ETHYLENE CAPACITY TOPS 77 MILLION MTY

The biggest reason for the large change is more information about plants in the CIS. This new information, provided by Trichem Consultants Ltd., London, reveals ethylene capacity of almost 4.9 million mty for the region, compared with 1.3 million mty reported last year (Table 1)(13005 bytes).

Capacity in the Asia/Pacific region has increased by about 2.6 million mty, according to the survey. This increase is due to more accurate figures and actual capacity additions.

Other countries in the region showing big increases are South Korea, up 865,000 mty, and Thailand, which reports 315,000 mty additional ethylene capacity.

Also responsible for the increase in capacity is the start-up of several large ethylene plants during the past year. These plants include:

• Dow Chemical Canada Inc., 544,000 mty, Fort Saskatchewan, Alta.

• Thai Olefins Co., 350,000 mty, Map Ta Phut, Thailand

• Saudi Petrochemical Co., 500,000 mty, Al-Jubail, Saudi Arabia (started up in 1993)

• Titan Petrochemicals (Malaysia) Sdn. Bhd., 230,000 mty, Juhor, Malaysia

• Keiyo Ethylene Co., 600,000 mty, Ichihara, Japan

• Formosa Plastics Co., 680,000 mty, Point Comfort, Tex.

• BASF AG, 600.000 mty, Antwerp.

• National Petrochemical Co., 240,000 mty, Arak, Iran, and 310,000 mty, Bandar Imam, Iran.

National Production Capacities Table (32862 bytes)

CONSTRUCTION

World ethylene capacity is expected to continue its steep upward climb through the end of the decide (Fig. 1)(50818 bytes). According to the journal's most recent construction survey, if all planned capacity additions come on line, world ethylene capacity could increase by as much as 11.5 million mty in the next 5 years (Oct. 17, 1994, p. 71).

Major plants are expected to come on stream in Indonesia and Malaysia in the near term. China alone has 13 ethylene projects in the works. And five plants, totaling 1.4 million mty are planned for India. Other countries showing high activity in debottlenecking and capacity additions are the U.S. and Qatar.

FEEDSTOCKS

In 1994, about 1.7 billion bbl of olefin plant feedstock were consumed, according to Gary Adams of Chemical Market Associates Inc. (CMAI), Houston. More than half of this quantity comprised naphthas, either from refineries or from field condensate.

Ethane and propane demand for ethylene production totaled about 600 million bbl in 1994, or about 35% of the total, said Adams.

Fig. 2 (38374 bytes) shows CMAI's predictions of world feedstock requirements for ethylene plants.

By 1998, olefins producers will be consuming more than 2.1 billion bbl of feedstock per year. Of this total, Adams predicts naphtha will comprise 57% and ethane/propane, 35%.

PRICE

Current high prices for ethylene are expected to fall away in the second half of this year. However, an underlying trend for growing demand is forecast to prevent prices from falling back into a trough as deep as in 1993 and early 1994.

The worldwide boom, which began in third quarter 1994 and which took much of the market by surprise, is expected to be curtailed by a combination of debottlenecking in the U.S., new capacity in the Far East, and lower demand from major importers such as China.

"First and second quarter prices will be very good," said Paul Ray, consultant at Trichem Consultants Ltd., London, "but the third and fourth quarters will be tamer.

"We are projecting a gradual decline," said Ray, "though we are conscious that the petrochemicals sector rarely does anything gradually. This will not be a price collapse to early 1994 levels, since the underlying market is growing. There will be a fall back in prices to a still profitable level. The market will be healthy, but will not offer reinvestment economics."

Ray sees the roots of the current relative boom in petrochemicals prices in the rock bottom market of late 1993 and early 1994.

"Nineteen ninety four is best described as a year of two distinct halves," said Ray. "The first was a continuation of the recession of 1993. Prices and margins were awful. There was not much hope in industry circles."

IN THE TROUGH

For the European ethylene market at least, the galvanizing factor, though not the actual turning point, was the decision by BP Chemicals Ltd. to close its Baglan Bay plant in South Wales, according to Ray.

Announcing in January 1994 the plan to close the 335,000 mty cracker that March, BP cited overcapacity for ethylene production in Europe. Baglan Bay was said to have been producing at a rate of only 185,000 mty since October 1993 (OGJ, Jan. 17, 1994, Newsletter).

BP said then that the Baglan Bay closure was consistent with its support for an initiative promoted by Brussels-based Association of Petrochemicals Producers in Europe (APPE) to close uneconomic ethylene capacity.

However, the APPE plan had run aground only weeks before BP's move, as members realized that not enough marginal plants would be volunteered for closure in return for cash (OGJ, Jan. 3, 1994, Newsletter).

Trichem was one of a number of companies which prepared background information for the APPE initiative. Ray said Trichem's work revealed that a significant portion of European ethylene capacity was not competitive.

"APPE proposed a fund that producers could draw from if they closed capacity," said Ray. "Some producers were opposed to the notion of funding companies which could not keep their house in order."

After the initiative failed, BP closed down the Baglan Bay plant, and the Leuna cracker in former East Germany was closed down under Germany's restructuring program.

"During the first half of 1994, petrochemicals was marked by demoralization," said Ray. "Only the leading cost producers were operating near a positive cash flow."

UNEXPECTED SURGE

In the second quarter of 1994 it became apparent there was a trend for increasing exports sales of polymers, according to Ray. Some considered this a continuation of European producers' efforts to unload products in an attempt to maintain plant loadings.

Though these exports were dismissed as a symptom of a rock bottom market at first, to pundits' surprise the exports figures continued to increase.

"At first we didn't notice that the recovery in the U.S. economy was strong," said Ray. "More importantly, the Far East market became gung he. The region became a big driver, with China subsequently buying at record levels during 1994."

Ray said China was a notoriously sporadic petrochemicals buyer, with one or two good years followed by a lean period.

Another spur came as demand in other Far Eastern countries began to soar because of delays in bringing new production capacity within the region into production.

"Then suddenly there were operating problems in the U.S.," said Ray, "and Japanese production was hit by droughts. There was a call for still more exports from Europe and at once there was a squeeze on prices driving them upwards."

Ray said the call for exports enabled European producers to push for higher domestic prices and a small trend upwards became an avalanche.

Buyers began to replace petrochemicals stocks after the recession, and as prices began to increase they bought faster to secure stocks before prices rose even further.

Speculative buying began to heat up the market still further, said Ray, but the final decoration on the cake was said to have come when several European producers had problems with their crackers at the same time (OGJ, Oct. 31, 1994, p. 16).

NEW CAPACITY

Trichem sees 1994 as the peak in olefins export trade, after which export business will die away until 2000.

"This has been an export-led recovery," said Ray, "and there are now lots of reasons to believe it won't continue."

First reason cited by Ray was expectation of 2 million mty of new nameplate ethylene capacity in North America this year.

Ray says Dow Chemical Co. started up a 680,000 mty ethylene unit at Freeport, Tex., though Dow reported no new capacity there for the survey. Also the Formosa Plastics 680,000 metric tons/year unit at Point Comfort, Tex., is expected to complete its first full year of operation, and debottlenecking at Exxon Corp.'s Baytown, Tex., plant and other producers' units are anticipated.

"The U.S. is no longer as ethylene constrained as last year," said Ray, "and therefore it can export more ethylene derivatives."

Among planned European debottlenecking projects Ray cited: a new 60,000 metric tons/year furnace at BASF's Antwerp plant; the BP Chemicals debottlenecking at Grangemouth, Scotland, which a BP official confirmed will release 25-30,000 metric tons/year of capacity from the third quarter; work by Exxon/Shell at Mossmorran, Scotland; and expansion by Dow Chemical Iberica SA at Tarragona, Spain.

New Far East ethylene plants were said to include: a 350,000 metric tons/year plant at Map Ta Phut, Thailand, operated by Thai Olefins Co. which came on stream at year end; Keiyo's 600,000 metric tons/year plant at Chiba, Japan, which also began production around year end; and a 550,000 metric tons/year plant at Merak, Indonesia, operated by Chandra Asri and due on stream around April.

PRICES OUTLOOK

All ethylene capacity is supported by downstream derivatives, said Ray, so as U.S. producers export more, Europe exports less, and the Far East holds back its high demand. Price erosion is set to happen.

"If the winds of change are detected by derivatives buyers," said Ray, "they will look to lower prices further to match the falling market. They will use inventories built up last year to force the situation."

A further complication seen by Ray is price differentials between the major ethylene derivatives market areas of North America, Europe, and the Far East.

For example, polyethylene prices were said to stand now at $1,200-1,300/metric ton in Western Europe, compared with about $1,000/metric ton in the U.S. and $950-1,000/metric ton in the Far East.

"Based on these differentials, it makes sense to sell surplus production in Europe," said Ray. "Hence prices for derivatives can fall away at any time."

Ray said it is now better for a Saudi petrochemicals company to sell its products in Europe rather than in the Far East, their normal destination under recent market conditions: "This sums up the overheated nature of the European marketplace."

Based on this anticipated interplay of factors, Trichem reckons first quarter price for polyethylene in Europe was 1,800-1,900 Deutschemarks/metric ton ($1,280-1,350/metric ton), and third and fourth quarter prices will be in the region of 1,500-1,600 Deutschemarks/metric ton ($1,050-1,150/metric ton).

Ray said the underlying demand growth, particularly in the Far East, will continue to keep the market healthy. Though ethylene and derivatives prices will ease back later this year, this will be to a level at which operations are still profitable.

But Ray said producers should be wary of overproduction, since they could get caught with high stocks of their own as the market switches later this year from being export and domestic demand driven to being import led.

EUROPE'S FRAILTY

Ray says the key problem for future developments in Europe's ethylene market can be traced back to the reasons behind the APPE proposal.

The problem which inspired the APPE move, namely how can Europe maintain its competitive position in the world market given regional overcapacity, has not gone away.

If the ups and downs of the petrochemicals market's cycles are averaged out, argues Ray, typical European producers come out with a small positive return: If you have a 20 year old plant that continues to make money, why close it?

"The next recession is a long way off," said Ray, "because the economic cycle is on the upside. But last year European producers were at a cash Cost disadvantage compared with other regions.

"The cash cost disadvantage is expected to still be there in 2000, for typical operations. Only for exceptional European operations can we look at different economics, under which selective investment may be worthwhile."

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