World petrochemical demand will strengthen by 2000- if economy rebounds

Dec. 14, 1998
Despite the maturation of the petrochemical industry, the world and regional petrochemical demands are surprisingly strong. If the Asian financial crisis does not worsen and a worldwide economic rebound begins by 2000, 5% or more annual growth rates are possible. These are the opinions of Ralph Hoag, SRI Consulting, Menlo Park, Calif., presented at a Chemical Management & Resources Association meeting, Ponte Vedra, Fla., in October.

Despite the maturation of the petrochemical industry, the world and regional petrochemical demands are surprisingly strong.

If the Asian financial crisis does not worsen and a worldwide economic rebound begins by 2000, 5% or more annual growth rates are possible.

These are the opinions of Ralph Hoag, SRI Consulting, Menlo Park, Calif., presented at a Chemical Management & Resources Association meeting, Ponte Vedra, Fla., in October.

Hoag predicted that the future petrochemical industry will be dominated by companies focused on global markets. Examples include Methanex Corp. for methanol, Amoco Corp. for purified terephthalic acid (PTA), Montell Polyolefins Co. NV for poly propylene, and Union Carbide Corp. for ethylene glycol.

Adequate long-term returns will be difficult for many current producers because of the concentration of business in the hands of low-cost, global suppliers. Even chemical companies with well-positioned product lines are looking for new avenues to increase stockholders' values.

Several chemical companies have recently taken steps to abandon their core chemical businesses for life sciences. Hoechst AG, Monsanto Co., and Rhone Poulenc. BASF, Bayer AG, Dow Chemical Co., and DuPont are making substantial life science investments.

Petrochemical outlook

Fig. 1 [20,587 bytes] considers the demand of 55 petrochemical products that include building-block chemicals, intermediates, polymers, fibers, and elastomers. When business cycles are de-emphasized, a long-term outlook of 55 petrochemical products reveals that the global industry is growing at an annual rate of more than 5%.

Broken into segments, polymers are the fastest growing petrochemical-derivative sector on a worldwide basis, led by low linear density polyethylene (Lldpe), polyester, poly propylene, and polystyrene. Elastomers have the slowest growth.

Surprisingly, Hoag projected the gross domestic product (GDP) growth to be higher in 1997-2007 than it was in 1987-1997 (Table 1 [26,631 bytes]). A substantial rebound in world economics after 2000 would accelerate the average annual consumption growth. A world recession, should it occur, would lower the 1997-2007 GDP forecast to 2.5%/year and the petrochemical demand by and average of 1%/year.

Fig. 2 [21,072 bytes] shows regional consumption of petrochemical products. Western Europe is expected to lag North America as a result of slightly lower economic growth and higher cost hydrocarbon feedstock.

Hoag predicted the highest growth regions will be Asia, Eastern Europe, the Middle East, and Latin America. He expected Asia to emerge from its short-term financial crisis with renewed demand. Latin American countries, despite their risk of currency devaluation, are expected to experience only GDP slowdowns.

East European demand declined by more than 50% from 1988 to 1996 during its economic transition. Central European countries, however, such as Hungary and Poland, are expected to continue to prosper.

SRI assumes that Russia will have future political stability and steady future growth after 1998. Although this is a risky assumption, according to Hoag, Eastern Europe is largely self-sufficient and has only a small impact on Europe and Latin America.

Much of the consumption shown for the Middle East is base chemicals and intermediates being converted to exported products. The Middle East is a major supplier to Africa and Asia.

Devaluation and oversupply

Currency devaluation of 50% or more in Indonesia, Korea, Malaysia, and Thailand has lowered the prices of their exports. China, Japan, and other Asian countries have let their currencies float, effectively devaluing their currencies and helping their exports as well.

Unfortunately, currency devaluations make imports "expensive," limiting trade opportunities. Combined with low Asian demand, the placement (or sale) of surplus production is driving prices down to unusually low levels.

The situation could get worse, according to Hoag, if a global recession occurs. He predicted a probability for a world recession to be about 50%.

The good news, however, is that most Asian chemical plants will survive, although perhaps with different ownerships, regardless of an economic turndown because the physical assets are comparatively new and of adequate scale. Currently, many outstanding Asian investments are available to companies with access to cash in strong currencies.

Furthermore, IMF and bailout funding, lower currency values, loan rescheduling, bank industry changes, and staff reductions support a strong recovery for the chemical industries.

Fig. 3 [30,206 bytes] illustrates the Asian GDP and Asian petrochemical demands for three scenarios: the pre-Asian crisis outlook, a current outlook, and a world-recession outlook.

In a world recession, Hoag predicted that the petrochemical demand in 1999-2000 would be lower than pre-crisis predictions by 12-20+%. Although Asian GDP could be affected for 3-4 years, it may take demand 6-10 years before returning to forecasted pre-crisis levels.

The Asian financial crisis has impacted product sectors uniquely. Hoag expected PTA and ethylene glycol demand to continue to grow. Elastomer demand, on the other hand, was off by as much as 50% through mid-1998 in various markets.

In early 1998, polyolefin demand dropped by 20% in Korea, Thailand, and the Philippines-and by more than twice as much in Indonesia.

Typical operating rates and supply-and-demand balances are not expected before 2003-2004.

Some projects were scrapped so that demand could catch up with supply. Fig. 4 [14,329 bytes] contrasts the number of Asian ethylene projects expected by 2007 in 1997 with the current outlook. Before 2002, postponed or canceled investments are in China, Indonesia, Korea, and Thailand.

After 2002, planned, rescheduled, or new projects are anticipated in China, Malaysia, and Singapore.

The Chinese plants represent more than 3.5 million metric tons/year (mty) of new ethylene capacity for 2003-2007. Additional delays, however, are likely.

The most significant risk of oversupply comes from the Middle East, where as many as six planned projects have not been delayed. New capacity to be added by 2002 amounts to about 4 million mty.

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