The petrochemical market in China is poised to grow at about 10% while Asia will record a growth of about 6% over the next few years. Asia, on account of robust growth of petrochemicals, is confidently building newer capacities. These capacity additions in Asia are accompanied by massive capacities that are being built in the Middle Eastern region. Four plants in Saudi Arabia and one in Kuwait will add a whopping 4.5 million tons of ethylene production capacity by the end of 2008, and similar amounts of capacity will be added between 2009 and 2010 in the Middle East.

The petrochemical industry started doing well in 2002. It continues to remain in a growth cycle for the last 5 years. The extended upcycle for the petrochemicals industry has confounded analysts who have been calling for an end since 2005. Demand for naphtha is growing faster than for other types of oil product, putting strain on both petrochemical firms as well as refiners, who are also trying to meet demand for summer gasoline.
The spread between ethylene and naphtha has improved from narrow levels of US$250 to nearly US$400 in this period. This can be attributed to a rise in ethylene prices, while naphtha's premium to crude has increased by almost US$20/MT to near US$200/MT. For 2007, profit margins on producing polymers, one of the basic petrochemical product group and representative of integrated margins, have been hovering around US$200/MT. Non-integrated polymer producers have lower but still decent margins, that are improving gradually.
The petrochemical complexes, and by extension demand for naphtha, will come under pressure in late 2008, when a host of new Middle East based export-oriented crackers using ethane for fuel come on-line, boosting ethylene and PE supplies. There would be approximately 15 million tpa of global ethylene capacity additions by 2009. Out of these, almost 10 million tpa of ethylene capacity would be added in Middle East. This would lead to a huge surge in product supply that will outstrip demand. Prices of petrochemical products would fall sharply and the margins will start shrinking. This huge surge in supply will squeeze the margins of petrochemical players. Though large integrated petrochemical players will not be affected much, smaller players which are usually standalone manufacturers of petrochemical products would face the heat as they would be at a greater risk of shrinking margins because each petrochemical product has a different cycle and hence, is priced differently in the market. Firms that are upstream in the petrochemicals sector, primarily refining and intermediates production, will be in best fundamental position.

Demand is China continues to be robust, maintaining the country's position as the largest export market with petrochemical demand expected to keep rising by around 9%pa till 2012, as against growth of 1.8% in the US and Europe. The Chinese also continue to expand capacities by multiplying petrochemical investments. As the Chinese raise their domestic capacity and exports begin to dip, Middle East producers are likely to turn to Europe to dispose off future surplus capacity. Russia too is expected to start investing heavily in petrochemicals in the next few years. By 2015, the Middle East region is expected to surpass Europe in terms of ethylene capacity. The region is estimated to account for about 20% of world ethylene capacity, against 17% share of Europe.
Pressures will be particularly acute for European manufacturers, who are now coming under far more stringent regulatory constraints than their competitors in emerging markets and oil-producing countries. Regulations include European Union's Reach directive on chemicals, the Kyoto protocol, and moves by individual countries to step up their environmental campaigns. Adding to the burden and slowing down growth are regulations being introduced vis a vis petrochemical industry. European regulations, however well-intentioned, exert a heavy burden on the big petrochemicals groups-making it even harder for them to compete with the new capacities.