Chemicals & The Economy

The blog's New Year Outlook has just been published in ICIS Chemical Business. Please click here if you would like to download a copy

It suggests that 2010 turned out to be a better year than many in the industry had expected. But even so, global operating rates (OR%), at 86%, remain well below those considered normal over the past 20 years.

So the key question is: What happens next?

Will the recovery continue, and OR% return to more normal levels, perhaps even to another 'super-cycle'?
Will they simply stabilise at today's levels?
Or will a slowing Chinese economy, plus the switch from stimulus to austerity measures by many governments (particularly in Europe), lead to a further fall as demand growth slows?

Equally, it is becoming clear that we are heading towards a New Normal in terms of global demand patterns.

So the article suggests that Scenario Planning is becoming essential, as we seek to position our businesses for an increasingly uncertain future.

Crude oil prices have been rocketing lately. In turn, they have produced the seemingly 'strong' year-end for the chemical industry forecast by the blog in early November.

At this point, there is a clear divergence of view. The blog's bullish friends see this as a sign of a major recovery in demand, and confidently forecast prices over $100/bbl during H1. And, of course, Wall Street will no doubt remain very keen to continue booking its current profits from selling futures contracts to gullible pension funds.

But given the fundamentals of supply and demand, the blog is finding it more and more difficult to believe that prices can rise much further, with global inventories stuck at record levels.

Two arguments suggest we are getting close to the end of the rally:

• China is the major source of demand growth. But as Petromatrix note, its gasoline and diesel prices are at record highs, 41% above early 2008 (due to its 2009 move to better link prices to world levels). Whilst traffic congestion has now led Beijing to restrict new car sales to just 240k in 2011, one third of 2010 demand.
• Equally, the euro's weakness means that European prices are close to record levels. As the chart shows, they are at April 2008 levels of €70/bbl.

The blog is not yet quite ready, as in July 2008, to forecast that the bubble is about to burst, in the absence of geo-political factors.

But it is becoming more and more convinced that prices cannot stay at current levels without something extraordinary happening to either demand or supply.

The above chart is very welcome news at the start of 2011.

It updates the blog's posting in July, which highlighted the dramatic increase in mentions of force majeures in ICIS news during H1. This linked to increasing concerns about availability issues amongst consumers. The fear was that maintenance spend on plant and equipment might have proved a soft target for cutbacks, during the difficult times seen in 2009.

The blog expressed the hope that "H1's better earnings will now encourage companies to reinstate any spending deferrals that have been made". And so it is delighted to see that H2 saw a stabilisation in the number of mentions.

In February, mentions had been 675% higher than in February 2009, and June was still nearly 400% higher. But H2 saw a major improvement: its total of 197 mentions matched the 202 mentions of H2 2007, when business was still booming.

This is an excellent result, and all those involved deserve congratulations.

We face more uncertainty today than I have ever seen over the past 30 years.

Will last year's strong performance in terms of profit continue? Or will higher oil prices ruin the party?
Might China's demand slow, as the government there worries about rising inflation?
How will European demand be impacted as governments switch from stimulus programmes to austerity?
Equally, what will happen in the USA, where we will have a Republican Congress up against a Democrat President for the first time in a decade?

Demographics are also likely to play a key role as we move towards the New Normal. The majority of the BabyBoomer generation (those people born between 1946-70), will soon be in the 55+ age group, when people typically spend less and save more. How will this massive shift by the wealthiest generation in history impact demand?

The Blog's new White Paper aims to help your company manage this uncertainy, as we transition to the New Normal. It focuses on the benefits of Scenario Planning, as a way of highlighting the key issues. Please click here if you would like to download a free copy.

I hope you will find it helpful.

The blog has gained important support for its view that oil prices are too high. and threaten the current economic recovery.

In an interview with the Financial Times, the chief economist of the International Energy Agency (IEA), Fatih Birol, has spelled out its view that "oil prices are entering a dangerous zone for the global economy."

The IEA estimates oil costs in the OECD richest countries have jumped $200bn to $790bn over the past year, reducing OECD GDP by 0.5%. The OECD accounts for 65% of all global oil imports, and Birol reminded OPEC that "oil exporters need clients with healthy economies. But these high prices will sooner or later make the economies sick, which would mean the need for importing oil will be less."

He also called for OPEC to increase production, in order to bring prices down to more sustainable levels, adding they need to "show their understanding that these high prices are not good for the global economy." Otherwise, he warned, current "price levels could bring us to the same financial crisis times that we saw in 2008."

GE's then CEO, Jack Welch, launched the Shareholder Value concept in 1981. It has since led many investors to adopt a purely short-term focus on financial metrics, rather than longer-term opportunities.

The only problem is that, as Welch admitted 2 years ago, it was "a dumb idea".

Now, one of the world's great management thinkers, Michael Porter, has launched his suggestion for a replacement. Writing in the Harvard Business Review, he proposes the concept of Shared Value - which focuses on the connections between societal and economic progress. And he argues this has the potential "to unleash the next wave of global growth".

Porter goes on to define the concept as follows:

Society's needs are huge--health, better housing, improved nutrition, help for the aging, greater financial security, less environmental damage. Arguably, they are the greatest unmet needs in the global economy. In business we have spent decades learning how to parse and manufacture demand while missing the most important demand of all. Too many companies have lost sight of that most basic of questions: Is our product good for our customers? Or for our customers' customers?

Thus he suggests food companies need to refocus on "the fundamental need for better nutrition" instead of simply trying to sell more product. Equally he applauds Dow for reducing freshwater usage at one US site by 1bn gallons - saving itself $4m, whilst freeing up enough water to supply 40000 people.

He also highlights Hindustan Lever's Shakti programme, described in the blog in September. This is spreading the use of its soaps and disinfectants, and so helping to reduce disease, as well as providing employment for 45000 women across 100000 Indian villages. Equally importantly, it now accounts for 5% of Unilever's total revenues in India.

The transition to the New Normal is creating great uncertainty, as described in the blog's new White Paper. But Porter's insight helps to define where we are headed. It also confirms that the New Normal offers great opportunities for those companies who can identify new products and services that will provide Shared Value for their customers.

As the chart shows, December's US auto sales (orange line) were the highest monthly level since August 2009's 'cash for clunkers'. But it was only achieved via a massive 7% jump in purchase incentives, which were back at Q2 2009 levels of $2700/vehicle. And 2010 was still the second worst year for sales since 1982, after 2009, with total volume of just 11.6m.

The issue, of course, is that people don't buy new autos if they are worried about losing their job. And sadly, Friday's monthly jobless figures gave no sign that the job market is about to improve, with just 103k new jobs created. Overall, 14.5m Americans were unemployed, with another 6.5m not counted as jobless as they had given up looking for a job. As the Wall Street Journal notes:

"8.4m jobs were shed during the recession, and in 2010 just 1.1m were added. At December's pace, it would take 70 months--or until late 2016--to make up for the rest of the jobs lost."

Thus it looks as though we may be looking at an 11 - 13m range for auto sales over the next couple of years. This would be well down on the 15 - 17m range seen between 1995 - 2007.

However, the mandated 40% increase in auto efficiency by 2016 will balance this decline. Replacing steel and glass is creating a need for more lightweight polymers and other materials, and the American Chemistry Council reported this week that average polymer demand rose to 384lbs (175kg)/vehicle in 2010.

In turn, this will hopefully provide good opportunities for many of the innovative chemical companies now supplying the sector.

The Falkirk Herald, INEOS's local newspaper in Scotland, has had to wait a long time for its 'scoop' of June 2009 to be confirmed. It had reported then that INEOS was in talks with PetroChina about the future of the Grangemouth refinery.

As PetroChina noted at the time, "downstream business has a poor margin nowadays and talks can take a really long time". But now the two companies have confirmed they plan to establish a "partnership in new trading and refining joint ventures related to the refining operations in Grangemouth (Scotland) and Lavéra (France)".

They expect to establish the trading and refining JVs by the end of June. In addition, they have announced a strategic co-operation agreement to share refining and petrochemical technology. The aim, according to the companies is to "create a true strategic partnership", seemingly focused in 3 initial areas:

• Refining, based on the Grangemouth and Lavéra refineries
• Oil trading, presumably replacing the current arrangement with Morgan Stanley (whose investment arm are advising INEOS on the PetroChina deal).
• Acrylonitrile, where INEOS's technology will support China's plans for domestic investment

INEOS will receive a cash injection when the JVs are formed, which it says will be used to pay down some of its current €7bn debt.

The JVs will also enable it to make progress with what INEOS director Tom Crotty terms its "two big strategic objectives" - growing its geographic footprint outside the West, and leveraging its technology in China.

In October 2008, the blog featured the US Treasury official responsible for running the $700bn TARP rescue fund. He was 35 years old, and just 6 years out of business school.

Apparently there was nobody available with more experience to take on the role of "choosing which US financial institutions live, and which die", during the financial Crisis.

Now, the same policymakers are making the same mistake again.

According to the New York Times, the senior trader responsible for the US Fed's new QE2 $600bn Lifeboat programme is just 34 years old, and supported by 3 junior traders who are only 26 and 29 years old.

He is apparently in charge because his boss, who runs the Fed's markets group, once wrote an academic paper on the subject with current Fed Chairman Ben Bernanke. This supposedly qualifies him to trade on equal terms with Goldman Sachs and the other 17 primary dealers. But the blog rather doubts they will be putting similarly inexperienced traders on the job.

This further example of the Fed's naivety when dealing with Wall Street may, therefore, be at least part of the reason why US interest rates have risen, not fallen, since it began the QE2 programme in November.

Many of the blog's readers have been known to sample the occasional glass of wine. So it thought new research, from the IMF (International Monetary Fund), on the linkage between higher prices for fine wine and crude oil, might be of general interest.

The IMF's researchers wanted to analyse "the causes of extreme fluctuations in commodity prices from 1990- 2010". And they found, as the chart shows, that both markets are now being driven by common forces.

The authors say factors such as climate, grape quality, and age are not key drivers for wine prices. Instead, they found a 90% correlation in 2002 - June 2010 between wine prices and those of crude oil. And apparently, this has strengthened since the financial Crisis began in 2007.

The reason is the rise of naive investors, who somehow believe that investing in fine wine, or crude oil, diversifies their portfolio risk. So they have decided that both can qualify as 'alternative assets', replacing stocks and bonds.

So now we know. These investors are not only making our work more difficult, by bidding up the price of the industry's major liquid feedstock, crude oil. But they are also increasing the cost of our key after-work feedstock as well.

Several blog readers have suggested it should highlight the arrival of Incoterms 2010, which took effect from 1 January this year.

As always, since first publication in 1936, they have been produced by the International Chamber of Commerce (ICC). They are important, because they define the terms of delivery for chemicals, and all other traded products.

This is the first revision for 10 years, and so far seems to have attracted little public comment. Of course, the ICC is a 'neutral' body, and so its terms do not advantage either buyers or sellers. Equally, their use is not mandatory, and people can still continue to use Incoterms 2000 if they prefer.

But there is certainly a concern in some companies that this lack of discussion may lead to them being specified them in new contracts, without everyone fully understanding their implications. As one expert told the blog, "the trick is to make sure you read them, and really understand them".

Another senior purchasing manager with a global major emphasised that "there are a host of small, subtle, but significant changes". For example, DDU (Delivered Duty Unpaid) has been abolished. Equally, CIF (Carriage, Insurance and Freight) can only be used for maritime shipments.

The concern is that the use of Incoterms 2010 may lead to confusion, if one side to a transaction doesn't realise changes have been made. In turn, this could cause delays to a shipment, and to increased costs.

Incoterms are not a glamorous subject. But the blog would certainly recommend anyone involved with product movements to make sure they really understand where their liability starts under Incoterms 2010 and, more importantly, where it ends.

US crude oil and product stocks have started the year where they finished in 2010. As the black dot on the above chart from Petromatrix shows, they are at yet another seasonal record. In terms of numbers, they are 101 million barrels above 2008 levels, and even 8 million barrels above last year.

It is clearly a nonsense that prices are still rising, when inventories have been so high, for so long. It is also bound to cause serious problems for the chemical industry when these stocks begin to be unwound, and prices fall.

In the short-term however, it is also leading to political instability in emerging economies, as food prices rocket. As the Financial Times has noted, "intensive agriculture is effectively the extraction of food from petroleum":

• India's government is facing serious problems over the rising cost of onions, an essential cooking ingredient
• China is now allowing vegetable trucks to travel toll-free on motorways, to try and keep costs down
• S Korea has released emergency supplies of cabbage, pork and other staples

The blog can't help feeling that this state of affairs can't continue for too much longer.

December was a good month for global auto sales.

China's volume jumped to 1.3 million, as buyers rushed to capture stimulus discounts before they ended. In Beijing, many 'brought forward' planned 2011 purchases, in order to beat the new quota system, which aims to reduce congestion by capping 2011 sales at just 240k versus 891k in 2010.

Overall, this meant China became the largest auto market in the world, with sales of 13.76 million. Its volume has doubled from 6.7 million sales in 2008, due to government stimulus policies. But local opinion is divided about whether this pace can be sustained.

Most expect growth to slow to around 10% in 2011, although some forecast a short-term decline in sales. And there are also suggestions that manufacturers will now need to target the 4th and 5th tier cities, with different business models, rather than continuing to focus on the major cities.

Meanwhile, as the chart shows, Europe lost its 2009 position as the largest market. Sales overall were down 6% at 13.36 million, still well ahead of the previous leader, the USA. But Q4 saw volumes down 9% following the end of stimulus measures. Overall, operating rates in Germany, the largest market, are now back to 85%, versus 62% in Q2 2009.

Major changes are underway in demand patterns for chemicals and polymers.

They are being driven by demographics.

The 'BabyBoomers' (those people born between 1946-70 in the major industrial countries) are the richest, and largest, generation the world has ever seen:

• As they entered the 25 - 54 age group, they caused an explosion of demand.
• This is the age when people marry, settle down, have children.
• It is therefore the period of peak demand for most chemicals and polymers.
• Now, as the chart shows, they are moving into the 55+ age group.
• 55+ is the time when people tend to save more, and spend less.
• The Boomers also now have the longest life expectancy of any generation.
• So they will have to save more.
• This means major changes in Western demand patterns.
• It also means export-driven development models in emerging economies must change Instead, Asian and Latin American countries will have to refocus on domestic demand.

Next month, in association with ICIS, the blog will running a Workshop on the New Normal in Singapore. The aim will be to help participants to better understand, and profit from, these massive changes.

Please click here if you would like further details.

China's economy ended 2010 on yet another high.

As the chart shows, bank lending (red column) and electricity consumption (blue line), remained very strong:

• Electricity usage was up 15% in 2010 versus 2009
• Bank lending was RMB 7.9trn ($1.2trn), above the RMB 7.5trn target

The change since the start of the Crisis is even more significant. Electricity consumption is up 22% versus 2008, and lending up a massive 62%.

Unsurprisingly, property is at the centre of the boom, with total sale volumes up 12%, and total value up 22%, versus 2009. Similarly auto sales, also central to chemical and polymer demand, were up 34% versus 2009 and have doubled since 2008.

Without China, global chemical demand would have been miserably low over the past 2 years. Therefore, we can only be grateful that it has taken off so extraordinarily. But can this pace be sustained?

If it was a Western economy, economists would now be pointing at rising inflation, and the housing bubble, and calling for policymakers to slam on the brakes. So far, this hasn't happened. But Li Keqiang (expected to be the next premier) is clearly increasingly concerned.

This major question mark over the sustainability of China's current Boom is one major reason why the title of the blog's new White Paper is 'Budgeting for Uncertainty'.

The blog has been in the USA this week, speaking at the bi-annual Global Coatings Summit. Coatings sales are worth $75bn globally, and are a key market for chemicals.

Interestingly, much of the discussion centred around sustainability. In spite of the downturn, it is clear that consumers are now very focused on carbon footprint as an issue, and have moved beyond simple compliance issues, such as the removal of lead, solvent-free coatings etc.

Sherwin-Williams CEO, Chris Connor, highlighted major problems in the USA of "over-leveraged consumers and businesses" and "unsustainable government spending". Whilst Akzo Nobel CEO, Hans Wijers, noted that the world is currently consuming at a rate of 1.4 times the plant's replacement ability. He suggested this represented a major opportunity, as well as a challenge, for the industry, and outlined a number of potential new types of 'offerings', including:

• Seasonally-responsive coatings, to reduce energy consumption in buildings
• Self-repairing coatings, that would reduce the need to repaint
• Increasing recycle rates by developing 'release on command' molecules
• Solar energy conversion products for roofing and glazing

These would build on successes in the marine and aviation coatings field, where current paints reduce energy consumption by 5-10% in ships and planes.

Wijers added that it was "easy to talk about these ideas, but difficult to do them". He suggested a move towards global standards, monitored by a body such as the WTO (World Trade Organisation), would help to build momentum.

His points were reinforced by Dow Advanced Materials CEO, Jerome Peribere, who argued that "sustainability is the biggest single challenge ever presented to the global chemical industry". Noting Dow's development of a binder to remove formaldehyde from air, he suggested there was a $20bn market opportunity for "clean and sustainable innovations" in the coatings field.

Overall, the Summit made clear that companies are now moving beyond their historical focus on products that provide 'protection'. In the New Normal, the winners will be those who can most contribute towards towards 'positive enhancement' of the environment.

Last March, the blog highlighted the major changes taking place in ethylene, propylene and butadiene prices versus naphtha. It also analysed them in ICIS Chemical Business in September. The above chart now summarises the 2010 outcome, using European prices to enable comparison over the last 30 years.

It was a most remarkable year.

The chart shows the US$ 'spreads' of the 3 olefins versus naphtha, in real (inflation-adjusted) terms. It highlights how these remained within a $200 - $500/t range between 1992 - 2004. Before this period, ethylene had been the main price driver, with propylene and butadiene often seen as by-products.

The 2004-8 SuperCycle led to dramatic increases in these spreads, which then fell back to historical levels in 2009. But 2010 saw volatility rise again:

• Ethylene spreads (blue line) climbed to $551/t, due to feedstock shortages in the Middle East and ex-refineries in Europe.
• Propylene spreads (red) averaged $527/t, as US crackers turned to gas feedstocks, and operating rates for US/European refineries reduced.
• Butadiene spreads soared to a record $951/t, as output fell due to lower liquids-based operation on steam crackers.

In addition, of course, prices were supported by the rise in crude oil prices, as naphtha remains the main feedstock for olefin production.

This was remarkable enough, given that demand remained relatively weak in key sectors of the global economy, outside of China. But the combination of feedstock changes, and lower operating rates, led to both butadiene and propylene trading above ethylene for much of 2010. This has never been seen before on such a sustained basis.

The blog would feel more comfortable about forecasting a continuation of such trends, if they had been due to solid demand. But they were in fact mainly supply-driven, with OPEC quotas reducing ME feedstock availability, and lower gasoline demand reducing US/European refinery output. Equally, China's remarkable growth was due to massive government stimulus.

It will therefore be critical to see whether these trends can be sustained in 2011? Can polypropylene maintain its volumes at parity pricing to polyethylene? And what will happen to consumers' discretionary spending, which drives petchem demand, with oil prices at such high levels? The blog will continue to keep a very close eye on developments.

Benzene has always been the blog's favourite indicator for the economic outlook. It has the most number of applications, due to its head-start in being a major product when coal was the main feedstock. Equally, paraxylene (PX) is an excellent indicator of demand in emerging economies, as their rise in living standards leads to greater use of polyester-based products.

The chart shows the US$ 'spreads' of the 2 products versus naphtha, in real (inflation-adjusted) terms, using European prices to enable comparison across the past 30 years. It highlights how:

• Benzene spreads (green line) have remained within a $150 - $400/t range for most of this period, with gasoline market changes driving weakness in the late 1990s and strength in the mid-2000s.
• PX (purple) has seen much more volatility. This was mainly caused by gasoline markets, as xylene availability depends critically on refiners' need for octane.

The chart also shows, however, that the 2004-8 SuperCycle led to a similar upturn in 'spreads', to that seen for olefins. Demand during this period was very strong, due to central banks' policies of stimulating the core petchem sectors of housing and autos via lower interest rates.

But there was no real sign of strength in the spreads during 2010. Benzene recovered a little, and PX weakened, but both were in the centre of the historical range. And this was in spite of central banks around the world flooding financial markets with liquidity, on an unprecedented scale.

This is further support for the argument that demand was not the key cause of the tight markets often seen during 2010. And the fact that olefin spreads rose, whilst those for aromatics stabilised, highlights a key difference versus the picture of strong overall petchem demand seen during the SuperCycle.

There was much discussion in the popular media of a possible US housing market upturn, during the blog's visit last week.

It was based on news of a 17% rise in building permits during December, often a leading indicator of future demand. But as the above chart shows, from the American Chemical Council's weekly report, the uptick is very minor in the context of historical volumes for permits (red line) and housing starts (blue).

The ACC's experts add that even this rise is somewhat misleading. It appears to have been due to "homebuilders racing to get projects approved before building codes changed" in January. And they further caution that even so, the main strength was seen in the always more volatile multi-family sector.

This week's news, of a further fall in the S&P Case-Shiller home price index, reinforces this caution. Prices have now been falling again for 6 months, and the Index chairman Index warned "a double-dip could be confirmed before spring" with prices in 9 of the 20 major US cities already below 2009's lows.

Recent days have seen some signs that the tectonic plates under current chemical and polymer markets may be starting to shift.

The most important has been the rapid rise in inter-bank lending rates in Shanghai. As the chart shows from Petromatrix, these have begun to rocket. A year ago, the rate at which banks could borrow from each other (SHIBOR, Shanghai InterBank Offered Rate), was 1.74%. Last night, it closed at 7.94%.

Inter-bank lending is core to liquidity in financial markets, as we all learnt during the early part of the Crisis in 2007-8. It allows the major banks to balance their books at the end of each day, as demanded by regulators. So a sudden jump like this, if maintained, will slow lending very quickly.

It suggests that the central bank has finally decided to tackle the rampant speculation underway in property markets. Last week, it also announced tough bank lending targets for the rest of Q1. China Daily reports the target could be 40% lower at just RMB 1.5trn ($225bn), versus 2.6trn in 2010.

Separately, it seems Saudi Arabia is finally starting to worry about the possibility of demand destruction taking place, with oil at today's high prices. Oil Minister, Ali Naimi, whilst maintaining his "optimistic" view on oil markets, indicated yesterday that some OPEC countries might increase output if oil hit the $100/bbl level.

The problem with moves like these is that they are usually too little, too late. Certainly, in the case of China, the time to rein in speculation was a year ago, when bank lending had already doubled versus the 2009 level. Equally, with oil prices now at $90/bbl, the damage has already been done.

China has been the main source of chemical and polymer demand growth over the past 2 years. But newly released trade data suggests its import volume on core products such as polyethylene may now be reducing, as more domestic capacity comes online. Equally, Asian producers, and the USA, face strong competition from low-cost Middle East exporters.

Trade flows are extremely valuable real-time indicators of market developments. The chart above, based on data from the leading provider, Global Trade Information Services, shows how China's imports of polyethylene have developed since 2008:

• Total import volume jumped 72% in 2009 to 5.2 million tonnes (orange column, right hand side), as the lending boom combined with restocking. But it then fell 6% to 4.88MT in 2010, as China's own domestic capacity increased.
• The Middle East (green line) has nearly doubled its market share from 20% to 37% between 2008-10, even though volumes were constrained by start-up delays, and feedstock shortages caused by OPEC oil quotas.
• The main 'winner' has been Iran, which supplied 700KT in 2010, vs just 35KT in 2008. But Saudi has doubled volumes to 575KT, whilst UAE, Kuwait and Qatar have all increased volumes significantly.
• North East Asia (blue line) saw its share fall from 36% to 28% between 2008-10, with its 2010 volume down 280KT in 2010 vs 2009. S Korea lost 170KT of exports last year, whilst Taiwan lost 50KT and Japan lost 60KT.
• South East Asia's (red line) share fell from 22% to 14% between 2008-10, with total exports down 50KT vs 2009. Malaysia/Singapore each lost 25KT of exports, whilst Thailand/Indonesia/Philippines were stable.
• The USA's (purple line) share slipped from 10% to 7% between 2008-10, whilst its volumes were down 250Kt in 2010 vs 2009.
• W Europe (light blue) and Russia (orange) both grew market share marginally between 2008-10, but whilst Germany's volumes was stable in 2010 vs 2009 at 95KT, Russia's volume dropped from 240KT to 140KT.

The blog's IeC colleague, Bob Townsend, is an expert in this area. And he suggests import volume will fall further over the next few years, as China increases capacity. He expects the Middle East to remain very competitive, given its advantaged feedstock and crude oil supply position with China.

This will put increasing pressure on NEA and SEA producers, just as many of them are bringing on new capacity. This could well destabilise other regional markets, if these producers try to export outside Asia to keep their plants filled.

European operating rates (OR%) for ethylene averaged just 82% in 2010, according to APPE data this week. This meant there was no improvement over H1 OR%, suggesting the recovery from 2009's 76% OR% has stalled.

Of course, in terms of profitability, 2010 will have been a great year. The industry did its usual excellent job of passing through higher crude prices, whilst the low OR% led to tight propylene and butadiene markets, and strong co-product margins.

And so far, 2011 seems to have continued on a similar basis. But there are clear signs that it is becoming more difficult to pass through higher upstream costs:

• Prices for PVC, for example, a major ethylene user, are pegged by ICIS pricing at $1000/t, similar to January 2010, when Brent crude oil was $75/bbl.
• By contrast, PET prices, another major user, have moved up sharply over the past year due to tight supply conditions. But now, the Wall Street Journal is reporting that giants such as Coca-Cola are finding it very difficult to pass these on to end-consumers.

In the short-term, unrest in the Middle East is helping to support current crude oil pricing, just as Israel's threat to bomb Iran led them to peak at $147/bbl in June 2008. But in terms of the fundamentals of supply/demand along the value chains, today's oil prices are looking more and more out of line with reality.

INEOS have today announced that PetroChina have made an "irrevocable offer of $1.015bn for a 50% share in its European refining business".

This is an excellent price, given the current weak performance of the European refining industry. INEOS' negotiating team have clearly done a superb job in ensuring that PetroChina looked beyond these difficulties, and instead focused on the long-term investment opportunity.

As INEOS Refining CEO, Calum MacLean, noted, "this new partnership will secure investment and the long-term sustainability of both sites in a highly competitive market". Importantly, of course, it is also excellent news for the petrochemical businesses associated with the Grangemouth and Lavéra sites in Scotland and France.

Negotiations were finalised today, before the start of China's Lunar New Year holiday. Although some details remain to be finalised, the blog understands all "big-ticket items" have been finalised, and that the offer is truly "irrevocable", with the new organisation expected to start operations late in Q2.

The negotiations have been underway since June 2009. The blog congratulates all those involved in driving them to such a successful conclusion.