The rapid rise in Middle Eastern petrochemical capacity in the next five years will have less effect on Asian resin markets than some analysts have predicted, according to one chemical industry financial analyst.
Sizable increases in Middle Eastern resin capacity and feedstock cost advantages there had been predicted to swamp Asian markets. But new developments such as greater industrialization in the Middle East and rising construction costs will mitigate some of that, according to Sandeep Talwani, managing director of chemicals, oil and gas at the global banking unit of London-based HSBC.
Even if there is a huge rise in Middle Eastern capacity over the next five or six years, Asian economies will not be affected as much as people think, Talwani said in an address at the 2010 China Plastics Industry Conference, held May 26-27 in Hangzhou.
Middle Eastern producers will be adding substantial capacity and much of it will be targeted at Asia, because that is where growth is expected. But a number of factors will mitigate the impact of Middle Eastern resin there, he said.
First, more of the new Middle Eastern capacity will be used locally, as countries in the region pursue industrialization to move further downstream the petrochemicals chain, he said.
There is a vast industrialization policy in place, led by Saudi Arabia, Talwani said.
Middle Eastern petrochemical firms also are increasingly interested in moving away from commodity materials and into higher-value plastics, such as Saudi Basic Industries Corp.'s 2007 acquisition of GE Plastics, he said.
Some Middle Eastern petrochemical firms also find their construction and financing costs rising, and that's changing the economics of projects and causing delays as firms are forced to refinance, he said.
When the dust settles, Chinese resin makers will remain competitive in their domestic markets when shipping costs and possible Chinese subsidies are factored in, Talwani predicts.
Other regions may not fare as well. North American petrochemical makers could stand to lose significantly in Asia from new Middle Eastern capacity, he said. Northeast Asian producers in Japan and Korea could also lose out, he said.
Petrochemical firms in the U.S. Gulf Coast and northwest Canada are major exporters of resins to Asia, and have been able to increase exports as Asian demand rose rapidly after the financial crisis, he said. Dow Chemical Co., for example, said 20 percent of its fourth-quarter 2009 production was exported from the U.S. to China, Talwani said.
Also, North American firms that use natural gas as a resin feedstock enjoy a sizable cost advantage now because new technology in the U.S. for horizontal drilling called fracking is significantly increasing the amount of natural gas available and lowering the cost, he said.
But in 2011 that cost advantage is expected to narrow and those exports decline, as Asia becomes more self-sufficient in petrochemical capacity, Talwani said.
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