CMAI foresees falling profitability for light olefins this year

Feb. 14, 2002
Chemical Market Associates Inc., Houston, predicts that profitability for light olefins will continue to fall in 2002. In its 2002 World Light Olefins Analysis, CMAI said producers must contend with a significant build-up of surplus capacity in the midst of a global economic slowdown.

By the OGJ Online Staff

HOUSTON, Feb. 14 -- Chemical Market Associates Inc., Houston, predicts that profitability for light olefins will continue to fall in 2002.

In its 2002 World Light Olefins Analysis, CMAI said producers must contend with a significant build-up of surplus capacity in the midst of a global economic slowdown. The study covers world markets for ethylene and propylene and their major derivatives.

The group also suggested that reduced profitability will likely result in additional industry restructuring through more acquisitions or merger activity. It may also spur ethylene plant closures, especially small-scale, high-cost units that require significant sustaining capital investments.

Nevertheless, CMAI's outlook for the US economy is optimistic, predicting a recovery in the global economy could begin in 2003.

"The combination of economic recovery (leading to a strong recovery in ethylene and propylene demand) and capacity rationalization provides the basis for concluding that strong market conditions will begin to re-appear in 2003 and will be very evident by 2004. A return to `re-investment' level profitability for the period 2004-06 coincides with the assumption of strong supply-demand conditions during that period," the group said.

CMAI noted that the last 2-3 years have seen surprises like rapid economic recovery in Asia, strong worldwide petrochemical demand growth, and rapidly escalating energy prices. Despite increases in petrochemical and derivative prices, "high production costs caused overall profitability to remain below reinvestment levels."

In 2001, CMAI said, industrial production declined and ultimately demand growth collapsed -- global growth in ethylene demand is estimated to have increased by less than 0.5% in 2001. A global economic slowdown was well under way at yearend 2001.

Last year, petrochemical producers in Canada, Mexico, and the US contended with historically high natural gas prices, taking North American petrochemical producers out of the international derivative markets. "Faced with a slowing domestic market, a noncompetitive position among international producers, and the start-up of three world-scale ethylene units in the region, North America ethylene producers reduced capacity utilization to the lowest levels in 20 years," it said.

"Consequently, with North American derivatives out of the international markets, as new capacity started up in the Middle East and in Asia, the market transition was smoother than anticipated, as these producers were able to fill the void left by North American producers.

"It would take until the end of 2001 for the weight of the US economic situation to bear down on the rest of the world. Light olefins producers in West Europe, the Arab Gulf and to some extent Asia would enjoy stronger market conditions until fourth-quarter 2001," concluded CMAI.