By John Richardson
A gaping chasm has opened up over the past 18 months between nameplate capacities and effective operating rates, resulting in much greater focus on the latter.
It isn’t easy and it is getting ever-more complicated to assess the actual volumes likely to hit markets.
There is a considerably well-supported school of thought that 2011 will represent a year of capacity absorption. More new plants are set to start up and facilities recently brought on stream should, in theory, run a little better.
But this assumes that the myriad technical problems at new Middle East plants that held back production in 2009 and 2010 will be resolved.
What nobody seems to have a clear perspective on is the extent to which faults have been built into the basic structure and design of plants, making technical fixes hard to achieve. If such fixes are possible, why haven’t they already happened?
It has been suggested that corners were cut on construction when project costs were at their highest in 2006-07.
The manpower issue is also not going to be resolved anytime soon.
Petrochemical companies the world over, and particularly in Iran, lack sufficient experienced staff to operate plants and rectify outages in a timely fashion.
“A mechanical problem that would take two weeks to fix in Europe can take several months to sort out in Iran,” an industry observer said.
There are rumours of major logistics problems at the container port in Al-Jubail on Saudi Arabia’s east coast.
A lack of enough experience in handling bills of lading and letters of credit is a cause of delays in shipments from one particular complex in the Middle East, according to a polyolefins trader.
Insufficient reliable information about the extent of these issues, and when and if they will be resolved, are further complications.
Government policy in China is another major imponderable that will still have to be pondered in 2011.
Sinopec was forced to cut polyolefin production by 10% in December because gas-oil feedstock for crackers had been diverted into diesel production.
Has China already achieved its emissions target under the 11th Five-Year Plan that expires in March, and will this therefore mean no more cuts in coal-derived electricity supply?
It was efforts to achieve these targets that led to a diesel shortage as factories were forced to switch on their diesel-powered back-up generators.
Source of picture: incadventures.com
Once the 12th Five-Year Plan has been announced at the National People’s Congress in March, there is the added complication of working out the timing of further cuts in emissions.
The Beijing-based online economic research publication, the China Economic Quarterly, says that China will reduce its total emissions by an additional 17% during the upcoming Five-Year Plan, which will run from March 2011 until March 2015.
Will everyone wait until towards the end of the plan to hit emissions targets, as was the case this time?
Or will the government force quicker compliance in order to avoid the embarrassment of being at risk of missing its own target?
A further imponderable is how global refinery operations will affect feedstock supply for petrochemicals.
Constrained production at European refiners was a factor behind low operating rates at crackers in 2010.
Oil, refining and chemicals analysts have been queuing up of late to claim that refinery margins have bottomed out, meaning higher production in 2011.
But a Singapore-based oil and refining consultant said: “Refinery margins will recover but not by that much. It will be the complex, full-conversion refineries that will benefit and not the simple refineries.”
Reading the intentions of OPEC is also going to be critical. If the oil cartel cannot resist political pressure over rising oil prices we might see an increase in production quotas later this year, resulting in more associated gas supply. Lack of associated gas was perhaps the biggest factor of all in restraining Middle East production in 2010.
If there is a delayed oversupply crisis as new plants run better and both naphtha and associated gas feedstock supply increases, how will the petrochemicals industry in the West respond?
The past two years have seen exceptional operating-rate discipline among these producers. This has been the result of mergers and acquisitions that have taken place since the last big downturn and inventory losses suffered in the fourth quarter of 2008.
Without an inventory shock on the same scale (and for goodness sake let’s hope that this doesn’t happen), will producers be as quick to turn operating rates down?
If producers bring idled plants back on stream just as markets tank, and if under-pressure sales staff are tempted to chase volumes in an effort to hit unrealistic targets, will this make the problem worse?
Perhaps the biggest doubts of all, though, rest around growth.
Global demand growth for chemicals has to a large extent been driven by China’s re-export trade. This has involved importing large volumes of chemicals and polymers for re-export to the West and to wealthier parts of Asia.
A recent report by Credit Suisse goes to the heart of the debate over how quickly home-grown domestic demand in China will replace lost exports.
With the West in deep economic funk and the Chinese government eager to wean the country off exports, will growth decline? This question applies to this year and probably much of the rest of the current decade.
“Over the last 22 years, demand multipliers – ethylene demand growth to global GDP growth – have averaged 1.3x. However the multipliers in this decade (2000-07) have averaged only 0.9x,” Credit Suisse said in the report.
“The question is what are we going to get going forward? Will multipliers rise as demand growth shifts to emerging markets as some have suggested? Or will it be otherwise?
“Using China’s exports of plastic-related products, we estimate that in 2009-10, China’s exports of product accounted for 45% of total ethylene/propylene demand, or 11% of total world demand.
“Going forward, as export growth slows, and shifts away from the more manufacturing-driven products into higher value-added things, the demand for petrochemicals from this segment of China’s GDP is likely to slow.”