With the celebrations for Eid al-Fitr now a fading memory, the Gulf petrochemicals industry should be getting back to business.
Unfortunately, polymer traders and converters in the region have seen demand falter, and prices have dropped by 20 per cent since August.
According to global chemical pricing service Icis Pricing, Gulf polyethylene prices have fallen by $390 a tonne to $1,650 a tonne in the first week of October, from highs of $2,040 a tonne in June – the sharpest fall in a decade.
While demand traditionally picks up following the lull of activity during Ramadan, so far it has failed to materialise.
Ramadan may have served to mask market worries over feedstock and crude oil values, exacerbated by the unstable global financial markets.
As a result, trading activity in the region has ground to a halt, as buyers order less polyethylene.
“It is not good for the converters,” says Prema Visnawathan, polyethylene editor at Icis Pricing in Singapore.
“They cannot raise their prices with polyethylene prices falling so fast, despite the high oil prices [and associated higher costs].”
With more attractive polyethylene prices appearing on a daily basis, buyers are simply holding off, preferring to run down their inventories.
The fall in prices is just one symptom of wider movements in the global petrochemicals trade.
The next few years will be particularly important in terms of the supply of olefins and polymers, as several new projects come on stream in the Gulf, increasing supply and challenging the competitiveness of European producers.
According to Gulf projects tracker MEED projects, there are 14 new ethylene projects under way in the GCC, which are due for completion by 2015. Their total capacity will be almost 17 million tonnes a year (t/y).
The 15 planned polyethylene projects total about 7.5 million (t/y).
The projects that will have the most immediate impact on supply and prices are mainly based in Saudi Arabia and include four plants, each capable of producing at least 800,000 t/y of polyethylene.
Sabic affiliate Yansab, which is set to be Sabic’s biggest petrochemicals complex, will produce 900,000 t/y. Smaller projects include Kuwait’s 226,000-t/y Equate 2 and Qatar’s 350,000-t/y Q-Chem II.
This first wave of ethylene projects were expected to begin production this quarter, but there have been delays, with most sources now expecting the first batches to emerge in 2009.
Kuwait’s Equate Petrochemical Company has delayed the start-up of its expanded polyethylene capacity in Shuaiba by three months, until December this year, because of engineering constraints – namely, a lack of available consultants and technicians for the whole engineering, procurement and construction process.
“The construction industry has been constipated for the past five years,” says Philip Leighton, director of petrochemicals at Jacobs Consultancy, of the progress of petrochemicals plants in the region.
But others are less concerned by the delays. “The deals are done, the steel is in the ground, and they will come on line at some point soon,” says one industry source.
In 2010, projects such as Borouge 2 in Abu Dhabi are due to come on stream, with the potential to produce 1.4 million tonnes a year of polyethylene.
While Borouge 2 is under construction, other planned plants may run into difficulty in the current project finance climate.
A lack of investor appetite, coupled with a diminished converter appetite, will throw the future of these planned plants into question.
In September, doubts surfaced over expansion plans for the petrochemicals complex at Ras Laffan, when Qatar Petroleum said it was temporarily suspending work on a key project.
A planned seawater cooling system to be built at Ras Laffan was cancelled because of a lack of demand from petrochemicals companies for the plots of land it would have served.
Some analysts expect a drying up of investment in the region in general, not just for petrochemicals.
“This credit crunch could be the straw that breaks the camel’s back,” says another source.
Petrochemicals projects have been largely debt-driven, particularly in Saudi Arabia, and companies will find it harder to borrow money.
“Oil may still be high by historical standards, but petrochemicals do not feature high on the lists of priorities for governments, falling behind power and water and infrastructure,” says Leighton.
This is one reason why even the government-backed projects may struggle.
However, most sources are confident that the Middle East will become the ultimate source of polyolefins in the world.
In 2007, Middle East and North African production totalled 10 million t/y, about 13 per cent of global supply.
Jacobs forecasts its share will increase to 21 per cent, with production of more than 21 million t/y, by 2015.
Much of the new capacity has been planned around China maintaining an annual growth rate of about 9 per cent. But this looks increasingly unlikely, with some economists predicting it could fall to as low as 5 per cent.
While this is still healthy growth, the Gulf’s petrochemicals industry will be asking if China can still absorb the new material.
“The world economy is in crisis, the US economy is tanking and there is slower demand for secondary products,” says Nigel Davis, insight editor at Icis. “The re-export market has slowed right down.”
In 2001, when Brent crude was priced at about $20 a barrel, there was a stand-off for potential investors, able to choose between naphtha cracking in China and Asia, or gas-based crackers in the Gulf.
Since then, oil prices have rocketed, reaching a peak in July of $147 a barrel and precipitating what most analysts are finally conceding is a recession. “The global outlook is bleak,” says Leighton.
Middle East petrochemicals producers are better placed to ride out any downturn. They will continue to enjoy the lowest production costs, thanks to readily accessible gas supplies, leaving them the best able to weather this storm.
Saudi Arabia’s plants currently buy gas at $0.76 a million BTUs, whereas European polymer producers rely on oil, making them likely to be the worst hit by the global trade downturn, thanks to high crude oil prices.
Davis describes the situation facing European polymer producers as a hole that could open up as demand falls, squeezing already weak margins in Europe.
“There is a fear among producers here that if Chinese demand begins to falter, Gulf olefins and polymers will simply back up into Europe,” he says.
When the new plants do eventually come on line, Gulf producers are likely to run them as hard as possible.
“All the plants have been subject to some form of delay, and have been built in a period when the construction and engineering market has been thinly stretched, so it is not clear if they can run at full rates,” says Leighton.
In the immediate future, demand is unlikely to match the increasing output, but Gulf producers will continue to produce, secure in the knowledge that with their uniquely favourable cost advantage, they can push their product on to the markets.
Jacob’s estimates the cost of poly-ethylene supply to China was $394 a tonne in August, compared with $1,466 a tonne for supplies from Western Europe.
As a result, the future for European producers will be tough. “What producers in Europe have been doing is shutting down older plants, and slowing commodity plastics,” says Davis.
“The Middle East is going to displace these commodity polymers in Europe and, to some extent, the US.”