Mideast: petchem downturn looms on the horizon.(new construction projects)(Cover story)

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The timing of the latest wave of Mideast capacity could he better. Global petrochemical demand is tumbling, dragging pricing and margins with it, just as Mideast producers are set to increase ethylene capacity by nearly 12 million m.t./year in 2008-09, a supply boost of roughly 10%. Chemical makers, including BASF and Dow Chemical, reported sharp demand declines in October, 20% or more in some cases. The combination of sharply weaker global economic growth and a collapse in oil, energy, and feedstock prices has moved petchem buyers to the sidelines. BASF announced plans last week to shut or idle 20%-25% of global capacity, and Sabic recently announced that it is reducing production of its engineering thermoplastics by up to 20%, indications of the broad-based nature of the weakness. Mideast producers maintain strong long-term advantages, including world-scale assets and a leading feedstock cost position. However, margins will still suffer unless demand rebounds soon, analysts say.

While downturns are not new to petchem makers, this one is playing out in a more severe manner. "There has never been this kind of volatility throughout the chain," says Andrea Borruso, senior consultant with SRI Consulting (SRIC; Menlo Park, CA). "We're seeing a simultaneous downturn in global economies and demand, and emerging oversupply, and the price of oil has dropped from $150/bbl, to $50/bbl in three months," Borruso says. "This has wreaked havoc. The market has lost any sort of reliable reference point. It isn't clear right now at what price you should sell or buy product." The lack of visibility has made short-term planning difficult, if not impossible, producers and analysts say.

"Mideast producers, just like everyone else, should be clear not to upset supply/demand balances too much," says Florian Budde, a director in the chemical practice at McKinsey & Co. Oversupply and poor margins challenge all players in the petchem industry, and Mideast producers are not immune, Budde says. "Global balances have to be respected. Excesses in petrochemical capacity and supply are extremely difficult to work through," he says. "Incumbent producers are going to defend assets until that last drop of …