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Good Chance Of Polyolefin Trough Delay

Business, China, Company Strategy, Middle East, Olefins, Polyolefins
By John Richardson on 19-Apr-2010

By John Richardson

THE betting remains on trough conditions arriving for polyolefins at some point later this year with new supply expected to begin to severely lengthen markets towards the end of Q2.

A temporary buying strike in China that dragged on for too long – following overbuilding of local resin inventories – has helped create a fairly bullish mood as the huge ChinaPlas exhibition in Shanghai begins today.

As we discussed last Friday, in linear-low density polyethylene (LLDPE) there’s just too much due on-stream by the end of 2010 to in theory prevent major market indigestion, regardless of the strength of demand.

A recent UBS report estimates that 8.6m tonne/year of ethylene capacity is due on-stream globally this year with demand growth likely to be only 2.6m tonne/year. This is set to be the biggest annual increase in C2 capacity in a decade.

But the unknown unknowns are too great, in the view of this blog, to be confident in predicting a trough by the end of this year – and there is a chance that the low-point in this current cycle could be pushed into 2011.

LLDPE is tighter than high-density PE (HDPE) because of what appears to be a global shortage of the co-monomer butene-1 with octene also reported to be in tight supply – as again we discussed in last Friday’s post.

Other reasons include OPEC’s decision to maintain production quotas at levels reflecting post-crisis oil demand, suggesting continued constraints on associated gas and therefore operating rates of existing Middle East crackers. However, quota compliance has reportedly slipped dramatically, to just 53% in March.

The ongoing long-term problem of increasing alternative demand for gas in the Gulf Co-operation Council region will continue to place limits on both existing and new production.

We understand that these days, new crackers in the region can only operate at 90% of their nameplate capacities because of feedstock allocations.

And remarkably, a senior company executive from a leading Middle East producer confirmed to a colleague of mine recently what we had been hearing for several months from contractors: Cost savings were made in buying raw materials and equipment for plant construction when project-financing costs were at their peak in 2005-07, resulting in technical difficulties in starting-up new complexes.

The shortage of senior start-up engineers is another problem, a long with the scale of the plants being built in this current round of capacity additions. These plants are the biggest of their kind in the history of the industry, meaning that smooth start-ups were always going to be a problem.

But one factor that might lead to the cycle low-point arriving this year is that according to the same UBS report we quoted earlier, 46% of this year’s ethylene start-ups are in China versus only 17% in the Middle East. Last year around 80% of start-ups were in the Middle East.

General labour shortages, including not only senior engineers but also construction workers, don’t appear to be as acute in China as elsewhere.

Infrastructure outside the battery limits of plants, another factor which is rumoured to have slowed capacity additions in the Middle East, are less likely to be a problem in China.

But 15% of Asian current Asian ethylene capacity will be closed down this year for turnarounds compared with 10% in 2009, again according to the UBS report.

And operating-rate discipline among Western producers remains high, with more rationalisation of capacity, especially in Europe, possible.

The scale of recent closures has been big. For example, Shell Chemicals recently disclosed that it had shut 22% of its US ethylene capacity over the past two years or so as it shifted to greater use of ethane feedstock.