Japan Disaster – Update On Lost Production

By John Richardson and Nigel Davis

THE humanitarian side of this disaster is foremost in everyone’s minds with more than 18,000 people now estimated to have died in the Japanese earthquake and tsunami.

Of equal concern is the crisis at the country’s stricken nuclear power plants which the International Atomic Agency describes as “very serious”.

And the relief efforts following the 11 March disaster have been hindered by bad weather with around 350,000 people in northern and eastern Japan in shelters, according to media reports. Water supplies are still cut to almost 900,000 homes.

But economic effects are, of course, also at the front of everyone’s minds with one of the most immediate consequences of tragedy being the tightening of some of the major petrochemicals markets.

As we wrote about yesterday, supplies of spot paraxylene (PX) have dried up following the closure of 950,000 tonnes of Japan’s capacity. Spot PX prices last week hit $1,815/tonne (€1,271/tonne) CFR (cost and freight) Taiwan. Purified terephthalic acid (PTA) prices rose to a 16-year high of $1,500-$1,517 CFR CMP (China Main Port).

The polyester chain is being supported by all-time high cotton prices, but going back upstream again to PX and PTA these were already very tight markets before the disaster occurred.

How much longer can the polyester producers down to the manufacturers of apparel and non-apparel keep on absorbing these cost increases? When do we begin to enter demand destruction territory?

Of equal concern is what is not happening in polyethylene (PE) where pricing has remained flat since the Chinese New Year.

This is despite more than of Japan’s linear low-density PE (LLDPE) capacity being closed down, with 38% of its low-density PE (LDPE) capacity shuttered and 26% of high-density PE (HDPE) off line, according to ICIS pricing.

Markets were already tight as a result of an extensive Asian cracker turnaround season and so the failure of PE to move up in China is a major worry.

We will examine varying opinions on reasons why PE remains so weak in a post later this week.

But to return to Japan, UBS provided a good summary of production losses in a report issued over the weekend.

Four major crackers remain closed, representing lost ethylene capacity of 31% – number that should decline to 25% by the end of the week, according to UBS.

Propylene capacity has been reduced by 37%.

Forty six per cent of polyvinyl chloride (PVC) capacity is down, 24% of PX and 20% of styrene.

Reuters on Monday listed some stark facts: 1.4m bbl/day of Japan‘s 4.5m bbl/day refining capacity and 1.7m tonnes of naphtha cracking capacity remain off line. Port facilities had been severely disrupted by the disaster.

With Tokyo Electric Power Co warning of rolling blackouts well into April, even if plants are soon brought back on-stream, there seems a possibility that production will be disrupted again.

How badly plants have been damaged is impossible to gauge at this moment.

Japan has been struggling to restructure uncompetitive parts of its industry for many years and so uncompetitive plants that have been badly damaged may not be rebuilt.Apologies if this sounds a little cold-blooded, but we are trying to think through all the economic consequences of these awful events.

But Japan also makes a lot of high-value chemicals that go into electronics supply chains. This area of its chemicals industry is highly competitive.

Disruption of production here could have a global impact as electronics assembly plants outside Japan are forced to shut down.

For example, The Economist magazine estimates that Japan makes 90% of the epoxy resins used the manufacturing of all the world’s printed circuit boards.

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