 due to the credit crisis.
But Bloomberg quoted Jiang Yu, spokeswoman for China's foreign ministry, yesterday as saying that a rise in the value of the Yuan would not help correct China's trade imbalance with the US. This perhaps suggests that the Chinese government will argue the case for no revaluation during important meetings in Washington later this month.
Nevertheless, the same article quotes Stephen Roach - Morgan Stanley Asia chairman - as predicting that a US decision to delay a verdict on whether or not Beijing is a "currency manipulator" has eased tensions and made it more likely that a managed float will be resumed. The Treasury's verdict had been due on 15 April.
As we pointed out in late March and yesterday, the irony of the extraordinary rise in exports to China of chemicals and plastics during 2009 was that these volumes probably helped to further undermine the domestic consumption base of the US and European exporters. A lot of the increased volumes went into filling the inventories of new partly export-focused manufacturing plants built as a result of China's huge economic stimulus.
If the value of the Yuan does rise then how hard will some of these new manufacturing plants run - particularly the ones making low-value products where the current currency advantage is crucial for maintaining thin margins?
If their operating rates are forced lower as these factories lose competitive advantage, this might contribute to lower chemicals and plastics import volumes.
But the bigger deal for the chemicals industry would be an easing of trade tensions between the US and China, thanks to the resumption of a manged float and a clear policy for gradual appreciation. Increased trade tensions and resulting sanctions could otherwise severely damage the fragile and uncertain economic recovery.
US chemicals producers might also benefit if their local customers enjoy an improved competitive position as a result of a stronger Yuan.
But this will only occur if other lower-cost manufacturers don't step in to gain any market share lost by the Chinese!
By John Richardson
Polypropylene (PP) appears to have become very tight in China over the last week as a result of a reduction in import availability and a resurgence in buying activity.
"PP is incredibly tight right now because the supply from North America is no longer available for delivery to China," said a Singapore-based trader.
There's been a sharp decline in availability from North America as a result of rising propylene costs.
C3s have risen by 53% since November 2009, according to my Houston-based ICIS pricing colleague, William Lemos. Contract pricing for April settled on Tuesday at 7 cents/lb higher ($154/tonne).
The surge in US propylene has been driven by reduced refinery operating rates on the dismal state of the refining industry globally.
PP producers have become more heavily dependent on feedstock supply from FCCs over the last 12 months due to crackers switching to lighter feedstocks.
"US Gulf Coast crackers are running on 82% ethane and only 18% naphtha compared with 65% ethane and 35% naphtha a year ago," a North American industry source told the blog earlier this week.
The switch to lighter feeds is the result of tumbling US natural gas prices relative to crude, a response to the big rise in local gas supply.
"I haven't seen virtually any US material arriving in China so far this year and the Middle East producers, for whatever reason, don't seem to be able to fill the gap right now," the Singapore trader continued.
But the lack of US dollar material has only tightened the China market over the last week as before then buyers were largely on the sidelines, the trader added.
"What happened about a week ago was the sudden re-entrance of the baxially oriented (BOPP) finished-film producers who hadn't been buying raw-material resins for several months," he said.
"These finished-film producers are big in scale in China, using the latest modern equipment, and so when they buy they buy in big volume.
"I think they came back in a rush because both yarn and BOPP film-grade resin prices had slipped to very affordable levels (these converters can run either yarn or BOPP film-grade resin through their machinery).
"A big factor behind their re-entry into the market was the rise in oi prices."
Yarn grade was at $1,250-1,300/tonne CFR main port China and BOPP film-grade resin was at $1,280-1,350/tonne CFR main port China, according to the ICIS pricing assessment for the week ending April 2.
As the ICIS pricing graph below indicates, pricing for these two grades has declined recently.
All homopolymer grades were in tight supply with stocks in bonded warehouses almost exhausted, the trader added.
This might just scupper the hopes of European buyers who are keeping an eye on availability in Asia in an effort to gain relief from high local PP pricing.
PP prices have already increased in Euros200/tonne in 2010 with further rises of as much as Euros130/tonne on the cards, according to my London-based ICIS pricing colleague, Linda Naylor.
PP Producer inventories in Europe have been low a result of restricted supply of C3s due to refinery and cracker operating-rate cutbacks.
Propylene supply is restricted because European refineries are running low on the terrible state of refining margins.
Cracker rates were also cut back earlier this year in an effort to initially prevent ethylene from becoming oversupplied.
Heading West,,Jeddah's container port
Source of picture: http://ofwngayon.com/home/?p=257
By John Richardson
SABIC has increased its exports of PE to the US in response to high pricing and what could be weaker demand in China, a source with a North American producer told the blog earlier this week.
"I have heard of more linear-low density PE (LLDPE) cargoes in particular being shipped from Saudi Arabia, the source added.
The graph attached - View image shows the surge in US PE on the back of more expensive ethylene during Q1.
What does this trade - apparenly via both bulk containers to the bigger inland US converters and in bags to the smaller, coastal processors - also tell us about the China market?
PE indigestion in China seems high as a result of overstocking late last year and in early 2010.
"I remember that you had asked me where all the heavy imports in Q4 and January this year were going," added the source with the North American PE producer.
"Now I can tell you - into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where Yuan-priced domestic material is stored."
China's PE buyers have appeared to be standing on the sidelines over the last few weeks at a time when Saudi capacity is ramping. YanSab is apparently back at 100% after electrictiy-supply problems caused an outage earlier this year and the the second Sharq complex has just come on-stream.
But as we heard yesterday, a rise in oil prices might have brought China's PE buyers back into the market in significant numbers.
Source of picture: www.wrh.noaa.gov/hnx/newslet/sum...mber.htm
By John Richardson
Hope springs eternal when it comes to trying to fathom the direction of the polyolefin market in China.
One particular hope rests on March import numbers from China Customs, due to be released later this month.
The data might just give a pointer to the extent that new local capacity has displaced the need for imports - and whether all the talk about credit-tightening has translated into weaker demand.
"March will be the first 'normal' month in 2010, when comparisons might just be valid with import volumes last year. Late January and the whole of February were distorted by the build-up to the Chinese New Year," said a Southeast Asia-based petrochemicals consultant.
New local capacity includes Tianjin Petrochemicals. Volumes from the recently-started complex are being seen in much greater quantities in the market, according to several traders and producers.
The Dushanzi Petrochemical complex also recently came started up in China. Some sources report large volumes from this site hitting the market, while others have yet to see significant deliveries.
Output from new plants is being absorbed as producton from the Fujian Refining & Chemicals complex, which came on stream at the end of August last year, is close to 100% of capacity, according to a source familiar with its operations.
But what will make the March numbers hard to read, as so often happens with China import statistics, was until recently a huge inventory overhang in polyethylene (PE) - the result of heavy buying by traders of overseas material late last year.
"I remember that you had asked me where all these heavy imports were going," said a source with a major North American PE producer.
"Now I can tell you - into warehouses! At the end of March, bonded warehouses had 2-3 times their level of normal stocks and we have no idea how bad the situation is inland, at all the warehouses where Yuan-priced domestic material is stored."
Credit remained extremely easy to obtain late last year with less concern over the Chinese government's efforts to cool the economy down, said a Singapore-based polyolefins trader.
"Many of the traders made the dangerous assumption that the future would be the same as the past.
"Recently, the government has been talking about cutting loan growth by 22% compared with 2009."
Such has been the inventory overhang in PE that small quantities of resin imported into China has been re-exported to Brazil, Bangladesh and Israel, the trader added.
But my fellow blogger Malini Hariharan, who was in Shanghai last week, talked to Asian producers and traders who reported that PE inventories are slowly coming back to normal as a result of a dip in buying activity.
What is strange is that PP shipments also surged late last year - and yet the PP market is in radically different shape to that of PE.
"Our assessments of rolling inventory indicate that PP stocks in China have not been as high as those for PE," the Southeast Asian-based petrochemicals consultant added.
"Reduced availability from the US in January-February has certainly been a factor behind this and this has been reflected in pricing. Whereas PP pricing had remained pretty solid over the past few weeks, PE slipped by $50-60/tonne."
The drop in supply from the US is due to the 53% rise in propylene costs since November 2009, with April contracts prices settling at 7 cents/lb ($154/tonne) early last week.
In short, therefore, if the March import figures show a sharp drop in both PE and PP this might tell us little about the underlying, long-term state of the market (PE numbers could be down on this huge inventory overhang with PP also lower, partly on lack of availability).
And if the statistics surprise on the upside, be careful of anybody who argues that this is a firm indication that China's underlying demand is booming.
"OK, credit has got a little tighter locally, but there are still an awful lot of speculators out there," continued the Singapore-located trader.
"I have done a lot of business with other traders in China who only want to buy resin in order to get hold of the 90 days' credit for speculation in other commodities.
"A lot of foreigners don't understand what continues to underpin demand in China.
"These traders will buy resin in US dollars and then sell in Yuan at a loss to local end-users. They will then use the credit to try and make money in steel, coal and other hot commodities before the 90 days are up."
This complex intra-trade business is now been further bolstered by rising expectations of a Yuan revolution, he added.
"The hope is that if you borrow in US dollars and convert to Yuan the local currency will have strengthened by the time your 90 days are up."
This suggests that a bursting of the bubbles in steel, coal and other commodity prices would have a big knock-on to demand for polyolefins, as would a Yuan revaluation.
And it also suggests that any month's polyolefin import statistics need to be taken with a large pinch of salt.
So what's the sentiment like among buyers then, perhaps a more useful pointer to the underlying state of the market?
"Overall, it's one of cautious optimism over the economy. But they know there's a lot more new capacity just around the corner," said a Hong Kong-based polyolefins trader.
New ethylene capacity in Asia and the Middle East alone - including, of course, a lot of downstream PE - will total 9.5m tonne/year in 2010 with global demand growth in normal market conditions around 5m tonne/year, according to ICIS data.
"Increased supply from the Middle East has been particularly big in linear low density PE (LLDPE) so far this year," continued the Singapore trader.
"A major producer from the region plans to deliver 40,100 tonnes into warehouses in Singapore in April for sale to China and Southeast Asia.
"This same producer only sold a total of 200,000 tonnes to China in the whole of 2009."
He added that high density PE (HDPE) would also get ugly.
New PP capacities in 2010 include the 800,000 tonne/year Borouge plant in Abu Dhabi and the 400,000 tonne/year Siam Cement facility in Thailand.
The Borouge plant will start up in the third quarter and Siam Cement in the fourth quarter, according to ICIS plants and projects.
The volume of new capacities seems to be far too big to prevent a severe margin-squeeze at some stage, with most estimates indicating that this will happen in the fourth quarter this year.
But making an educated guess about what this margin-squeeze will mean for the China market remains about as easy as nailing water to the wall.
By Malini Hariharan
H2 is just two months away but one China-based market participant says that there is still a total lack of clarity on price direction for the rest of the year.
Buying activity picked up last week but he is not confident that this can be sustained. And he is certainly not expecting China to deliver a repeat of last year's record rise in imports and demand.
The China market is redefining itself this quarter, he says.
Stocks, which had built up over Q1 and Q4 2009 are slowly coming down. Speculative activity is also easing as Chinese banks tighten credit availability.
He expects many new traders/speculators who entered the market in 2009 to exit. The froth that was seen last year would slowly evaporate, the market player added.
On the positive side, China has been reporting a steady rise in monthly export numbers.
Pic source: Financial Times
They are not yet back to pre-crisis levels but this will contribute to polyolefin demand growth, he adds.
As for revaluation of the yuan, he thinks the Chinese government will follow its own timetable and will not want to hurt exports in the process. As the third quarter and fourth quarter are viewed as the peak manufacturing season when exporters make money, the government is unlikely to disturb exchange rates during this period, he adds.
Although the outlook is hazy, he expects prices to fluctuate in a narrower band this year with crude oil propping up numbers at the lower end of the range and increased availability from new plants preventing significant increase in prices.
By John Richardson
Inventories of copper, aluminium, lead and nickel have risen as prices for all these commodities have also surged, says this article in The Economist.
Source of graph: The Economists
Copper stocks total half a million tonnes in metals-exchanges warehouses in what HSBC analyst Andrew Keen describes as a market that's departed from fundamentals.
The reason behind high stocks and rising prices is the willingness of traders to take positions in the belief that demand for these commodities will get even better next year.
And surprise, surprise, a lot of these hopes rest on China's economy continuing to expand at or at least very close to the rates we saw in 2009 and in Q1 2010.
But pointers to significant further economic tightening in China are emerging every few days.
Last week, for example, the People's Bank of China issued three-year bills for the first time in about three years in order to reduce liquidity. Financial analysts told ICIS news that Beijing was becoming more creative as it attempted to keep a lid on inflation short of interest-rate rises.
And last week also, there were reports quoting unidentified sources that Shanghai is considering a property tax in order to clamp down on investment properties. The source of the original news story was Shanghai Securities News, affiliated to the state-owned Xinhua News Agency.
This suggests the government is at least thinking about such a tax, and maybe is using the news stories to sound-out market and public reaction.
A slowdown in China's overall growth would obviously mean that demand for metals would be less than is being anticipated, leading to a sudden unwinding of stockpiles.
If interest rates globally start to increase - a possibility as governments ease back on economic stimulus - this could give metals traders another reason to develop cold feet.
As the pricing of all commodities are so heavily interlinked these days, crude, chemicals and plastics pricing could also head south.
What's interesting and needs more research by this blog are the more direct links between trading in chemicals and plastics and other commodities, such as metals, which seems to be common practice in China.
Parallel trading contributed to a sharp rise in China's polyethylene (PE) stocks in March, which we talked about yesterday.
By Malini Hariharan
If you are moving a project to a new location then why not take some time to re-examine its configuration?
That appears to be the thinking at Saudi Aramco and Dow Chemical for their proposed cracker and derivatives complex in Saudi Arabia. As reported on this blog recently, the mega petrochemical project is likely to be moved to Al Jubail from Ras Tanura.
But along with this shift the two companies are now said to be re-examining the product slate. Zawaya reports that the sponsors are trying to decide if it would be better to source some intermediate products from other companies located at Jubail. This would mean fewer units and therefore lower costs for a project that was initially estimated at over $20bn.
The news report also states that while a final decision on the move to Jubail has yet to be made the companies are in discussions with the Royal Commission for Jubail and Yanbu. The project is likely to be based in Jubail II as all plots in Jubail I are occupied. It would be housed next to a joint-venture refinery being built by Aramco and Total which can supply feedstocks to the cracker.
Pic source: Kentz
By locating the project at Al-Jubail, Dow and Aramco would also save on infrastructure development costs as this location is better developed than Ras Tanura. And sources close to the project have also said that contrary to expectations the relocation would help speed up project execution.
But with contracts yet to be awarded completion of the project could easily take another 4-5 years.
By Malini Hariharan
After seeing very strong pricing for the last few months US propylene and polypropylene (PP) buyers have started talking of imminent correction.
PP buyers expect a 7-10cent/lb ($154-200/tonne) drop in May prices, reports ICIS news.
The prediction is based on improved propylene availability.
Earlier this week the US Energy Information Administration (EIA) released data that showed a 12% increase in propylene stocks for the week ended 16 April. The increase came amid higher US refinery operating rates - 85.9% compared with 78.4% in the second week of January.
And the US is now even looking at exporting propylene with one cargo reportedly settled for early May shipment to Europe.
Propylene contract prices had moved up by over 50% in the last six months but a significant drop in May contracts is now being predicted.
By Malini Hariharan
A turnaround in petrochemical fortunes in the US, as a result of falling gas prices, means that Dow Chemical is willing to wait to get the best value for its basic chemicals business.
At an earnings call last week, the company's ceo, Andrew Liveris, was clear that while Dow was committed to its asset light strategy it was also in no rush to form a joint venture.
"The fact that this business is earning this much money has made the business more valuable and we are definitely taking our time in structuring the right deal.
"Even though these are trough like conditions, the business is earning four to five times what is earned in the '01 and '02 trough, which is a spectacular statement," he said.
Dow's basic plastics unit reported $718m in first-quarter earnings before interest, tax, depreciation and amortisation (EBITDA). That was up substantially from $122m reported for the same time last year.
Dow was now intent on making the most money from a basic plastics joint venture, Liveris said.
Liveris was also optimistic that the rise in shale gas production would allow US petrochemical producers to retain their competitive position in the future.
"If you go into the next several years and you take the shale gas production that will come online in this country, then that in our view is a sustainable advantage for some years. The consequence of that is that US natural gas will start to stabilise, be less volatile as will indeed natural gas liquids (NGL),"
Another advantage was the flexibility of US crackers to take a variety of feedstocks.
"Ours is the most flexible in the industry. It has made the business and the assets more valuable for the foreseeable future," he added.
Flagging-up the dangers...
Source of picture: http://www.illusionsofdander.com/2007/08/car-dealerships-and-flag-companies-may.html
By John Richardson
THE recent 22% and 18% falls in US spot ethylene and propylene prices might be a sign that this yeat's price rallies have been more the result of stronger crude and petrochemicals re-stocking and supply constraints than sustainable demand increases.
As my colleague Nigel Davis, editor of the Insight section for ICIS news, wrote in the same article we linked to above on the C2 and C3 price retreats: "Inventories seem to have filled, with real demand growth now taking up the slack.
"The rate of that growth will very much determine producers' fortunes in the latter part of the second quarter and particularly in the second half of the year.
It is another reason to be cautious about the continued strength of the chemicals recovery if not the sustainability of the current upturn."
The big question - not just in olefins, of course, but in many commodity and also speciality downstream segments - is the continued strength of recovery in the light of the Greek debt crisis and further efforts by China to cool its economy down.
BASF CEO Jurgen Hambrecht summed up the need for caution on the release of his company's excellent first-quarter results when he said that there were risks from "the continuing financial and debt crisis, the winding down of national stimulus programmes, volatile raw materials markets, excess capacities, growing geopolitical tensions and protectionism".
He also makes the point that this quarter's results were always going to look good given that the world economy was in deep crisis in Q1 last year.
This will make quarter-on-quarter comparisons weaker as this year progresses because of the recovery that began to take hold in Asia, especially China, from the second quarter of 2009.
Dow Chemical's Greater China sales volumes could help prove the above argument. They grew by 46% in Q1 this year, but I very much doubt that this growth can be sustained as China's huge economic stimulus only started to deliver major benefits from the second quarter of last year.
My fellow blogger Paul Hodges has also repeatedly made the point, taking data from key chemicals consumption markets such as US autos and housing, that in absolute terms demand is a long way short of where it was in 2007-08.
By John Richardson
THE jury is out over whether the recent decline in US propylene prices will re-open arbitrage to Asia for polypropylene (PP).
Arbitrage for ethylene has remained strong with Dow Chemical disclosing that 20% of its US production went to Asia during Q1
US propylene contracts for May settled at a reduction of 12 cents/lb ($265/tonne, Euros209/tonne), according to a report by Houston-based colleague William Lemos on ICIS news last week.Polymer grade C3s settled at 63.50 cents/lb and chemical-grade propylene at 62 cents/lb.
The drop, the first in contract prices since October 2009 and only the second in the last 17 months, was the result of weaker demand and a decline in spot values.
But will it last?
At the same time as propylene has fallen, so has ethylene due to the easing of supply constraints. US ethylene contracts for April have slipped by 3 cents/lb ($66/tonne, Euros50/tonne).
The settlement, which leaves the monomer at 52.50 cents/lb, is the first drop in the monthly contract since July last year.
"According to producers and buyers, cracker feedstock is getting light again as ethylene values have dropped and producers are no longer able to crack any feed (both light and heavy) and make money on ethylene and co-product propylene, C4s, etc," Willliam told the blog.
"So, it seems crackers here will go back to the mom-and-pop routine of cracking NGLs (natural-gas liquids) to keep costs down and preserve their margins as long as possible.
"I heard a consultant say NGLs jumped to 85% of the feeds in April, compared with 80% in March. A caveat would be the start-up of Petrologistics in late July."
This is a propane dehydrogenation plant in Houston that will add 544,000 tonnes/year of propylene capacity to the market, added Willam.
"Crude could be another factor. If prices stay in the mid-70s/tonne it could help keep costs down and encourage heavier cracking in the months ahead."
Yesterday, though, crude jumped by around 2% on confidence over the EU Greek rescue package, in line with the huge rebounds in global stock markets.
You hardly have to be an Einstein t forecast a lot more volatility in days and weeks to come.
An industry source agreed that propylene costs would soon increase again in the States.
"US gasoline stocks are at record highs and the US is exporting lots of gasoline right now. Stocks are very high ahead of Memorial Day (May 31) which should not be the case if we are going to have a strong US driving season," he said.
"So I don't see the recent increase in US refinery operating rates and therefore the lower propylene prices being sustained. I see C3s going up again and so no arbitrage to Asia."
He added that the situation for ethylene economics was more complicated.
"True, supply constraints are easing for ethylene which has pushed the price down, but the ethane sellers are charging quite a high premium over Henry Hub right now and with gas-oil so cheap (because of very long overall middle distillate markets), this makes cracking gas-oil attractive."
By Malini Hariharan
The blog has been writing about the softening in olefin and polyolefin prices in the US. But the European market presents an interesting contrast offering arbitrage opportunities for those willing to take the risk.
Operating rate reductions have been reported at crackers in Priolo, Italy; Tarragona, Spain; Carling, France; Cologne, Germany; and in the UK at Grangemouth, writes Nel Weddle the ICIS pricing olefins editor.
However, none of these have been officially confirmed by the companies concerned. But operating issues have been confirmed at Borealis' cracker at Porvoo, Dow Chemical's No 2 cracker at Terneuzen and LyondellBasell's plant at Berre in France.
Enquiries for spot ethylene have increased but propylene remains soft as problems at derivative plants has freed up supplies.
Linda Naylor, the ICIS pricing editor for polyoelfins, reports that tight supplies have forced some PP buyers to agree to a price hike of Euro30/tonne (about $38/tonne) for May shipments.
Buyers had hoped that the tightness experienced since January would ease in May. But the situation has not eased because of operating issues at plants around the region.
Firm European prices should tempt traders to bring in product from other regions. But no deals have been reported as a weak Euro coupled with expectations of a price slide in the second half of the year has made traders reluctant to take a position in the market.
Greed definitely not good for chemicals....
Source of picture: reelmovienews.com
By John Richardson
THE chemicals industry is once again confronting the risk of being badly damaged by the ever-more interconnected oil, other hard commodity, currency and equity markets.
As fellow blogger Paul Hodges told us last November: "Demand visibility - even without as yet a collapse in crude - is already extremely poor, making planning very difficult.
"More companies go bust in an upturn than a downturn, because of the inevitable increase in working capital. This is a major risk in 2010, given the fragile state of the financial system, and banks' unwillingness to lend."
We have now seen a mini-collapse in crude from around $87/bbl at the beginning of May to this morning's NYMEX price for July delivery of $70.33/bbl.
One of the reasons for poor visibility back in November was confusion over to what extent crude prices reflected a fundamental improvement in demand versus financial speculation that a sustained global economic recovery was just around the corner.
Now we have our answer: Money has poured out of crude and into the US dollar, indicating widespread aversion to risk and a clear indication that the rise in oil prices was, indeed, mainly built on speculation. The switch to the dollar, as the US dollar carry-trade starts unwinding, could gain very damaging momentum.
Further strengthening of the dollar would also very likely lead to greater reductions in other futures-traded commodities, such as metals - and equity markets.
John Authers of the Financial Times neatly summarises the evolution of markets to where we are today.
Problems he identifies include the rise of super-fast computers that can move hundreds of millions of dollars in milliseconds between commodities and equities, the "other people's money" syndrome" (i.e. the rise of trading by institutions), and "herding" - investment managers following the general trend because of the way they are incentivised.
This has exacerbated bull runs and has made bear markets worse.
Fear has once again overtaken the investment community as talk of a double-dip recession and deflation regain popularity.
Until or unless regulations are introduced to make commodity and financial markets less greedy, less short-term, and less driven by what Hodges describes as "irresponsible bankers", an important part of managing chemicals businesses will remain understanding how all these markets work.
Out of the investment deep-freeze?
Source: tehrandaily.wordpress.com
By John Richardson
A VERY interesting story from my colleague Bee Lin Chow on ICIS news today reports the signing of a memorandum of understanding (MOU) between Sinopec and Iran's National Petrochemical Co (NPC).
The agreement will explore joint- venture opportunities in petrochemicals and related businesses in the two countries.
China needs oil and has the political muscle and pragmatic mindset to in some cases place energy security above geopolitical concerns such as alleged nuclear proliferation and human-rights abuses.
Hence, it is now talking to Iran about petchem and associated investments.
And it has done energy deals in the past with Sudan and other countries with dubious human-rights records.
Iran, as we reported on the blog last October, is finding it increasingly difficult to get the foreign investment it needs to develop iits refining, gas-processing and petrochemicals industries. Even obtaining catalysts to run plants has reportedly become difficult.
New investment is sorely needed to shore up the economy. Value is, for example, being given away as Iran exports crude and imports gasoline with domestic pricing of the fuel heavily subsidised.
And in petrochemicals, limitations on gas extraction can cause erratic operations at existing crackers.
Lack of feedstock supply and an inability to source foreign investment and technologies have also stymied growth in petrochemicals capacity.
The scope of the MOU between Sinopec and NPC also involves joint marketing of products.
This might help Sinopec limit price disruptions in the Chinese market that might occur at times of sudden influx of Iranian petrochemical products.
Source of picture: http://www.andrewgriffithsblog.com/
By John Richardson
DOOM-MONGERS are scratching their heads as to why the global petrochemicals industry has remained in such a healthy state over the past 18 months.
Old assumptions are, as a result, being challenged. It would be a painful irony if these assumptions are changed just as a new global economic crisis creates yet another set of realities.
Right now, it is far too early to say that the end is nigh.
Sure, we have seen Asian ethylene margins take a hammering over the last couple of weeks - but all that seems to have happened is that they have gone from obscenely good to still pretty good in historic terms.
The correction was always going to take place as the full impact of Shell Chemicals in Singapore switching from a major net buyer to a net seller of ethylene was felt by a thinly-traded spot market.
The fall in oil, polyethylene (PE) and mono-ethylene glycol (MEG) prices on the escalation of the euro crisis for the week ending 21 May were obvious other factors.
Last Friday (28 May), ICIS pricing reported no further reductions in PE values, whereas ethylene had tumbled a further $160/tonne to $980-1020/tonne FOB Korea.
But the decline in ethylene came before the end-of-the-week rebound in crude to around $75/bbl.
This reaffirmed that the weakness in petrochemicals pricing is all about the euro crisis, China's economy, geopolitical tensions in Korea and their impact on confidence across many economies and industries.
To get back the original point of this article, just why therefore have the doom-mongers been proved wrong - and why do the optimists believe that this will continue to be the case?
"I think it could be because petrochemicals demand-growth in the four biggest emerging economies in Asia - China, India, Indonesia and Vietnam - is much-higher than many of us had expected," said a former doom-merchant.
"I think we need to go back and re-examine our assumptions and re-crunch our data. Maybe, for example, we are no longer looking at growth multiples of 1.2 times GDP (gross domestic product); perhaps they should be more like 1.5 times."
The other big factor we've well-documented on this blog is delays in project start-ups.
These look set to continue because of a myriad of issues including manpower, technologies and the use of inferior equipment when building costs were at their peak.
The iron operating-rate discipline of Western producers also looks likely to persist.
Highly-nervous shareholders will accept nothing less and for private equity companies such as LyondellBasell and Ineos, cash-flow remains King.
My London-based colleague Nigel Davis, editor of the Insight section of ICIS news, reports that inventory management in Europe remains exceptionally rigid down all the value chains.
"European crackers are running at an average operating rate of around 80%", added a source with a North American PE producer.
So if the euro crisis does escalate, resulting in damage to strong Asian economic fundamentals and the moderate improvement in the US, production is likely to be cut even further. This might be enough to bring markets back into balance, provided this new economic crisis isn't worse than the last one.
And if the oil price was to fall to the low $60s/bbl and stay there, a further output cut by OPEC is likely to happen in attempt to get the crude price back up to the target range of $70-80/bbl.
This would mean even less associated gas for Saudi Arabia's crackers. They are already operating at below 100% because of feedstock supply reductions resulting from the current OPEC production quotas.
A further factor behind strong margins has been the steep drop in ethane-gas prices in the US thanks to the rise in overall gas supply.
We all knew that butadiene, and C4s in general, would become tight because most of the new cracking capacity is gas-based. What nobody had predicted was the big switch to lighter feeds in the US by existing cracker operators.
So anybody operating a liquids cracker with butadiene extraction is enjoying excellent returns.
As we said, it is still very possible that we will get through this current crisis intact with margins remaining very strong.
And with so little new capacity planned for post-2011, what are the odds against another fly-up sooner than is expected by the pessimists?
By Malini Hariharan
Asian aromatics markets are getting increasingly hard to read not merely because of volatile crude prices.
Demand, usually strong at this time of the year, has so far failed to materialise. The US gasoline season has started on a slow note. In Asia, benzene demand has been hit by maintenance shutdowns and operating troubles at styrene plants. And Chinese refiners have preferred to use MTBE instead of toluene for gasoline blending.
On the supply side, operating rates at reformers and pygas-based units have been kept high in anticipation of demand. And even now, producers are hesitating to cut output as they do not want to be caught with low stocks once demand kicks in.
"Though the market is long now, the volumes can be easily consumed when demand comes," says Leonard de Guzman of Dewitt & Co.
But when that will happen is still uncertain. The US is said to be awash with gasoline and summer driving is predicted to remain much lower than what it was two years ago.
The US Energy Information Administration's (EIA) Gasoline Summer Consumption and Supply report predicted an increase of just 0.9% in gasoline consumption this summer, but gasoline stocks were about 7m bbl (3%) higher than the start of the 2009 driving season.
Source: ICIS pricing
The net result is an oversupplied market that pushed benzene prices down by 18% in May and toluene by 17%.
Prices rose last week on stronger crude prices but fell again in the last few days.
Producers are struggling with high stocks. It is estimated that Sinopec is holding a benzene inventory of around 40,000 tonnes, double the normal level.
De Guzman predicts that Asian benzene will be slow to recover as the global inventory situation has still to be resolved.
The key, he says, is operating rates at reformers - will they be cut or will producers keep them running in expectation of the summer gasoline demand and also a recovery in styrene demand.
By Malini Hariharan
Asian polyolefins (PO) producers are seeing no signs of an immediate recovery in demand and pricing as buyers in the key China market continue to remain on the sidelines.
There are just too many negative factors, says one producer referring to concerns about the economic health of Europe, the Chinese government's efforts to control asset bubbles, volatile crude oil and additional supplies from new plants in the Middle East and China.
This is probably the reason why prices in the physical market did not increase despite an improvement in linear-low density polyethylene (lldPE) futures on the Dalian Commodity Exchange.
A second producer does not expect Chinese demand to pick up for the next couple of months. "The controls on real estate mean that the construction sector will be weak. We are also hearing that car companies are holding very high inventories of more than 1m cars; they do not want to produce more. And while the film sector is not too bad, the agricultural film season is over," he explains.
Chinese exporters of finished products are reported to be seeing delays in shipments as European buyers have asked for deliveries to be spread out over a long period.
And another worrying trend, says a market participant, is that Chinese buyers at the second level of polymer distribution chain are backing out of contracts. That is contributing to the pessimism, he adds.
Asian producers are also anticipating higher export volumes from the US where domestic polyethylene (PE) prices are continuing to fall.
US producers have reduced June offers by 4cents/lb, reports ICIS news. And buyers are gunning for further reductions.
"I expect more, maybe a couple of cents," a US buyer said. "Our demand isn't slow. I think they [producers] just built up inventory while pretending they were short."
A question that is being increasingly asked is whether Asian producers will start cutting operating rates to prop up markets.
But as can be seen in this chart, from ICIS pricing, margins for Asian naphtha crackers have fallen sharply in June but are still fairly comfortable at around $200/tonne.
"The second half of 2010 could get more dicey especially if the new Middle East capacities for ethylene and PE flood the market. Margins will then start to deteriorate. In 2001, Asian cracker margins were not even $100/tonne. We are not there yet but the potential of getting there is very real," says Larry Tan, ICIS pricing's director of data & analytics in Asia.
But in the midst of all the pessimism certain segments such as lldPE hexene and lldPE octane are doing well. Producers' inventories are still at manageable levels. And there is confidence that Chinese demand for local consumption will remain strong, although exports, despite the jump in China's May numbers, is a matter of concern.
Deepwater disaster expected to impact shale gas
Source of picture: Minnpost.com
By John Richardson
THE booming shale-gas industry could either benefit or suffer from the BP Gulf of Mexico oil-well disaster, with the end-result determined by the effect on energy prices of any long-term clampdown on deepwater and Arctic drilling.
Those for and against shale gas are lining-up to make their cases as to why the BP catastrophe will be a negative or a positive for what Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, says is "the most significant energy innovation so far this century".
An executive with a Houston-based oil and gas services company told the blog: "Shale gas may well enjoy an easier regulatory ride in the US in light of the fact that deepwater and Arctic drilling is going to be a lot more problematic.
"If you can't get your energy from far out at sea or under the Arctic and the US still wants to improve its energy security, then shale gas is the obvious solution as it is onshore and therefore easier to deal if there is an incident. It's also inherently safer than going offshore."
And he pointed out that politicians will surely decide to pursue the path of least resistance.
"Once Deepwater Horizon has faded in the public imagination - i.e. when it drops out of the 24-hour news cycle - the focus of voters will return to the cost and availability of energy.
"The White House will face the choice of either seeing energy costs rise or letting the development of the perfectly-safe shale gas process continue."
Last month, in a supplement on the natural-gas industry, the Financial Times quoted Scott Van Bergh, an energy expert at Bank of America Merrill Lynch, as saying that higher deepwater hurdles might make shale-gas exploration and production (E&P) easier.
Negative publicity towards shale gas looked as if it had slowed, he added.
But his comments came before two incidents at the Marcellus shale -gas field in Pennsylvania earlier this month. One involved a gas leak and the other an explosion which injured seven workers.
And the hydraulic fracturing or "fracking" process used to extract the gas from the shale remains under scrutiny because of emissions and groundwater pollution claims.
Congress has, as a result, asked the US Environmental Protection Agency to complete a comprehensive study into fracking.
The US-based Natural Resources Defense Council argues that the oversight and insufficient regulations that have occurred offshore are an equal concern onshore.
The outcome of this whole debate could have big implications for petrochemicals.
In the US, the big oversupply in US gas has helped to make ethane cracking a lot more advantageous.
The other factors behind the fall in US natural-gas pricing is liquefied natural gas (LNG) oversupply and the drop in gas demand resulting from the economic crisis.
To date, the benefits delivered to US petrochemicals by the rise in shale-gas production have been indirect through its contribution to the drop in overall gas prices.
Continued E&P is seen as crucial to fulfilling the current forecast that US total gas reserves will last a further 100 years. Before the shale-gas technology breakthroughs, reserves were only expected to last 30 years.
Plus, there may be opportunities for direct feedstock supply from shale gas via any fields which prove to be rich in natural-gas liquids (NGLs).
And overseas, there's huge interest with feasibility studies taking pace in countries such as China, the UK, Austria, Germany and Poland.
The studies in Poland have indicated that shale-gas reserves could raise total European natural-gas reserves by 50%. But questions have been raised about the accuracy of these estimates and how quickly and effectively Polish and other reserves can be developed.
Still, though, the shale-gas revolution - provided it is not stymied by regulations - could benefit petrochemicals outside the US through advantaged feedstock.
This possibility has arisen as the Middle East gas advantage erodes, raising the chance of new places to build super-competitive crackers.
In the end, energy costs and energy security seem certain to set the future of shale gas globally, as well as in the US.
The unfeasible alternative is a radical change in consumer behaviour and lifestyle expectations.
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.
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He also believes that environmental problems that have halted investments at the country's Map Ta Phut petrochemicals complex will be resolved.
Europe and China: A two-tier market is hard to bear...
Source of picture: blog.pinkcakebox
By John Richardson
CHINA'S polyolefin pricing is likely to remain under downward pressure over the next few months as a result of a persistent inventory overhang, new supply and weak construction and auto markets, two traders and one producer have told the blog.
And as we reported earlier this month, falling US PE prices are raising concerns over very competitively-priced imports from the States.
The weakness in the Chinese market is in contrast to Europe, where tight supply is keeping prices firm and is attracting imports.
A further negative factor in China might be a stronger Yuan, which could encourage price-cutting by local suppliers, the producer said.
But so far this week the local currency has both weakened and strengthened against the US dollar following the weekend announceement that it would be allowed to trade in a wider daily band across the US dollar.
One argument is that the government's decision was designed to engineer more volatility in order to discourage currency speculation and not a stronger Yuan.
Reports
www.theage.com.au
