Depressed exports and a sharp contraction in the domestic market affect Israels’ petrochem industry

The Israeli chemicals industry is suffering generally from the effects of the global economic downturn with both depressed exports and a sharp contraction in the domestic market, but a report by Companies and Markets predicts a fast recovery with domestic petrochemicals demand likely to be led by construction. In Q1-09, chemical exports fell 21% y-o-y to US$2.68 bln, with exports of petrochemicals and plastic raw materials down 40% y-o-y to US$115.3 bln. Domestic demand is faring little better with the economy in recession and consumer spending falling hard and fast amid rising unemployment. The report forecasts a 1.9% contraction of GDP in 2009, followed by 2.4% growth in 2010 and 2.6% in 2011. More importantly for end-users of petrochemicals, household spending growth is likely to remain negative in 2009 and sluggish in 2010, as unemployment remains relatively high. However, there are some signs that consumer confidence could be starting to bottom out, or at least stabilise, suggesting a pick-up in private consumption growth rates later in the year. For 2009 as a whole, household spending will decline around 2.0%. The industrial sector will mirror the consumer spending slump. Another positive trend can be observed in the building sector, which is a major petrochemicals consuming industry. Recent data reveals an ongoing contraction in the supply of housing in Israel, and with the volume of house sales starting to pick up; we highlight the possibility that the current spurt in house prices could be maintained, particularly as credit conditions improve. Over the medium term, however, increased bank lending will benefit property developers, boosting supply growth and thus moderating the rate of house price inflation. This should help lift the price and boost demand of certain petrochemical products on the Israeli market, such as PVC. While domestic petrochemical producers will benefit from the recovery, feedstock availability constraints will limit the growth in potential capacity expansion. The recent commission of Carmel Olefin’s (COL) new PP facilities has raised the company’s PP production capacity from 200,000tpa to 450,000tpa. It has also expanded the production capacity of its monomers plant and other ancillary facilities. The new plant aims at alleviating PP shortage in Israel and significantly boosts the country’s polyolefins capacity. The Israeli petrochemicals sector is likely to remain focused on domestic sales and is not expected to rival other markets in the region. This is primarily due to the country’s lack of upstream activity. While Gulf States have developed petrochemicals industries on the back of their domestic gas and oil production, Israel’s gas and oil production are negligible. If recent offshore gas discoveries are confirmed, there may later be some scope to develop the petrochemical industry further. The report forecasts that ethylene production will rise from 200,000tpa in 2006 to reach 450,000tpa by 2013, due to COL’s expansion programme. PP capacity should remain at 450,000tpa beyond the forecast period on current indications, while PE capacity is not forecast to change from current levels of 165,000tpa. However, BMI expects new investment plans following the privatisation of ORL, with a likely expansion over the forecast period.