By the OGJ Online Staff
HOUSTON, June 6 -- Short-term ethylene margins will remain volatile, but long term, they will be flat for many years, said UBS Warburg LLC in its Global Ethylene Review.
The next big ethylene earnings cycle, said the financial services company, is clearly beyond 2003.
In the base case 5-year outlook, UBS Warburg assumed 4.1%/year compounded demand growth, which is indicative of the past. Supply, however, will grow faster than demand -- 4.8%/year through 2005.
North America will add 1.9%/year. South America and Latin America will add about 6%/year although they start at a small capacity. The Middle East and Africa will add a whopping 17.8%/year of capacity between 2000 and 2005 (much of which is headed for Asia) and Asia will add 6.1%/year.
Iran will contribute a significant amount of capacity by 2005 and Saudi Arabia will build at least two more world-scale plants before 2006.
UBS Warburg said these numbers translate to overbuilding in Asia. "The Asian crisis did not last long enough to discipline this industry from overbuilding as it has always done in the past."
Trade patterns
Trends affecting the operating rate of ethylene plants, and thus the profits of ethylene producers, include feedstock and energy considerations, trade loss by North America to the Middle and Far East, industry consolidation, and emerging economies.
The Middle East, because of its ample supply of world oil reserves, and Iran, because of its natural gas resources, will bear the lion's share of new plant capacity, according to UBS Warburg. Toward the end of this decade, NGLs from the Alaskan North Slope could provide incentive for new Canadian or US ethylene plants.
The US will lose its world share of ethylene capacity, however, because of its higher natural gas cost relative to oil. Today, about 70% of North America's ethylene production is based on natural gas. Comparatively, the rest of the world depends on oil feedstocks for about 73% of its production.
Increased exports from the Middle East and Canada will change trade patterns and make the US, Japan, and Europe less competitive. This shift in trade and planned increases in capacity in the Middle East and Far East will diminish the 15% export level of ethylene derivatives the US now has.
Escalating feedstock costs are compelling ethylene producers to find upstream partners or backwards integrate to ensure their access to feedstocks. "There are still far too many players with too little market share" to greatly affect the competitive nature of the industry, the report said.
Production
Outside of the Middle East, emerging economies, such as China, India, Malaysia, Singapore, and Latin America, are the target of new ethylene production.
China, said the analyst, has reported a GDP of 8% in the past 5 years and this is expected to continue at more than 7%. It said such emerging economies will determine future global demand.
At the base-case of 4.1%/year global ethylene demand growth, UBS Warburg estimated four 2-billion-lb ethylene plants/year are needed.
Except for 2004, each year between 2001 and 2005 will provide more new capacity than required to meet demand growth. By the end of 2005, there will be 6-7 billion lb/year of surplus capacity. Thus, operating rates will decline from 91% in 2000 to 88% in 2005.
In the US, with other things being equal, product margins -- that is, the spread between net sales and production costs -- improve at operating rates greater than 90%.
With uncertainties of project timing and potential project cancellations (should the global economy experience a protracted slowdown in 2001 and 2002), the analyst predicted a "flat" outlook on operating rates for the next 4 years.
An overly optimistic demand of 5%/year, however, would require more ethylene plant additions than currently planned. Operating rates in this scenario would increase by 2% over 5 years.
