After the turbulent market conditions of recent years, 2000 is shaping up to be an upbeat year for petrochemicals producers. Monomer prices rose strongly in the first quarter, boosting polymer prices as well. Though the recovery is still in its infancy and prices in the Asian market are still under some pressure, analysts expect petrochemicals prices to recover steadily over the year, peaking in 2001-02.

The benefits of the rise in oil prices since 1999 have not been uniform for petrochemicals producers. In March, European contract prices of naphtha - the feedstock base for 70 per cent of European producers - tripled to more than $310 a tonne, squeezing margins for monomer and downstream derivative producers.

However, with monomer prices looking increasingly healthy, Middle East producers appear in a strong position relative to their European, Asian and US competitors. After a positive first quarter, the signs are that they will continue to prosper in 2000. 'Middle East producers are in a great position,' says Florent Chavrier of Trichem Consultants. 'They are fully integrated - they don't buy monomers, they produce them - so cashflow is extremely competitive at the moment.'

With a slew of large-scale petrochemicals projects due to come on stream in the Gulf, including the 820,000-tonne-a-year (t/y) Yanpet ethylene plant in Saudi Arabia, the region's producers are poised for a wave of expansion over the next two years. The challenge will be to ensure that the extra capacity does not create over-supply and erode the stronger margins that have been registered this year.

The key driver for the revival in petrochemicals has been the revival in oil prices since March 1999. Though the increase in petrochemicals prices has lagged that of oil, the improvement began to be felt strongly in the second half of last year. Middle East petrochemicals groups were the first to benefit from the oil price rise, which had given a significant cost advantage to rival naphtha-based producers in the US and Europe. The oil price hike put pressure on monomer and downstream derivative producer margins. As a result, olefins producers have been pushing for increased contract prices in the second quarter. 'Recent market prices for oil have pushed up prices for polymers. Buyers have lost ground and are having to pay high market prices,' says Jean Marc-Antonio of consultants Tecnon UK.

The March 2000 Vienna OPEC agreement, designed to keep Brent crude prices in a $22-28 price band, is expected to restore some advantage to European producers this year. Around $80 a tonne has come off naphtha prices since March and analysts expect polymer margins to come under pressure in the second quarter as new capacity comes on stream in Europe and the Middle East, squeezing margins further. Polymer producers face another hurdle if, as expected, the recent softening in crude prices prevents them from pushing through second-quarter price hikes to compensate for first-quarter feedstock price increases.

Overall, however, the outlook for polymers is positive. 'Though polyethylene is on a downer at the moment, in the long term polypropylene prices are looking good. Some other products have recovered strongly, such as PVC and PET,' says Marc-Antonio.

European contract prices for ethylene have risen 18 per cent to Eur 685 a tonne since the first quarter. Propylene prices have increased 25 per cent to Eur 555 a tonne. 'West European producer margins are extremely good in the second quarter. As Middle East producers get lower feedstock prices, they are in an even better position,' says Trichem's Chavrier.

The picture in Asia, the biggest market for Middle East producers, is still mixed. Though a recovery of sorts has taken place since last year, Asian prices are still coming under pressure and demand from the key Chinese market has been disappointing. 'Everyone expected a surge in demand after the Chinese new year in early February but it never materialised. A number of traders took long positions in the expectation that prices would rebound, but it hasn't happened,' says Chavrier.

Destocking

European and Asian demand will need to remain strong if the new capacity from the Middle East is to be absorbed. Extra capacity of 4 million tonnes is set to come on stream from six ethylene complexes under construction in the region, with capacity set to reach more than 10 million tonnes by the end of 2002. Looking further ahead, Saudi Basic Industries Corporation (Sabic) is expected to promote two new 800,000-t/y steam crackers in Jubail and Yanbu to come on stream in 2004.

With the price advantage restored to producers of ethane derivatives, the challenge for Middle East producers is to find markets for the increased exports of ethylene derivatives. Prime among these is polyethylene, for which Middle East exports are expected increase to over 250 per cent by 2003. However, polyethylene prices have come under pressure this year as a result of heavy destocking in the first quarter.

Many argue that Middle East producers will need to be more aggressive about developing new markets for their output, including offering a wider range of product to existing markets such as western Europe. 'Middle East producers are looking for new projects, not new markets,' says Tecnon's Marc-Antonio. 'They have proved they sell standard petrochemicals best and only Kuwait, Saudi Arabia and Qatar are in a position to produce new grades.'

Latin America remains a largely untapped market for the Middle East, with most of its requirements met by US and Canadian exporters. Even Sabic does not have significant distribution centres in the Latin American market. 'For Middle East producers, the key markets are Asia and Europe. Latin America remains a backyard for the US,' says Chavrier.

The coming year will also test the limits for private participation in Middle East petrochemicals expansion. The collapse in oil prices in 1998 gave added impetus to Saudi drives to get the private sector more involved in expansion, with major projects such as the National Industrialisation Company's joint 900,000-t/y propylene/polypropylene plant getting off the ground. With Sabic's price advantage restored, nascent private ventures will have their work cut out ensuring they are not sidelined by the state- owned group's own expansion plans.

Elsewhere, prospects for private ventures look mixed. In Egypt, there are ambitious plans for new polyester, polystyrene and gas-to-olefins ventures at Suez to be undertaken by the private sector, though progress so far been has been patchy.