Petrochemical industry adjusts to Asian flu

April 27, 1998
SE Asia Petrochemical Prices (CIF) [52,389 bytes] Ethylene Capacity Changes, Western Europe [51,517 bytes] Middle East Petrochemical Market Share, 2000 [58,014 bytes] The Asian economic flu and the resulting slowdown in growth-especially in Indonesia, Thailand, and South Korea-will cause a 25% decline in demand for major commodity polymers in 2000, says Marshall Frank, president of Chem Systems Inc., Tarrytown, N.Y. This change in the Asian market is being felt by petrochemical producers around
The Asian economic flu and the resulting slowdown in growth-especially in Indonesia, Thailand, and South Korea-will cause a 25% decline in demand for major commodity polymers in 2000, says Marshall Frank, president of Chem Systems Inc., Tarrytown, N.Y.

This change in the Asian market is being felt by petrochemical producers around the world, to varying degrees and in different ways.

Asian countries' petrochemical import patterns are shifting, with more supplies coming in from outside the U.S. And the fallout from the Asian crisis has had some unexpected benefits for European producers (OGJ, Apr. 6, 1998, Newsletter).

Meanwhile, the Middle East's strong feedstock position is advancing its position as a global petrochemical supplier.

Although most Asian countries will recover, said Frank, the region's economic growth rates will fall below those achieved in the early 1990s. As a result, demand for polyolefins, polystyrene, and polyvinyl chloride will be checked considerably.

Prices

Uncertainty in Asian petrochemical demand and the sharp decline in petrochemical prices in the region make it more important than ever to understand the factors affecting product prices, says Chem Systems Vice-Pres. Bruce Pickover.

Asian prices vary substantially from product to product, from country to country, and even within the same country. And domestic prices differ from cif prices.

External forces must be considered when forecasting Asian prices. The traditional practice of relating Asian prices to U.S. prices no longer prevails, especially because U.S. producers export at a discount in difficult times and at a premium during flyups.

Imports into Asia from the U.S. are being replaced by shipments from other regions. As Asia moves toward self-sufficiency, local production costs play a greater role in setting prices.

There are several key pricing trends, said Pickover:

  • The U.S., because it is the low-cost producer of propylene, poly- propylene, ethylene dichloride, vinyl chloride monomer, and polyvinyl chloride, is expected to play a key role in setting Asian cif prices for those products.
  • South Korea will continue to influence the ethylene, polyethylene, and polypropylene prices during industry downturns-and, in the future, styrene prices as well-because of its excess capacity for producing those chemicals.
  • Western Canada petrochemical producers will be a major factor in setting ethylene glycol prices during periods of overcapacity.
  • Saudi Arabia, during flyups, is likely to set Asian cif prices for ethylene, polyethylene, ethylene glycol, and styrene at a level that enables it to achieve the same netback as if selling to Europe.

European producers

In recent years, Asia's high petrochemical demand has had some favorable effects on the European chemical industry, boosting cash flow and profitability beyond most expectations. But continued growth in the short term is threatened by another dip in the petrochemical cycle, says Chem Systems.

Satisfactory petrochemical profitability has been coupled in Europe with a restraint on new investment and a surge in restructuring. No new ethylene capacity has been built since 1994, when BASF AG started up a plant, and only one new grassroots unit has been announced, by Repsol SA in Spain.

Comparing incremental capacity changes with expected increases in ethylene demand, the industry's plans appear to be much in line with demand growth (see graph, this page).

To the industry's overall advantage, the unprecedented number of mergers, takeovers, and alliances in the European chemical industry in the recent past has reduced the excessive number of players in many business areas, especially in polyolefins.

These factors will continue to bolster the European chemical industry as it faces the challenge of creating value during an inevitable cyclical decline in profitability this year and next, says Chem Systems. However, success during this period can be achieved by pursuing additional restructuring, lowering the cost base, gaining geographic advantage, and diversifying technology.

Companies that implement these strategies should be able to achieve acceptable returns on investment through the cycle, says the firm.

Middle East

"The extent to which petrochemicals add value to hydrocarbon resources is clear," said Chem Systems Ltd. Managing Director John Philpot. And no region better demonstrates that value creation than the Middle East.

During the past 15 years, this region has developed from essentially a zero base into the world's largest petrochemical exporter, he added. The political imperative behind this move was to conserve and add value to resources, which effectively diversified the economy and created opportunities for employment and investment.

Despite the region's advantages, the handicaps to be overcome were high initial capital costs and the need to export virtually all of the final output.

The main driver behind the increase in petrochemical production in the Middle East is the availability of hydrocarbon feedstocks. Natural gas associated with oil production has supplied feedstocks and fuel for petrochemicals production and other process industries. And oil revenues have provided the finances necessary to develop the infrastructure needed to build petrochemical plants and export products.

The number of Middle Eastern petrochemical producing countries continues to grow, as does total capacity. Overall, Saudi Arabia dominates, but there will likely be seven ethylene-producing countries in the region by 2000 and eight by 2001, of which five should be significant in terms of global derivative trade.

The region's share of global capacity will be around 8% for ethylene and polyethylene and a striking 20% for ethylene glycol (see graph, p. 24). Because most derivatives are exported, these levels translate to about a 50% share of all materials entering interregional trade for some key products, including polyethylene and ethylene glycol.

Cost advantages continue to provide the incentive for further projects to be developed and for foreign partners to participate. The list of such companies now involved in the Gulf countries is extensive and heavily U.S.-influenced (OGJ, Sept. 22, 1997, p. 73).

Can the Middle East continue to create value in petrochemicals in the future?

A number of issues will be key, says Chem Systems, including: availability of additional ethane, discounts on traded feeds and other incentives, tariff reduction, free trade zones, technology breakthroughs, Asian market uncertainties, and global and Asian sourcing strategies.

Several countries in the region will have enough ethane to support additional ethylene production, as oil, gas, and liquefied natural gas projects are developed. All of these have the potential to be competitive globally.

While feedstock discounts and additional incentives are offered, the introduction of other feeds and derivative chains will facilitate new projects in the region.

Tariff reductions will continue to add to the attractiveness of Middle East exports. And improvements in gas conversion technologies may support a new wave of petrochemical investment in this gas-rich region.

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