AMERICAS' PETROCHEM OUTLOOK DIMS

Bob Williams
Senior Staff Writer

The U.S. petrochemical industry will enter the 1990s shakily, as analysts and industry officials expect a weak market performance in 1990.

That's because weakening domestic demand and lagging export markets are combining with surplus capacity to depress prices and thus shave margins.

It won't be a total collapse of the market as was seen in the early 1980s, but the specter of overbuilt capacity and with it depressed markets looms in the next few years, with another cycle of strength just beyond that.

In Canada, market conditions will as usual generally track those in the U.S., save for a few select niche areas of opportunity.

The big question mark for the petrochemical industry in the Western Hemisphere this decade will be Latin America.

Uncertainty over the direction of struggling economies there makes it a difficult task to gauge whether some of the big industrializing Latin America nations will contribute to market stability or instability.

U.S. DOWNTURN?

Forces ushering in a downturn in the U.S. petrochemical industry--weakening demand stemming from slower economic growth amid impending excess capacity--are still in play, contends Bill Urquhart, consultant with Bonner & Moore, Houston.

Despite a recent stability in olefins markets, prices will resume their slide soon, said Urquhart.

"Reduction in inventories caused by the late December freeze and production interruptions in ethylene and polyethylene provided a temporary plateau for ethylene prices," he said.

Urquhart expects a better balance of supply and demand early this spring, although he still sees too much supply on the horizon.

With the current market price at about 23-24 cents/lb, Bonner & Moore expects ethylene to dip to the middle to upper teens later on during the year, perhaps 18 cents/lb by yearend.

"There won't be a total crash if people don't get too aggressive," Urquhart said.

Urquhart sees the worldwide buildup of ethylene capacity contributing to a temporary capacity glut in the U.S.

"It's going to take until the mid to late 1990s before demand catches up," he said.

U.S. EXPORT MARKETS

Probe Economics, Mt. Kisco, N.Y., notes that U.S. ethylene, with capacity utilization running at about 90%, has about 10% excess capacity to export.

Probe analyst John Johnson contends that the U.S. will continue to lose export markets during the worldwide buildup of ethylene capacity, with ethylene exports dropping essentially to zero by 1996.

Probe's projections call for U.S. ethylene utilization to fall to about 80% by 1993, then rebound to 95% by 1996.

In the meantime, the best export prospect for U.S. petrochemicals is propylene, Johnson maintains.

"The U.S. has plenty of excess propylene in the refining sector. The world needs it now, and we will need it by 2000."

Johnson also sees improvement ahead for methanol in the U.S.

He expects methanol prices to rise to more directly reflect gasoline values as methanol works its way increasingly into the gasoline pool either directly or in methyl tertiary butyl ether (MTBE).

"The U.S. won't be a good site for methanol plants, however, because natural gas is too valuable here (to serve as a methanol feedstock). Expect the U.S. to import more methanol and absorb more butane for MTBE. That trend looks solid," Johnson said.

1990 OUTLOOK

Most analysts and industry executives expect a weak performance in U.S. petrochemicals in 1990.

Here are thumbnail sketches of Bonner & Moore's outlooks for U.S. petrochemicals:

Polyester fibers demand, after growing 4% in 1988 and 2.4% in 1989, will rise only by 0.5% in 1990.
Demand for acrylonitrile butadiene styrene (ABS) resins, after jumping by 9% in 1988 and falling 2.1% in 1989, will rebound by less than 1% in 1990.
After a terrible year in 1989, a comeback in antifreeze could pace ethylene oxide demand growth of 3.54%.
Although styrene demand climbed by 7.2% in 1988, inventory drawdowns cut demand growth to 3.4% in 1989. With no inventory drawdown impending, pent up demand and restocking will hike styrene demand by 4.5% in 1990.
Polyethylene will see a modest amount of product conversion and restocking this year, with high density polyethylene (HDPE) demand rising by 5.5% and low density polyethylene (LDPE) demand climbing by 4.5%.
Among polymers, 1990 demand for ABS, polycarbonates, and nylons--all hurt by a slowdown in automobile production--will be just as depressed as in 1989.
The weakest products in 1990 overall will be acrylic fibers, ethylene oxide, and ethylene glycol.
Among other petrochemicals, 1990 will see demand growth of 1.8% for polyvinyl chloride, 3.5% for vinyl chloride monomer, and about 6% for polypropylene.

But 1990 is not all bad news for U.S. petrochemical producers worried about slumping demand, Urquhart contends.

"In 1988, we saw the tail end of a rapid runup in demand from the Far East," he said. "In 1989, we saw the mirror image: A lot of destocking made the year look weaker than it really was. The underlying level of demand is higher than it would appear, judging from reports from plastics producers."

CANADIAN OPPORTUNITIES

Profits of some Canadian petroleum companies with petrochemical operations were squeezed by the market downturn last year.

Nova Corp., Calgary, expects some improvement in earnings from plastics and petrochemicals in first quarter 1990 but a likely decline in commodity sales prices later this year and into early 1991 (Chart). Nova's plastics division 1989 operating income was $89 million (Canadian) compared with $309 million in 1988.

Canada's olefins markets generally will track those in the U.S., especially in the East, because of proximity to markets.

In ethylene, however, western Canada has an advantage because of its large gas supply, said Johnson.

Western Canada offers a large ethane market that is attractive for one or two more ethylene plants, Johnson contends.

Although Canada has been hesitant about bringing new gas supplies on stream, said Johnson, the U.S.-Canada Free Trade Agreement will force the issue and thus make more ethane available to support ethylene manufacture in the West.

At the same time, Canadian producers will run up against more competition in the Pacific Rim, so a lot of their olefins will end up in the U.S., according to Johnson. He also expects to see some expansion of paraxylene and phenol capacity in Quebec for small volumes of export to the U.S.

Among other prospects for eastern Canadian exports are chlorine and VCM because producers there have an advantage in low feedstock prices and electricity costs, Johnson said.

LATIN AMERICAN ENIGMA

Latin America poses a real puzzle for forecasters. Although the potential for demand growth could be significant there in the 1990s, most of that growth would come from the relatively industrialized countries such as Brazil, Mexico, Argentina, and Venezuela, which are struggling with unstable economies and massive foreign debt.

Latin America's petrochemical industry is relatively small and in an early development phase, says a study by East-West Center, Honolulu.

Installed ethylene capacity, 3.835 million metric tons/year, was 7.4% of global capacity in June 1989. Latin America's 1987-89 rate of expansion lagged the 3.8%/year global average, due largely to lack of capital, the center said.

At the same time, Latin American petrochemical import bills are rising substantially. Thus, ample feedstock and the desire to diversify oil and gas development strategies are making expansion of the region's petrochemical industry an attractive alternative, the center said.

Latin American ethylene consumption will reach 5.6 million metric tons/year by 1995, East-West Center predicted. Construction of a further 1.1 million metric tons/year of planned capacity would still leave a shortfall of 1.36 million metric tons/year.

KEY UNCERTAINTIES

For Booner & Moore, the major uncertainty in Latin America lies in Brazil and Argentina.

"Brazil's economic austerity program could really hammer demand, and it wouldn't just drop in the next couple weeks," Urquhart said. "Brazil pulled back on exports last year because of booming domestic demand.

"If demand goes sour, Brazil could get into the export market again."

An example is Brazil's recent movement into the methanol market to supplant a shortage of ethanol in that country's motor fuels crunch.

"That has contributed to the turnaround in world methanol prices," Urquhart said. "If they pull back after April, redirected cargoes from places like Chile would depress methanol prices again.

Another question arises over the future of Argentina's petrochemical industry, which has scheduled a program of major expansions in the coming decade. Economic restructuring, with some emphasis on privatization, under the new government of President Carlos Saul Menem, will lend support to expansion plans.

However, the industry there worries about efforts to hike taxes on petrochemical feedstocks.

Mexico will see more activity as it moves closer to a free market, analysts say.

Mexico has a severe problem with foreign exchange, but the country's huge low cost gas resource gives it a natural advantage if it chooses to be an exporter, Johnson said.

Venezuela's ambitious plans for expansion of its petrochemical industry are proceeding apace.

"Venezuela is not as well equipped as Mexico because it doesn't have the same low cost gas resource," Johnson said. "They need more gas development for LPG feedstock. On the other hand, the Venezuelans are moving more aggressively."

Most industry observers expect Latin America to become a net exporter of commodity petrochemicals and become a key market in the 1990S.

"If all Latin American expansions come on as planned, that will add to the world's surplus," said Bonner & Moore consultant Earl Simpson said. "If they are strung out as we expect, then the market could accommodate those expansions."