The Dangers of Forgetfulness

By John Richardson

“IF YOU want to develop a good memory, you should learn to stop xxxxxxx forgetting, you brain-dead idiot” a former editor of mine often said, in his charming Glaswegian accent, after I had made the same mistake yet again.

The same might apply to petrochemicals where maybe, just maybe, shutting down capacity with so few new projects being planned post-2011 could end up being the wrong decision – prompted by the mistaken belief that history won’t repeat itself.

This chart, drawn up by my colleague and fellow Asian Chemicals Connection blogger Malini Hariharan, lists the paucity of announced investments in the Middle East. (It’s hard to think of that many projects elsewhere.)

The chart shows announced new ethylene additions for the region: 



Source: ICIS

“I noticed that 2015 was the date identified by KPMG by which time 14 of the 43 crackers in Europe should have shut down,” said a senior industry source yesterday – referring to a recent study by the management consultancy.

“But by 2015-16 I think we could be in the midst of the next up-cycle and so anybody who exits this business, no matter how uncompetitive they seem to look right now, might end up regretting it.”

I wasn’t entirely sure, having only met this particular source once before, whether he was having a little fun with a gullible journalist by suggesting that old European crackers really have a future in a world dominated by the Chinese and the Middle East.

His broader point, though, was as old as the hills and might still have validity: Companies overbuild when they have money and markets are tight, suffer when supply lengthens and so hardly invest at all; they once again find themselves in very tight markets and so on and so on.

In the midst of all the talk of a new and permanently-changed competitive landscape, this reminds me of how the Japanese government back in the early 2000s warned that around 2m tonne/year of the country’s uncompetitive ethylene capacity would have to close dow within a couple of years.

All of that capacity is still running and has made good money from the China boom.

The above scenario – of an upswing by 2015-16 – presupposes, though, that the world economy won’t suffer any further cataclysmic setbacks.

Put yourself in the position of a European cracker operator with all the above uncertaintie. Unless you are absolutely forced to shut down why bother?

It would be pretty damned annoying to be the first to shutter your plant – only to later find out that you were also the last due to a strong market recovery!

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