* More than 6 million tonnes of ethylene coming up
* China to account for nearly 38 pct of the growth
* China forecast to cut petchem imports
* Ethylene margins from naphtha crackers falling
By Seng Li Peng
SINGAPORE, March 26 (Reuters) - Asia will add record naphtha cracking capacities this year while new Middle East plants are boosting output, which may force petrochemical makers to cut runs from the second half after producing at full tilt since 2009.
Cracker run cuts in Asia, which analysts said would bring production to around 85 percent of capacity, are crucial to maintaining petrochemical margins, but will hurt naphtha demand.
China, South Korea, Thailand, Singapore and India will add 6.3 million tonnes of ethylene capacity, taking the region's total to 48.33 million tonnes per year. China will account for more than a third of the additions, reducing its need for imports.
Asia will not escape the brunt of the glut this year, as more competitive Middle East petrochemical plants, which use cheaper gas instead of naphtha as feedstock, have also started cranking up production.
This was unlike last year when several petrochemical makers were running their crackers at full blast to meet sizzling Chinese demand for plastics amid a robust economy.
"Everyone was waiting for a tsunami," said Mazlan Razak of petrochemicals consulting firm DeWitt & Co, referring to a surge in global supply led by new Middle Eastern capacities last year.
Traders had expected the glut to trigger permanent shutdowns of polymer plants and crackers in Asia and Europe last year. But such closures did not take place because of start-up delays in Middle Eastern plants.
Yanbu National Petrochemical Co (Yansab), 51 percent-owned by Saudi Basic Industries Corp (SABIC) <2010.SE>, was the most recent to start operations around January this year.
Any run cuts, the first since Asian capacity utilisation was slashed as low as 70-75 percent in third-quarter 2008 at the onset of the worst recession in decades, will coincide with a heavy maintenance slate this year and damp the naphtha market.
CHINA WILL CUT PLASTICS IMPORTS
Naphtha suppliers will be hard hit if Asia's top petrochemicals buyer China lowers imports of ethylene and polyethylene (PE), the world's most used plastic, found in pipes and cables needed in infrastructure to grocery bags.
China's annual PE demand is still expected to grow, estimated at 7-10 percent between this year and next, but its imports will fall because of new capacities, said Razak.
"China's PE import growth could be negative (versus 2009), with volumes projected at 6.5-7.0 million tonnes this year," said Razak. This is down from 7.4 million tonnes in 2009.
South Korea was the leading PE exporter to China, accounting for 18 percent, or 1.34 million tonnes, followed by the United States at 13 percent, Saudi Arabia at 11 percent.
"The ranking is likely to change in 2010. Saudi Arabia will export more this year," he said.
China's ethylene imports will also fall in 2010, to 770,000 tonnes versus 1.02 million tonnes last year, said consultancy Chemical Market Associates Inc (CMAI).
"There are new crackers in Singapore, Thailand and China. Margins will ease and cracker operations will be reduced to around 85 percent capacity from second-half of the year," said Jinsu Yim of CMAI.
FALLING MARGINS
Although China is adding new crackers and has flipped into a naphtha net importer in 2009, their import volumes this year are not expected to counter the fall in Asian demand for the feedstock when run cuts take place, analysts said.
South Korea, Japan and Taiwan alone currently have a nameplate capacity of around 19.14 million tonnes per year (tpy) of ethylene. A 25 percent cut in runs would approximately amount to a naphtha demand loss of nearly 1.2 million tonnes a month.
Most Asian crackers, except a few such as Shell's <RDSa.L> newly started 800,000 tonne-per-year (tpy) facility in Singapore and the 1 million-tpy plant run by Thailand's PTT <PTT.BK>, rely on costly naphtha as raw material to produce ethylene, the building block of plastics such as PE.
For now, ethylene sellers are keeping offers around $1,140 a tonne, free-on-board (about $1,200 C&F China), double last year's prices, said a Korean petrochemical maker.
But no buyers are biting at those high levels, as they expect the additional capacities to hammer ethylene prices.
"Current ethylene margins are around $200 a tonne, down from $700 earlier this year. It's been falling since March, and margins could be close to zero soon," said Yim.
Naphtha cracks surged to 20-month highs of $178 a tonne premium in Jan. 15, 2010 versus a record low at a discount of nearly $190 a tonne in early November 2008.
The rebound was also reflected in the 50 to 90 percent jump over the past year in shares of Asia's large listed firms -- Formosa Petrochemical <6505.TW> , Mitsubishi Chemical <4188.T>, Shanghai Petrochemical <0338.HK>, and PTT Chemical PCL <PTT.BK>. But the looming glut may start to pressure the sector.
"Chemicals have held up relatively well compared to what companies have thought, with global recovery coming back quite strongly," said Adithep Vanabriksha, deputy chief investment officer of Aberdeen's Thai unit.
"But having said that, going forward, companies are still quite cautious about new capacities coming onstream, particularly those in the Middle East. That would pressure supplies."
(Additional reporting by Judy Hua; Editing by Ramthan Hussain and Ed Lane)
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