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Middle East petrochem products set to dominate Asian markets: Analysts

JEDDAH: The coming on stream of the delayed large-scale petrochemical projects in the Middle East would likely impact on the profitability of the Japanese chemical industry.

In addition, the Asian market is likely to see an influx of products from the Middle East as the delayed large-scale petrochemical projects of Petro Rabigh and Eastern Petrochemical (Sharq) come on stream in Q4 2010.

Japanese chemical firms have been preparing for competition from the Middle East and other parts of the world for some time. They have been focusing on high-performance grades, and streamlining their portfolios through "choice and focus" business strategies.

The key now lies in establishing strong partnerships with leading petrochemical companies in these countries, including those owned by governments, to secure access to cost-competitive feedstocks and ensure access into highly regulated markets.

One example is Petro Rabigh , a JV between Sumitomo Chemical and state oil company Saudi Aramco.

This world-leading petrochemical complex in Saudi Arabia is a milestone in the history of Japan's chemical industry.

While it took some time before it got on track because of the sheer scale of production capacities involved - 900,000 tons/year of PE and 700,000 tons/year of PP - the complex is expected to post profits in fiscal 2010. A feasibility study for the second-phase project including derivatives such as phenol, nylon resins and acrylic acid is scheduled for completion in Q4 this year.

Sumitomo Chemical also has petrochemical operations in Singapore and plans to build new plants for solution-styrene butadiene rubber (S-SBR, a raw material for high-performance tires) and ethylene vinyl acetate (EVA) copolymer, used for solar cell encapsulants, through its synthetic resin subsidiary, Polyolefin Company (Singapore). A decision will be made by the end of this year.

Mitsubishi Chemical will produce PC resins and BPA through its JV projects now under construction with Chinese energy and chemical major Sinopec. A feasibility study is under way to produce bio-succinic acid with Thailand's PTT in Thailand.

In the Kingdom, the company participates in the Sharq JVs with Saudi chemical giant SABIC and other Mitsubishi group companies, and is now planning a JV for methyl methacrylate (MMA) between Mitsubishi Rayon, now a Mitsubishi Chemical subsidiary, and SABIC.

The most revolutionary change has taken place in recent months with a genuine step forward in the first of the projects to improve the integration of Japan's ethylene cracking centers.

In addition, Japanese chemical companies have been striving to downsize their operations over the past two years, and they are now poised to compete more effectively in the growing Asian market from a position of improved profitability. Their medium-term goal is to further specialize in supplying sectors such as the environment, energy, information technology (IT) and life sciences, in which Japan has a competitive edge.

The performance of Japan's chemical industry, especially the petrochemical sector, nosedived in the fourth quarter (Q4) of 2008 as the global financial crisis started to unfold. The petrochemical market hit bottom in Q1 2009, with domestic naphtha crackers, capable of producing 7.7 million tons/year of ethylene, operating at around 70 percent of capacity.

The average operating rate of Japan's ethylene centers increased from around 80 percent in April 2009 to over 90 percent in May 2009 and remained above 90 percent until July 2010.

As a result, the 11 ethylene centers reported an operating profit of Y300m in fiscal 2009. Of the six leading chemical firms, only Mitsui Chemicals reported losses both at the operating level and bottom line.

All registered significant improvement over the previous year.

This upswing continued into the first half of fiscal 2010. While domestic demand has yet to pick up, each ethylene center has remained profitable on robust demand in Asia.

"Japanese chemical companies will not just sit back and watch as large-scale petrochemical projects in the Middle East go on stream," said a source at a Japanese petrochemical company. Companies point out that they started work on restructuring well before the collapse of Lehman Brothers in 2008.

For example, they have discontinued or cut back production in Japan of commodity products such as polyethylene (PE), ethylene glycol (EG) and styrene that are not competitive with the ethane-gas fed products coming on stream in the Middle East. They have shifted their focus to propylene-based products, aromatics and functional ethylene-based products.

Mitsubishi Chemical decided to discontinue the production of styrene monomer at Kashima and of vinyl chloride monomer (VCM) at Mizushima by March 2011. It had already made its exit from its Singapore operations where it made styrene through its toll arrangement with Anglo-Dutch major Shell at Seraya and Ellba.

The company will also scrap styrene chain (including polymers) and vinyl chloride chain operations. It has withdrawn from its nylon chain operations through its polyamide for polycarbonate (PC) swap with Netherlands-based chemical group DSM, and has relocated its production of purified terephthalic acid (PTA) overseas.

In addition, an olefin conversion unit will be set up in Kashima to ramp up propylene production, and at the same time subsidiary Japan Polypropylene will shut down part of its polypropylene (PP) facilities.

Mitsui Chemicals has reduced capacity and consolidated production of ethylene oxide (EO), EG, bisphenol A, ethylene-propylene terpolymer (EPT) and also plans to reduce its PP capacity.

In addition, the production of Evolue metallocene straight-chain low-density polyethylene (LDPE) will be expanded in 2011, and a new plant for hexane-1, a feedstock for Evolue, is scheduled to start up in Q2 2011.

In the core propylene business, olefin conversion units were started up in 2004 in Osaka and in Q2 2010 in Ichihara to ensure the supply of feedstock.

© The Saudi Gazette 2010