EGYPT - Petrochemical Sector Keeps Expanding; But The Global Prospects Are Uncertain.

The petrochemical sector in Egypt, having grown rapidly in recent years, has been elevated to the top tier of the industrial hierarchy. The state-owned entity in charge of this is the Egyptian Petrochemicals Holding Co. (Echem) which, as one of three strategic pillars in parallel with the Egyptian General Petroleum Corp. (EGPC) and the Egyptian Natural Gas Holding Co. (Egas), are answering directly to the Ministry of Petroleum. Echem, set up in 2002, is implementing a 20-year Petrochemical Master Plan (PMP) to 2020, adopted in late 2000, to raise Egypt's capacity to produce petrochemicals to 15m t/y for the local market and for export, with new ventures to involve both the private sector and state companies of strategic importance.

Egypt sits on more than 72.3 TCF of proven natural gas reserves. The government is putting considerable faith in the country's unproven reserves, which are estimated at about 100 TCF, with a number of gas discoveries made in 2006 and 2007 yet to be proven officially. Gas has been identified as the key to meeting the country's industrial feedstock requirements, as well as rising demand for electricity. Cairo has planned to add considerably to its electricity generation capacity and natural gas is to be the main fuel source. But the costs of having such capacity have risen sharply in recent years due to a potentially disastrous global recession. Cairo is rapidly developing its gas export capacity, with the construction of a pipeline to Europe through Jordan, Syria and Turkey. Further export revenues are expected to come from the export of LNG to West Europe and the US (see OMT & Gas Market Trends of this week).

The Global Perspective: There is already a recession in the US and a much worse situation is expected on the global scale. The cost of Egypt's PMP in 2000 was estimated at about US$10 bn and the costs for such a plan have since risen more than five-fold. In some cases project costs have more than doubled since 2006. So there is doubt as to whether or not Egypt will manage to have a big expansion in its petrochemical sector. The same is true of plans to expand Egypt's refining sector (see down2EgyptRefJan7-08).

The price of WTI crude oil has fallen sharply in one week, from more than $100/b earlier this month to a little over $93/b at the week's NYMEX close on Jan. 11. But the recession is not likely to cause WTI to fall much further as demand for oil in the developing world, mainly China and India, is very strong. Pessimists are forecasting stagflation in the West, while optimists are the World Bank say the global economy still can be saved as growth in the emerging economies (EEs) this year is expected to be 7.1%.

There are two problems of global implications, which will affect the petrochemical business and all the other sectors of the world's economy: China and Japan.

Beijing's yuan-currency peg has created a situation of driving growth within China while exporting inflation globally. By fixing the currency, China guarantees its export-advantage over OECD countries, which in turn drives its own domestic growth. As China prospers and develops at record pace, it garners and insatiable appetite for global commodities, from energy to grains to metals. This marginal demand has depleted world reserves of commodities, which have subsequently led to the boom in prices we have seen. It is not only oil which has reached records: the same can be said of the price of corn, soybeans, metals, etc. - all of which have reached records in the past 12 months. Japan, too, does not allow its yen to float freely.

This global boom in commodities in turn has created wealth creating effects and booming economies in all the EEs which produce these commoditites: Latin America, Russia, the Middle East, etc. As these EEs prosper, they in turn reinvest in infrastructure and goods, which creates yet another cycle of demand. The end result is inflation globally, and a wealth transfer effect from the West to the EEs, because the American/European consumer is getting poorer, and the EE consumer is getting less poor, if not richer.

To add to the fire, as the OECD markets like the US and the UK slow, their central banks are caught in a conundrum, as they wish to lower rates to prevent their economies from slowing, yet they cannot lower rates too much because of the inflation now is prevalent in their own markets. The environment of slowing growth coupled with inflation is known as stagflation.

Stagflation is rare because a slowing economy usually leads to deflation, while a booming economy leads to inflation. Yet, the reason the world may well see stagflation is because the economies in the US and Europe may slow; but the insatiable appetite for commodities and currency-pegged-growth of China and its EE trading partners are what is leading to the inflation part of the equation. The last time we saw stagflation was in the 1970s, when America was slowing economically, yet the oil embargo led oil to sky-rocket and, in turn, led to inflation. Staglflation renders the central banks helpless to some extent, because they want to raise rates to beat inflation, yet they actually need to lower rates to prevent recession.

The only solution is for freely floating currency rates. If the Bank of Japan and China freely float their currencies, then a slowing OECD and a booming Asia would immediately mean that the yuan/yen will appreciate, which would in turn deem their exports less competitive and slow their domestic economies. That would then recede this global inflation we are seeing. However, so long as Japan keeps rates near 0%, and China keeps pegging its currency to the falling US dollar, the export arbitrage will remain, and China and the other EEs will keep growing at the expense of the West. This is a potentially explosive situation.

Beijing is not listening to repeated US and EU warnings, eager to keep growing and growing until at least the Olympics - in August 2008. Many people are worried why in the autumn of 2007 President George W. Bush warned of World War III. That was when Russian President Vladimir Putin was visiting Tehran. People then asked: Is the US preparing to attack Iran? (see news17-IranInArabPersianConfrtnOct22-07). But the indications now are that no such war is imminent (see news3-GCC-US-IranJan14-08), though no one knows who or what will cause World War III and when this will happen.