GLOBAL PETROCHEMICAL INDUSTRY EXPERIENCING CYCLIC DOWNTURN

March 29, 1993
The current deterioration of the petrochemical industry-particularly in the U.S. and Western Europe-is a cause of great concern to operators and analysts alike. And although the rapidly developing Asian market will continue to be a major factor into the next century, the immediate global outlook is for a weak market.

The current deterioration of the petrochemical industry-particularly in the U.S. and Western Europe-is a cause of great concern to operators and analysts alike.

And although the rapidly developing Asian market will continue to be a major factor into the next century, the immediate global outlook is for a weak market.

Chem Systems Inc., Tarrytown, N.Y., discussed these issues at its annual petrochemical conference, held Jan. 13-14 in Houston. One of the few optimistic predictions of the meeting was that the harbingers of the next industry cycle already can be seen in the U.S. economic recovery, a slowdown in new project planning, and a reduction in fixed costs.

U.S. MARKET

Fig. 1 depicts Chem Systems' U.S. petrochemical profitability index, a weighted average of cash margins for manufacturing petrochemicals in the most efficient, "leader" plants. The U.S. market clearly has been in a downturn since 1988.

In one conference presentation, Chem Systems' vice-president Dr. Bruce Pickover reported that profitability has peaked about every 9 years.

The high profitability and consequent capacity expansions of the late 1980s led to falling margins, which have now reached 1982-85 levels. The U.S. industry's return is less than 1981, 1983, and 1984 levels, although operating rates are about 10% higher. This pattern indicates a deterioration of industry structures cause of great concern, says Pickover.

The production of petrochemical derivatives was actually quite strong in 1992, despite a weak global economy. This strength led to large growth in basic building block production (Fig. 2). The increase was not, however, caused by a growth in exports because of the weak dollar, as is generally believed. Additionally, U.S. domestic demand has been strong, contrary to what one would expect in a weak economy.

The key to understanding demand growth is recent price trends. At the end of 1990 and throughout 1991, petrochemical prices dropped sharply as operating rates declined and refined products prices decreased after the Gulf War was resolved.

But petrochemicals are now priced favorably, compared to competitive materials. Petrochemicals are even replacing paper, glass, and metals in many applications.

For most of 1992, natural gas prices, and consequently ethylene feedstock prices, increased sharply. And because margins were already at very low levels, these increases had to be passed on. Because of the increased product prices, companies replenished their depleted inventories.

What can we expect for the future?

Chem Systems predicts limited production growth this year, despite the expected stronger economy. And exports will probably decline further as new overseas capacity comes on stream, says Pickover.

Furthermore, natural gas and NGL prices declined sharply late last year, and some of these cost savings must be passed on. Inventories are likely to be reduced again once companies see failing prices.

MARKET STRUCTURE

Several factors differentiate the current industry downturn from previous cycles:

  • Cost curves for most commodity petrochemicals have flattened considerably as licensing has led to a dissemination of many leading technologies.

  • Leading producers have far less competitive cost advantage because petrochemicals prices are often set by marginal producers.

  • Because of this reduced competition, fewer marginal companies are likely to leave the business because of a significant disadvantage in cost position.

Foreign producers are gaining a substantial share of the domestic market (Fig. 3). The U.S. imports major quantities of commodity petrochemicals such as butadiene, propylene, cumene, ethylene glycol, methanol, styrene, and polyethylene, which puts downward pressure on pricing and margins.

The U.S. is also experiencing a declining export market.

Asia is the largest importer of petrochemicals, accounting for one half to three fourths of the world's net exports. Production in East Asia was almost insignificant in the early 1980s, but South Korea has expanded its capacity dramatically, and by the mid-1990s, many other Asian countries will complete major complexes.

Also, by 2000 China and India will have several facilities that will reduce their trade deficits considerably.

INTEGRATION

There is also a trend toward capacity integration. For example, high-density polyethylene production was about half captive in 1984, but by 1994, it will be about 75% captive.

The problems facing the petrochemical industry have caused many companies to reposition themselves. Occidental, Shell, and Exxon, for example, have competitive strengths including refinery integration and scale of operation and plan to increase their shares in olefins and primary derivatives such as commodity polymers.

Through strategic alliances, companies can take advantage of such strengths on a global basis, while minimizing the need to invest in foreign markets. And as competition increases in process and product technology, research and development costs can be shared.

Finally, says Pickover, alliances may be structured to offer partners the future option of acquiring or divesting the business as strategies change.

On the other hand, a number of companies are focusing on fewer core petrochemical businesses. Several companies have diversified away from commodity petrochemicals altogether and moved toward higher-margin specialty, products.

PRODUCT FORECASTS

The most important factor affecting margins is capacity utilization. Other factors include:

  • Global supply and demand

  • Integrated trade

  • International competition.

Chem Systems expects some short-term softening of ethylene prices as costs decline. On average, margins for cracking ethane and naphtha will be close, based on yearly average values. Consequently, ethane is expected to be the optimum feed on a return-on-investment basis, considering its lower fixed and working-capital requirements.

Naphtha crackers will frequently produce higher actual margins, however, because these plants can switch feeds when conditions warrant.

Margins for cracking an ethane-propane mix, the most common feed, are expected to remain fairly constant over the next few years, says Pickover.

These margins will then begin to increase in 1995, reaching a peak of about 19cts/lb some time between 1996 and 2000.

PROPYLENE

Because about half of the propylene used in the chemical industry is recovered from refineries, the price is set by its alternative use in alkylation, the largest refined product application.

At a given alkylate price, propylene values vary inversely with isobutane values.

Propylene prices are currently extremely weak because alkylation values are somewhat low and isobutane values are high.

Other factors affecting propylene prices are:

  • Heavier feed used in U.S. olefins plants

  • Improved catalytic cracking in U.S. refineries

  • Weak polypropylene production, partially because of reduced export markets

  • Weak propylene export market because of competition from Libya and South Korea.

In 1992, there was an oversupply of propylene both from olefins plants, where heavier feedstocks were being cracked, and from refineries, where new cracking catalysts were producing more olefins. Demand was relatively weak. Polypropylene production did not grow as sharply as expected because exports declined.

Chem System projects that, if ethylene prices cycle upward, propylene prices will follow, so that a reasonable ratio will be maintained.

AROMATICS/BENZENE

Factors affecting aromatics and benzene prices are:

  • Toluene hydrodealkylation economics will continue to set benzene prices.

  • By-product benzene production from olefins plants, refineries, and coal tar will be insufficient to meet demand.

  • The 1990 U.S. Clean Air Act Amendments will reduce reformate production.

As a result of decreased reformate production, toluene hydrodealkylation will still be needed to supply the deficit in benzene production from olefins plants, refineries, and coal tar operations.

Chem Systems predicts average margins for benzene via toluene hydrodealkylation to be only a few cents per gallon, including those times when plants cannot cover cash costs and discretionary units are not operated.

Aromatics and benzene prices are currently very low. They are expected to trend upward, however, with increasing gasoline values.

High-density polyethylene and styrene prices, incidentally, are expected to remain weak for the next few years, then increase in the 1996-2000 period because of cycling raw material costs and increasing margins.

In conclusion, Pickover says the harbingers of the next industry cycle already can be seen in the economic recovery, a slow-down in new project planning, and a reduction in fixed costs.

ASIAN MARKET

Developments in Asia will continue to be an important influence on the global petrochemical industry for the remainder of the 1990s and into the twenty-first century.

Howard R. Blum, director of Chem Systems Japan Ltd., presented an overview of the Asian petrochemical industry at the Houston conference. Blum predicted higher growth in production and consumption of petrochemicals in Asia than for the rest of the world combined.

JAPAN

Japan has been the leading Asian petrochemical center, but Japanese industry restructuring and Japanese-led investments have catalyzed production in other Asian countries (Fig. 4).

The effect of Japan's current general economic recession on the petrochemical industry is magnified because inventories were built up in late-1991 and new capacity is coming on stream.

Chemical production in the country has declined and profitability has decreased sharply (Fig. 5). Operating rates have been reduced, plants have been shut down, and start-ups have been postponed.

KOREA, TAIWAN, CHINA

Petrochemical production in South Korea has increased dramatically, making the country a major net exporter of polyolefins and styrene (Table 1). Chem Systems estimates that the South Korean capacity buildup has increased the industry downturn by 1 year.

One such example of the capacity increase is Han Yang Petrochemical Corp.'s Yoechun plant, which started up in December 1992 (see article, p. 60).

Consumption has increased sharply as well. Profitability, however, has fallen sharply because of the new capacity (Fig. 6).

In Taiwan, after years of a relatively stagnant industry, petrochemical production and consumption are booming.

Factors causing this boom are a strong economy and increased demand for products in mainland China. And with South Korean projects starting up, low-cost raw materials are available.

Chinese Petroleum Corp.'s CPC 5 is proceeding toward a 1994 planned start-up, and Formosa Plastics is planning to come on stream in 1996. Formosa, however, still has many problems, such as feedstocks and ports, to work out, which could cause delays in commissioning the plant. Plans are under way for a seventh complex led by a consortium of companies with USI Far East playing a prominent role, according to Blum.

Chinese imports have a tremendous effect on the regional, as well as the global, supply and demand balance.

Imports were strong in 1992, partially absorbing South Korean output. In 1992, China's $36.2 billion chemical output exceeded 1991 levels by 12%, and imports and exports increased 40-50% compared with 1991.

Although China has scaled back its plans, 12 complexes were included in its 5-year plan, and several additional projects have since been proposed.

China's program of political and economic reform may cause great changes in the coming years. Chem Systems projects ethylene capacity in China to increase to 3.5 million metric tons/year (mty) by 2000.

ASEAN COUNTRIES

In Indonesia, PT Tripolyta Indonesia's polypropylene plant is operating, and BP Chemicals Ltd.'s polyethylene plant is scheduled to start up shortly. The PT Chandra Asri complex is proceeding with foreign funding and is likely to be on stream in 1996 at the earliest.

In its Kepres 39 decree, however, the Indonesian government excludes projects requiring local financing and feedstock guarantees.

Malaysia is planning three complexes:

  • A polypropylene plant is operating at Pasir Gudang and ethylene and polyethylene plants are under construction.

  • An LPG dehydrogenation unit is starting up at Kuantan. The propylene will be used for polypropylene and the isobutylene for MTBE.

  • A gas-based ethylene unit is planned at Terengganu, with the output to be used for polyethylene. This plant is unlikely to be on stream before 1996.

Petrochemical Corp. of Singapore has the largest petrochemical plant in the region with an ethylene capacity of about 450,000 mty. Mobil Petrochemicals International Ltd. is completing an aromatics complex in Singapore and plans to double the size of its olefins complex by 1996.

Thailand, as well, is planning a second olefins complex, based on naphtha feedstock and including an aromatics plant.

Total Asian ethylene capacity additions between 1991 and 1996 will be about 6 million mty.

REGIONAL TRADE

For some products, such as polyolefins and polyester intermediates, the trade deficit is expected to decline significantly.

But for others, such as vinyl chloride monomer, polyvinyl chloride, acrylonitrile, and styrene, the deficit will remain the same.

Because the region is not homogeneous, pricing is complex. Factors affecting prices include global and local costs and margins, operating rates, global and local trade patterns, and company strategies. Chem Systems says the region is changing so fast that historical relationships may be only guidelines.

Although ethylene has been a global market, low prices and high shipping costs will make supplying ethylene to the region prohibitive during the next few years. Only South Korea, Japan, and possibly the gas-based producers in Saudi Arabia and Qatar, will supply Asia. The principal ethylene importers will be Taiwan and Indonesia.

The U.S. will be a large exporter of propylene in the near-term and the major price-setting factor will be U.S. export price plus freight. Japan is also expected to export propylene. The main importing countries will be Taiwan, Indonesia, and South Korea.

The U.S., South Korea, and Japan will supply the Asian polyethylene deficit. Ethylene glycol will come from the U.S., Western Canada, and Saudi Arabia. The U.S. will also supply ethylene dichloride and vinyl chloride monomer, primarily to South Korea, Taiwan, and Japan.

Polypropylene and styrene will be supplied largely by the U.S. and South Korea, and paraxylene will be supplied by the U.S. and Japan.

EUROPEAN MARKET

The European petrochemical industry is currently in crisis, says John A. Philpot, managing director of Chem Systems Ltd. Every company has had its earnings slashed and many are in loss. Producers are experiencing a period when the average return to leader plants is approximately zero.

The recent steep drop in margins is linked with only a mild downturn in operating rates since their peak in 1987-90. The tight market balance experienced during 1987-91 eased in 1992, when operating rates fell to 85%.

Demand, however, did not fall. The combination of new capacity and adverse trade swings caused the drop in operating rates.

The operating rate problem in Europe has been mirrored in the Far East and Latin America. In contrast, rates in Western Canada and the Middle East have remained at greater than 90%, while U.S. utilization rates have been somewhere in between.

One product currently undergoing restructuring in Europe is polypropylene. Shell/Himont has led the process and it is widely believed that BASF/ICI will follow. This leaves 15 producers, few of whom have both the capability and resources to match these ventures, says Philpot.

If all the speculation is to be believed, every company is talking to most others, and at least some further changes will occur in the coming year. The key to remaining optimistic is believing that the actions being talked about in the polypropylene market will turn into reality.

It is highly likely, says Philpot, that during the next few years, the modest recovery post-1994 will lead to another profitable cycle. He ended his presentation on an upbeat:

"Petrochemicals is a differentiated commodity business. Both life and the textbooks tell us that if a firm is a leader in this type of industry, the returns are likely to be satisfactory to the stakeholders. It is up to all of us to make that happen."

Copyright 1993 Oil & Gas Journal. All Rights Reserved.