Almost 63% of global capacity additions in 2008-2012 will happen in the Middle East and China, raising their share of global production to 27.6%. In other terms, ethylene capacity in the Middle East and China will account for 14.8% of worldwide installed capacity in 2008. Since most Chinese and Middle East petrochemical projects will get commissioned at the same by 2010, it will lead to a glut of ethylene and polyethylene products in the global market.
More capacities are scheduled to come on stream in the Middle East in the next few quarters. Unable to use all the output for captive consumption, the Middle east region relies heavily on exports - particularly to Asia. Currently Chinese import growth is lagging behind Middle East capacity growth. The Middle East region, therefore, will require exploiting new markets at a time when global capacity operating rates are falling. Other markets of Western Europe and the Americas are geographically remote from the Middle East region and difficult to penetrate.
New mega polyethylene capacity additions are also scheduled to come onstream in China around the same time. Hence the Middle East petrochem industry could face a challenge of exports to China in a couple of years. PE from the Middle East will offer a cost advantage over Chinese PE mainly because of cheaper feedstock and input costs and inherent economies of scale based on low feedstock costs.
The average production costs for ethylene and polyethylene is about 50% lower in the Middle East than in North and East Asia. This is posing a sharp challenge to China's upcoming petrochemical industry.
Currently, of the 159 petrochemical projects in the region worth US$247 billion, almost half are located in Saudi Arabia. Saudi Arabia has US$124 billion investments in petrochemical projects, followed by the UAE with US$33 bln and Qatar with US$23 bln. Other big players are Egypt with petrochemical projects valued at US$16.6 bln, Libya US$16 bln, Algeria US$14 bln, Oman US$9.6 bln and Kuwait US$6.5 bln.
The Arabian Gulf polyethylene net exports will increase to around 16 mln tons by 2010 and 19 mln tons by 2012.
But so will the Chinese capacity. China is forecast to have ethylene capacity of up to 18 mln tons and output of 14.5 mln tons in 2010, with a self-sufficiency rate of 58%, as compared with 43% in 2005, and 78% in 1990. China's ethylene supply gap may widen to 9 mln tons in 2010 and 16 mln tons by the end of 2020.
China could have problems in securing a stable supply of cheap naphtha with its own rapid construction of ethylene crackers.
As per ICIS, this year was supposed to mark the big build-up in propane dehydrogenation-to-polypropylene (PDH/PP) capacity in the Middle East, but it hasn't happened.
Several plants have been delayed for technical reasons, including the 650,000 tpa plant from Saudi major PetroRabigh. It was due online in Q4 of this year but is now expected to start up in Q1 2009 at the earliest.
Several plants have been delayed for technical reasons, including the 700,000 tpa plant from Saudi major PetroRabigh. It was due online in Q4 of this year but is now expected to start up in Q1 2009 at the earliest.
Two big Saudi Arabian cracker complexes with a great deal of associated PP, polyethylene (PE) and monoethylene glycol (MEG) capacity also look as if they have been pushed back to 2009 start-ups from this year.
Eastern Petrochemical (SHARQ) and Yanbu National Petrochemical (Yansab) - affiliates of Saudi petrochemical giant SABIC each with ethylene capacities of 1.3m tpa - are again forecast be on stream some time in Q1.
Propylene from the cracker at Al-Jubail, in Saudi Arabia, will feed a 250,000 tpa PP expansion at Saudi Polyolefins Co. (SPC)- a JV between Tasnee and LyondellBasell. SEPC is a joint venture (JV) between Sahara Olefins, with 24.4% equity National Industrialization (TASNEE), with 50.6% and global chemical group LyondellBasell, with a 25% stake.
Sahara Olefins and LyondellBasell are also due to start up 450,000 tpa of PDH-based propylene and 460,000 tpa of PP at Al-Jubail in Q1 of next year under their Al-Waha Petrochemical JV.
Kuwait Olefins, the JV between US major Dow Chemical and Kuwait's Petrochemical Industries Co. and Al-Qurain Petrochemical, is due on stream in December this year. The 850,000 tpa cracker complex had been scheduled for start-up in August.
The final olefins and derivatives complex on the immediate horizon is Ras Laffan Olefins, the JV involving France's Total Petrochemicals, US-based Chevron Phillips and Qatar Petroleum, in Qatar. The 1.3 mln tpa cracker and downstream units are rescheduled to start up in Q1-09.
Ethylene capacities 2012 (mln tons)
|Rest of World
|Source : ICIS
But demand could be even worse by the time product from the delayed and on-time units hits the market.
And demand has already been slashed, with China alone expected to see zero or even negative growth in PE, PP and polyester in 2008, as per ICIS. The danger is that the feedback effect on the real economy from the financial sector will drive consumption growth even lower.
The boom times for the Chinese petrochemical industry appear to be over as producers report a massive drop in net profits due to tightening margins and government controls on fuel prices, according to BMI�s latest China Petrochemicals Report.
In the first seven months of 2008, the value of Chinese petrochemicals production rose 32.4% y-o-y to CNY3,830 bln, with exports up 23.5% y-o-y to CNY250.25 bln. Petrochemical gross output value isexpected to grow by around 27% for the year as a whole, with moderation in H2-08 due to rising global crude prices and an economic slump in the US. Despite the strength in demand, producers are struggling with rising crude prices, which have pushed up the cost of feedstock right down the petrochemical chain. At the same time, petrochemicals firms are unable to pass on rising crude prices to customers due to pricecontrols, and the level of state subsidy is insufficient to cover losses.
In H1-08, PetroChina�s net profit fell 34.5% y-o-y to CNY53.62 bln, largely due to government caps onrefined fuel prices at a time of rising raw material costs. Despite this overall fall, the company�schemicals and marketing segment saw an increase in production, sales and efficiency, leading to a 24.4% y-o-y rise in operating profit to CNY6.71 bln. Chemical production was up 4.2% y-o-y to 8.16 mln tons while ethylene output was up 1.1% y-o-y to 1.32 mln tons. Resin production rose 2.0% y-o-y to 2.04 mln tons, synthetic fibre and polymer was up 25.2% to 880,000 tons and urea output was up 7.9% to2.05 mln tons.
Sinopec was also suffering from the effects of high crude oil prices and government restrictions onrefined oil product prices, which led to a 77% decline in net profits to CNY8.26 bln (US$1.2 bln). Its Sinopec Shanghai Petrochemical subsidiary recorded a net loss of US$54.56 mln in H1-08. With no upstream oil and gas operations, Sinopec is highly sensitive to rising crude oil prices. Its petrochemicals performance was unspectacular. Sinopec Shanghai�s ethylene production rose by just 0.9% y-o-y to 480,900 tons, while propylene output rose 6.9% to 265,000 tons. Output of resins and plastics fell 4% to 536,100 tons. Net sales from petroleum products, intermediate petrochemicals and resins andplastics increased by 43.9%, 44.3% and 5.5%, due to an increase in average selling prices of 16.7%,20.4% and 9.2%. Operating revenue was up 22.4% y-o-y in H108 to CNY32.91bn, but this wasoutweighed by a 40.7% increase in input costs to CNY33.3 bln.
According to BMI's report,
while the cost of inputs has risen, prices on the Chinese petrochemical market slumped in Q3-08 due to high inventory levels, aggressive price competition and broader concerns over the global downturn. price cuts and concerns over the health of global economies. The slump in prices is related to tighter lending conditions in China, with smaller polyolefins compounders unable to borrow to purchase PE and PP feedstocks and facing bankruptcy. With more than half of producers in Shanghai and Guangdong provinces reliant on exports, the situation has been exacerbated by the slowdown in the West, particularly the US�s declining demand for polymers. Chinese petrochemicals producers are looking to the Chinese government�s planned economic stimulus package, to be unveiled by end-2008. This could be worth up to CNY400 bln and would include tax cuts and a boost for the capital market in order to fuelgrowth in house building. The package would help stimulate the polymers market, raise product pricesand offset the effects of the US slowdown and global credit crunch.
Despite these problems, petrochemical capacity will continue to climb. Ethylene capacity expansion is set to continue over the rest of the forecast period with PetroChina�s Fushun Petrochemical cracker (800,000tpa from 2010) and its Chengdu Ethylene Project (800,000tpa from 2012) as well as Sinopec�sSinopec Zhenhai Refining and Chemical (800,000-1mn tpa from 2009) and Sinopec Wuhan (800,000tpa from 2012).