Global Petrochemical Markets To Get Tougher

World petrochemical demand [32,336 bytes]
Additions to world capacity [30,741 bytes]

Petrochemical surplus capacity, utilization [31,973 bytes]

The global petrochemical industry faces surplus capacity, declining profits, and stiff competition in the near term.

That's the view of Chemical Markets Associates Inc. (CMAI), Houston, presented by CMAI Pres. Patrick E. Baggett at an international petrochemical conference sponsored by Calgary-based Canadian Energy Research Institute this summer (OGJ, June 30, 1997, Newsletter).

Baggett noted that there are opportunities for companies that sharpen their competitive edge and exploit a shift in the trends for economic growth and petrochemical demand towards developing nations.

Supply/demand trends

CMAI estimates that global petrochemical demand for the next 5 years is expected to grow at a rate of 4.6%/year.

If new capacity required to meet this demand operated at 90% of capacity and existing capacity operated at its current level, 118 million metric tons of new capacity would be required by 2006, working out to increments of almost 12 million tons/year.

The greatest concern of companies expressed to CMAI is an upcoming wave of new capacity and the "potential devastating impact" it will have on profits.

To meet predicted demand by 2006, the global petrochemical industry will need to add 10.6 million tons/year if operated at 100% capacity and almost 12 million tons at 90% capacity.

"The main problem is that by the year 1999, the world surplus will be over 26 million tons, and there will be little decline until 2002-03," Baggett said.

"From what we know now, the large capacity wave is coming and will hit our shores by 1998. It will last until early into the next decade. With new capacity and the resulting decline of petrochemical operating rates, the degree of world competition will certainly increase."

Baggett noted dramatic political changes since the late 1980s, particularly in eastern Europe and the former Soviet Union, that have had an unexpected negative effect on economic growth and employment. He said positive changes for the longer term, however, include trends toward privatization of state industries in many areas, new investment, and greater understanding of free market systems.

He said one significant trend identified by CMAI studies is changing population balances and a shift of the center of economic growth and petrochemical activity towards the world's developing regions.

"The per capita GDP for countries of the Asia-Pacific region will grow by 50% by 2010 but will still be only 70% of South America and about equal to that of East Europe," Baggett predicted.

"A significant conclusion here is that the South American and East European regions will play a more important role in increased petrochemical demand than some might imagine. World petrochemical companies need to be prepared to take advantage of the growth in these regions, not just in the Asia-Pacific region."

Policy issues

Frederick L. Webber, president and CEO of the U.S. Chemical Manufacturers Association (CMA), said key policy issues now on the agenda could seriously affect the global and-in particular-North American petrochemical industries.

These include the debate in the U.S. over fast-track trade legislation, a growing anti-free trade climate in the U.S. Congress, and upcoming United Nations discussion of a convention on global climate change that could eventually result in a new international agreement designed to sharply reduce greenhouse gas emissions.

(In May, the Clinton administration postponed congressional consideration of a bill that would renew the President's authority to negotiate future trade agreements.)

Webber said free trade initiatives such as the North American Free Trade Agreement (Nafta) and the Uru- guay Round have opened markets and increased U.S. chemical industry exports by more than 50% in the past 5 years to a value of more than $60 billion in 1996. U.S. imports of chemicals have more than doubled in the same period to more than $40 billion/year.

But, the CMA executive warned, free trade is not fashionable now in Washington, and international agreements in general are not popular. He said many Americans believe Nafta has been a failure, despite evidence to the contrary.

Webber warned that U.S. ambivalence on free trade policy could lead to a new wave of protectionism with consequences for world trade and chemicals as a global industry.

Specifically, Webber noted that the U.S. does not have a trade agreement with the nations of Mercosur-Brazil, Argentina, Uruguay, and Paraguay. A monomer shipped from Houston must pay a 14% duty before entering the fast-growing Mercosur market. The European Union (EU) is close to a bilateral agreement with Mercosur. The same monomer shipped from Rotterdam will pay a 2% duty to enter a Mercosur nation.

Webber said he expects free trade supporters will prevail in the coming U.S. debate, but it will be a very close vote.

Global warming worries

Another major issue, Webber said, is U.N. action towards a binding global climate change convention and control of greenhouse gases.

The EU has proposed a plan to reduce greenhouse gas emissions in developed nations to a level 15% below 1990 emission levels by 2010. But developing nations would not be held to any timetable for reducing emissions.

The U.S. government has estimated the U.S. can stabilize emissions at 1990 levels by imposing a $100/ton carbon tax at a cost of $160 billion/year. Webber said such a tax would increase the price of natural gas by 70% and coal prices even more.

He noted that there would be an immediate and enormous advantage for developing nations not bound by the same rules and a rush of investment capital to lower-cost markets.

The CMA president said the issue is far from settled. The industry will continue to stress voluntary, results-oriented action, additional research, and involvement by all countries-including developing nations-in this effort.

Dennis Lauzon, president and CEO of Dow Chemical Canada Inc., also warned delegates of impending industry problems as governments move towards a policy on global warming issues. He noted 150 nations will meet in Kyoto, Japan, in December to debate policy on greenhouse gases and global warming.

"There's a freight train coming down the tracks," said Lauzon, who described global warming as not just environmental but a "change of living issue."

U.S. perspective

The international conference also included presentations from regional and national perspectives.

John E. Akitt, executive vice-president of Exxon Chemical Co., Houston, said the U.S. industry now accounts for 25% of world petrochemical production.

Major pluses for the U.S. are an efficient Gulf Coast infrastructure and access to diverse and abundant feedstock. Negatives include "the most demanding regulatory environment in the world, the most litigious society in the world and 'dumbing down'-the system isn't producing the well-trained specialists the industry needs."

Akitt said the U.S. industry is aggressively developing its position in a multitude of foreign markets.

"The leadership challenge in the future is how effectively (companies) globalize to take advantage of international markets," Akitt said.

Canada's changes

DuPont Canada executive David Findlay said the industry in Canada and elsewhere is being buffeted by forces that amount to "gale winds of change."

These include globalization, freer trade, the emergence of new econ- omies, new technologies, and new materials that challenge the status quo, and a fourth force-public demand for sustainable development of resources.

He said the "responsible care" ethic has spread to 42 nations but is not as strong in developing nations, which are still striving for an improved standard of living. He asked how North American manufacturers will be able to compete effectively when they are expected to create-at their own expense-the more environmentally sustainable products and processes.

"I want to emphasize that I am neither judging nor complaining here, but merely posing questions that no doubt test your company as much as they do mine," Findlay said.

Findlay said the Canadian industry enjoys a number of advantages, including: access to readily available, low-cost petrochemical feedstocks; market access opportunities provided through trade agreements; declining unit labor costs and lower staffing costs; well-developed infrastructure; an efficient regulatory system; high-caliber work force, and the lowest cost per researcher for R&D among the G-7 countries.

Latin America

Arnold Volkenborn, president of Venezuela's Pequiven SA, said he expects to see a fully integrated Latin American petrochemical market in the near future.

Volkenborn said the Venezuelan economy is opening up to the private sector, and there are strong investment opportunities in a growing market. The Pequiven executive forecast that the country's oil production will increase to 6 million b/d from 3 million b/d within 10 years.

Gov. Antonio Britto, of Rio Grande do Sol State, Brazil, said Brazil is entering a stage of extraordinary industrial development, with forecasts of national and foreign investment of $240 billion (U.S.) in the next 5-7 years.

Britto said an explosion is expected in Brazil's consumption of petrochemicals and plastics. Per capita consumption was 16 kg in 1996, up from 11 kg in 1994. General Motors, which currently makes 2 million vehicles/year for Brazil, forecasts production of 3-3.5 million units by 2003.

Britto said Brazil offers enormous potential for petrochemical growth. But there are challenges, including exceptional investments required for plants to meet environmental preservation requirements and a need to reduce production costs to be more competitive.

South Africa

Eric Spore, of South Africa's Sasol Alpha Olefins North America Inc., said there are exceptional petrochemical opportunities in South Africa.

There has been $6.7 billion in foreign investment since the historic elections in April, 1994.

Spore noted that South Africa is the major industrial economy and most developed nation in Africa and the gateway to that continent's market of 1 billion people.

Spore said Sasol is actively seeking alliances and joint venture arrangements for its technology originally developed around coal as a feedstock because of South Africa's lack of crude oil.

He said the technology also works with methane gas as a base feedstock and is a viable option for methane-producing countries or remote gas fields.

Japan

Hiroshi Watanabe, representing the Japanese Petrochemical Industries Association, said the Japanese industry has been relatively isolated from global competition.

But he said it is now abandoning an outdated focus on the domestic market and gearing for the global market.

The industry has taken a number of steps to be more competitive: the work force was reduced 5.5% during 1990-95; increased efficiency has been created by mergers and joint ventures; and it is now widely accepted that the Japanese industry must expand into other Asian countries.

Watanabe said Japan remains uneasy about the Chinese political situation and the potential for domestic turmoil only 8 years after the violent repression of dissent at Tiananmen Square.

China

Jack Howe, president of Phillips Chemical Co., noted that Phillips has long operated in China and said that the current situation offers both risk and opportunity.

He sees the process of change in China happening over several decades.

"It is incredible what is happening in China. They are seeking the high quality of life (elsewhere) and putting pressure on government," he said.

"Government realizes it can't meet expectations without globalization and the opening of economies. Major joint venture efforts are flourishing in China.

"We will continue to see a high multiplier and dramatic growth rates in plastics and petrochemical consumption. China will have a dominating impact on demand growth and trade flow globally."

Risks, Howe said, include political change and legal and monetary systems that are not well developed.

He said companies considering China need to build understanding, to see the choice of local partnerships as critical, and to proceed with caution, one step at a time.