The global olefins business is enjoying a period of unprecedented high capacity utilization rates, expected to continue through 2008 before a move towards oversupply in 2009-10. Supply in the olefin markets has been affected by dual forces: It has been kept tight by robust demnad due to sustained high economic growth rates (particularly in Asia), and on the other hand, supply has been affected on account of delays in several major projects and feedstock restrictions. This situation is expected to reverse by 2011- Several large scale projects that have been delayed, will be completed coinciding with a cyclical downturn in demand growth, leading to a trough in operating rates and profitability. The polypropylene market has been driven by similar forces : with high gasoline prices affecting supply. Demand for octane has increased propylene demand, diverting the material to production of alkylate within refineries, leaving less available for chemical uses. High operating rates and profitability have been restored recently to butadiene, on account of various reasons: A long period of low investment in butadiene extraction capacity, rejuvenation of derivative markets by the rapidly developing automotive industry in Asia.

Regional competitiveness, though existent, is less apparent in the present globally tight market scenario. Global olefins producers have been able to pass high feedstock costs downstream in the current tight derivative markets. Producers in the Middle East region, with access to cheap and abundant feedstock, have enjoyed a competitive advantage over the last few years, manifesting into record profits for Middle Eastern producers. It has also attracted unprecedented levels of investment in new capacity in the Middle East, and financed the acquisition of producers from other regions.
Regional competitiveness will become increasingly apparent as operating rates drop in 2010. The situation will change as the global markets move towards oversupply, high operating rates in the Middle East will leverage advantage, while producers in other regions will be forced to cut back production. As global olefins producers increasingly include low-cost assets in the Middle East in their portfolios, there will be a tendency for them to maximize output at the Middle Eastern plants at all times, leading to larger fluctuations in output at their assets in other regions. The cost advantage enjoyed by the Middle Eastern producers in the current high oil price scenario is sufficient to outweigh other competitive considerations many times over. The cash cost of ethylene production in 2007 spiked over US$650/MT in Western Europe and the United current high oil price scenario is sufficient to outweigh other competitive considerations many times over. The cash cost of ethylene production in 2007 spiked over US$700/MT in Western Europe and the United States, while the cost for a typical gas-based producer in the Middle East remained under US$100/MT. Along with the capacity developments in the Middle East has come acceleration in capacity addition in Asia, primarily in China. Following long delays to the first world scale, projects in China are increasing in number, scale and speed of development. Cracker projects developed by Chinese producers in joint venture with BASF, Shell and BP are increasingly integrated with refineries, and exploit the advantages of lower fixed cost and proximity to market.

The growth outlook for olefins is strongly positive in the long term, supported by consumption growth in plastics and intermediates. The global market is thus not expected to show significant signs of maturing over the next decade, and growth rates will be broadly similar to those seen over the past ten years.
The operating rates will remain above 90% through 2007-8, before declining sharply in 2009-10. Global consumption of ethylene is expected to increase from 112 mln tons in 2006 to 168 mln tons by 2015. The next five years will see capacity in the Middle East surpass that in Western Europe and the United States. The Middle East currently accounts for 10% of global capacity, but will account for 22% by 2010. Capacity in China will also grow dramatically, although demand for ethylene derivative imports will continue to rise. Capacity development elsewhere in Asia will mainly be restricted to countries in the early stages of development and those that currently import ethylene. Capacity in the Asia�s ethylene-derivative exporting regions such as South Korea and Japan will be slowest.
Capacity developments are focused in the Middle East and Asia, motivated respectively by feedstock cost and proximity to market. The scale of the capacity addition in the Middle East is unprecedented, and will see the region�s capacity more than double over the next five years. Expansion has been enabled by the increasing use of private finance, the availability of non-associated gas and the development of new industrial cities outside Saudi Arabia. Projects in the Middle East include an increasing proportion of propylene, due to a move towards heavier feedslates in Saudi Arabia, as well as major refinery sourced propylene developments, and large scale on-purpose production from propane dehydrogenation and metathesis. The major liquids based steam cracker developments in Asia will produce large quantities of propylene, and also most of the world�s new butadiene capacity. The Middle East will supply the growing demand for ethylene and propylene derivative imports in Asia Pacific, but also most other markets, including Western Europe and North America.
Demand growth for ethylene and propylene will remain above global GDP levels over the next cycle, but will drop slightly below GDP after 2020. Demand growth for butadiene will remain significantly lower than that of ethylene and propylene. The heavy additions of liquids-based steam cracking capacity in Asia will lead to an increasing surplus of crude C4s in the region, despite the focus of new butadiene extraction capacity there. Selective hydrogenation and co-cracking of C4s in Asia will increase accordingly.
Polyolefins remain the largest sector of olefins demand, and have the highest overall growth rate. Monomers and intermediates form the second largest grouping for both ethylene and propylene, comprising products such as EO/MEG, EDC, ethylbenzene/styrene, propylene oxide and cumene/phenol. Elastomers account for the majority of butadiene demand. Other applications include a very wide range of large and small derivatives, which collectively track GDP growth and industrial activity.

The current extended period of high operating rates is expected to be followed by an abnormally low trough in 2011. This is an exaggeration of the normal cyclical phenomenon, where excess investment in new capacity is caused by the high levels of income generated in the long up-cycle. Due to the apparent severity of the upcoming trough, and the escalation of project costs, the delay of a number of announced projects particularly in Asia are likely to be delayed in preference to developments in the Middle East.