Category → Fertilizers
Here’s an interesting question: How might the political turmoil in the Middle East affect the global petrochemical industry?
Let’s look at the potential areas of impact:
Directly, the countries that have seen the most serious challenges to their ruling regimes—Egypt, Libya, Algeria, Tunisia, Yemen, And Bahrain—don’t have very large petrochemical industries, at least not in the sense that they are major producers of olefins and derivatives. However, they do have significant production of methane derivatives like nitrogen fertilizers and methanol. (Dow did once sign a preliminary agreement to modernize and expand a small Libyan petrochemical complex in 2007. But I haven’t heard company officials mention that project in a couple of years.)
The countries that do have large petrochemical industries—Saudi Arabia, Kuwait, the UAE, and Qatar—haven’t seen as much unrest, though they haven’t been completely immune to political protests. If these countries do see serious challenges to the regimes, then there could be a disruption in chemical operations.
Iran, which has had significant protests, is a separate question. Politics have already impacted its petrochemical industry in the form of sanctions over its nuclear program. This has been making it harder for Iranian firms to export chemicals.
Geographically, the countries that are major petrochemical producers sit on the Persian Gulf. In addition, Saudi Arabia has the major Red Sea port of Yanbu, which is also a major petrochemical center. The countries with the turmoil are mostly in North Africa. Most petrochemical exports are headed in the opposite direction, towards Asia. However, Oman, which sets right near the Strait of Hormuz, is experiencing major protests. Moreover, any disruption to the Suez Canal would also disrupt petrochemical exports to Europe. But if there was such a disruption, the world would have more important fish to fry than a few containers of polyethylene.
Oil prices always have the ability to disrupt the chemical industry. Brent crude prices have climbed since the turmoil began and have since hit $100 per barrel. That said, prices began the year in the mid 90s. The turmoil seems to be exacerbating an existing run up in prices. This will tend to make the natural gas based North American industry even more competitive versus the naphtha cracking rest of the world.
(It should be noted that Algeria is also a major player in the international natural gas market, and has pipelines that connect it directly with Europe.)
Finanlly, never underestimate the power of high oil prices to sabotage the economy. The last time oil prices climbed into the 90s was in the fourth quarter of 2007, when the recession began.
BHP Billiton’s $40 billion bid to purchase Potash Corporation of Saskatchewan is starting to give me a this-is-not-actually-going-to-happen feeling.
The Canadian Competition Bureau has issued a Supplementary Information Request for the merger. BHP has delayed the deadline for its $130 per share hostile tender offer by a month to November 18 to accommodate the request.
BHP has been saying that it would market potash independently of Canpotex, an export cartel of the three big Saskatchewan potash producers: PotashCorp, Agrium, and Mosiac. This has caused much pulling of hair and gnashing of teeth among Canadian officials who worry that this would cause potash prices to plummet. That the Canadian Competition Bureau might intervene to keep a cartel going is highly ironic.
And Canada’s Globe and Mail has added some specificity to reports, swirling since BHP unveiled its offer, that the Chinese government is interested in buying PotashCorp through Sinopec.
It makes sense that the Chinese government would be interested in doing this. When it comes to potash, China sips from a long and narrow straw. According to Potash One, a company that is developing a Canadian potash mine, China consumes 27% of the world’s potash. It has no significant potash production or potash reserves. Canada, on the other hand, produces 35% of the world’s potash and has more than half of global reserves.
The Canadian Prime Minister has let it be known that he isn’t terribly comfortable with the idea of foreign ownership for PotashCorp. Stephen Harper reminded Parliament that the government can block the merger. “This government’s position has not been to give a blank check to foreign takeovers,” he said.
As for BHP, it has been keeping the door to an exit ajar. The company has been indicated there is a limit to how much it would up its Potash bid. It might be noted that two years ago BHP walked away from its hostile bid for Rio Tinto.
Another sign that the North American chemical industry is getting its groove back is news from Methanex that it is restarting a methanol facility in Medicine Hat, Alberta, that has been idle since 2001.
The company says low natural gas prices in North America have made the site competitive again. The company plans to restart the unit next year at a cost of $40 million.
Now, I would normally consider methanol and fertilizers a little far afield of what I would call “the chemical industry”. However, methanol and fertilizer makers led the charge away from North America a decade ago, and opted instead to build capacity in natural gas rich areas like Trinidad. North American ethylene makers followed with closures and a rush to the Middle East.
The reversal is an indication that natural gas from shale has reversed a downward trend for the North American petrochemical industry.
Then again, there are the ominous signs that the NIMBY people will scuttle the whole program.
Yesterday, Potash Corporation of Saskatchewan sent out a letter to customers in which it talked a little trash. A little background: BHP has been buying up mining rights in Saskatchewan to develop a greenfield potash mine. There is nothing that PotashCorp executives like more than to talk about how expensive the BHP mine would be.
Here are the good bits of the letter:
We recently learned that Chris Ryder, director of potash marketing for BHP Billiton, has begun to cold call many of you. Since the purpose of BHP Billiton’s call clearly was not to solicit your potash order from BHP Billiton’s Jansen project—a multi-year Greenfield project which BHP is not even proposing to take to its own Board of Directors for approval until 2011—we consider this contact to be inappropriate and highly unethical. We can only assume that BHP Billiton’s purpose is to sow seeds of doubt and confusion about the future of PotashCorp by raising questions about our ability to do business across the nutrient spectrum as well as the future location and makeup of our sales organization.
I am a little bewildered by BHP’s motives here. Chris Ryder is sitting at his desk wondering how BHP can buy PotashCorp without raising its bid too much. He decides the best course of action is to start calling PotashCorp.’s clients? I don’t see how that kind of thing can help. Due diligence, perhaps? It’s really hard to tell because we are getting this second hand from PotashCorp.
Maybe it implies BHP would sell off PotashCorp’s non-potassium containing fertilizers.
Ryder is no low level rogue employee. Most recently, he was marketing director for diamonds at BHP. Perhaps he does have good reasons.