A GlobAl PersPective

What are the key issues to watch in Q2 and Q3 that are now emerging in world markets? In the second of a series of market analyses planned to coincide with major petrochemical conferences through the year, Integra Executive Director Gina Fyffe gives her assessment of the short-term outlook

1. Diverging gas and oil prices make tight C4s and pygas more likely in Q2

■ The differential between US gas and international crude oil and naphtha prices is widening. This is pushing US and Euro-pean cracker operators to move to lighter feedstock slates earlier in the year and to a greater extent than usual. US natural gas prices remain exceptionally low at the end of Q1. Crude oil and naphtha prices have remained high despite the indication that the strategic crude reserves may be reduced in the US and UK. Reduced out-put of C4s and pygas in late Q1 will mean lower inventories by early Q2. Lack of C4s and butadiene molecules for import to the US could hinder attempts by US butadi-ene and rubber producers to raise operat-ing rates in Q2.

2. US ethane-fed cracker investments are set to make this a long-term trend

■ US investment in ethane-fed crackers based on shale gas is surging. This will make the divide between the economics of ethylene-based and other petrochemi-cals a structural feature of the US industry. Shell Chemical announced in March it has selected a site in Pennsylvania for its ethane-based cracker complex with downstream PE and MEG. An announce-ment is expected from Dow on the loca-tion of its ethane-fed cracker near the Gulf Coast, due onstream by 2017. Similar plans have been voiced by Occidental Chemical, Chevron Phillips Chemical and Formosa Plastics Corp. The shift in the cost balance between ethylene on the one

hand and propylene, C4s and pygas on the other will drive investment in propane dehydrogenation and on-purpose produc-tion of butadiene, and encourage efforts to extract more aromatics molecules from refineries. The shift in relative economics between PE and PP could see PE sub-stituting for PP in many applications. As an indirect consequence it could boost recycling rates.

3. Geopolitical uncertainty brings volatility and short-term risk

■ Markets in Q1 have been very short term and unusually sensitive to external influences. The result has been reduced transparency and unpredictable fluc-tuations in demand and pricing for most products. It has made it hard to look at

A fundAmentAl shift

Integra has grown and developed because it has anticipated changes in the market, evaluated their potential and taken action

A globAl perspective

Integra Executive Director Roger Van Baal in discussion with Peter Johansen from the senior management team

■ Prepared for the 2012 AFPM international Petrochemical conference, 1-3 April 2012, san Antonio, texas, UsA. AFPM (American Fuel & Petrochemical Manufacturers) is ‘the new NPrA.

the underlying fundamentals and plan for the coming months. We are living in a peri-od of exceptional uncertainty, both political and economic. Some in the US believe nothing has changed since H2 2008 and anticipate a double dip recession. US economic indicators are improving month by month, and the hope is that the bears are being unduly pessimistic. However, the slowdown of growth this year in China, the world’s second largest economy, cannot be ignored. Chinese growth is expected to slow from 9-10% to 6-7% in 2012. Growth is also slowing in India and Brazil. In 2008-09, strong growth in India, China and Brazil helped cushion the worst of the recession.

4. Pressures are growing on shipping and shippers

■ We have seen a number of defaults by chemical tanker operator and owners in the past 6-12 months. More are expected this year. Rates remain under pressure and costs are increasing (port costs, canal fees, bunker/fuel expenses). New tonnage already ordered and coming into the mar-ket will keep pressure on freight rates for the next 12-18 months. There is concern that ship owners and operators may be tempted to cut corners on maintenance as they come under increasing cost pres-sure. To address this, vetting and checks

may be increased, which in turn increases costs, resulting in a vicious circle. Per-formance risk is increased, which affects deepsea spot trade and is also a concern for owners, majors and traders negotiat-ing COAs (Contracts of Affreightment). Poor economics are also limiting orders for new builds and fleet renewal, raising the prospect of shortages of vessel space and sharply higher freight rates if shipping volumes rebound in the next few years.

5. Piracy remains a major concern

■ Piracy is a risk in a growing area of the African and Indian coastlines as well as Yemen and Somalia. The rate of attacks seems to be increasing. Demands are also increasing. The average demand has been for around $10m per ship, with crew and vessel detained for several months. Now there is an increase in violence and de-mands for the release from prison of rebels and people imprisoned for piracy. Concern is growing that pirate groups could be infiltrated by terrorists.

6. Environmental regulations represent a new cost

■ New environmental regulations to be implemented by 2015 across Europe and in some other countries will add around 10% to the freight charges for a stan-

dard chemical tanker voyage. Although accepted as necessary and desirable, the changes come at a time when ship owners are under severe cost pressure. A concern at a recent IMO meeting was that safety may be compromised if owners are tempted to cut corners in implement-ing the new requirements for ballast water treatment and reduced sulphur and carbon emissions.

Issues to note for the longer term

■ Momentum is building for the next round of investments in the Middle East. In Saudi Arabia the trend is towards downstream derivatives and intermediates. This is part of the Saudi strategy to move into more specialised lower volume, higher value products to boost employment prospects and market diversification. Earlier this month, Saudi Arabia confirmed six new petrochemical and downstream projects in Jubail Industrial City representing a com-bined investment of Riyal21.2bn ($5.65 bn). In our view, this shift downstream will bring fundamental changes in the trade flows and patterns of competition that have prevailed for more than two decades. We are monitoring this development closely from our Riyadh office.

Integra has grown to become one of the world’s leading petrochemical traders. We are a global operation, with our headquarters in Singapore, and companies in Beijing, Seoul, Brussels, Houston, Riyadh, Moscow and Porto Alegre in Brazil, handling a wide range of petrochemicals gases and liquids.

With a strong and experienced team of specialists on board, covering all aspects of the business from products to operations to logistics, and strategically located around the globe, we believe we are able to offer a unique level of expertise to our clients. www.integra-global.com