Petrochem margins to bottom in 1999-2000

• U.S. Petrochemicals/Polymers Profitability [96,642 bytes]

The global petrochemical industry is expected to hit the low point in its cycle in 1999 and 2000, says Chem Systems Inc., Tarrytown, N.Y.

Profit margins for U.S., Asian, and European producers were healthy through mid-1997, supported by high operating rates, increasing demand, limited capacity start-ups, and low feedstock prices. But reduced demand resulting from the Asian economic crisis triggered a fall in utilization, and consequently profitability, for Asian and U.S. plants starting in third quarter 1997.

U.S. and Asian margins have continued to weaken throughout 1998, says Chem Systems.

And, while margins for European producers held up well through the early part of this year, they have fallen recently, wiping out most of the gains made in recent years.

"A clear downward trend in margins (is) apparent," said the chemical industry analyst.

Cycle dip

Chem Systems' predictions are based on its annual analysis of prices and margins for petrochemicals and polymers. The forecast includes two bases: a cycle case, which assumes a peak in the cycle in the early part of the next decade; and a trend case, which assumes a relatively constant operating rate and takes into account the expected average profitability for each product studied.

"In both scenarios, the average margins throughout the forecast period are the same," said Chem Systems.

The forecast indicates that the next typical downturn in the petrochemical cycle will occur in 1999 and 2000.

"Contributing factors are lower GDP (gross domestic product) growth rates in the U.S. and Europe, leading to lower rates of growth for petrochemicals and polymers," said the firm.

In addition, new capacity expected to come on stream in the U.S., Middle East, and Asia will depress operating rates for many products.

"The aromatics chain looks particularly vulnerable for some years," said Chem Systems, "with paraxylene and styrene already at very low levels of profitability. Lower margins are also expected for olefins and polyolefins for the next 2-3 years."

Keys to upturn

A subsequent upturn in the cycle will be prompted by a recovery in Asian economic markets and limited supply increases as a result of delays in current projects.

"There will be more difficulty in sanctioning projects through the bottom of the cycle with limitations in project finance," said Chem Systems.

Furthermore, the firm predicts that, as margins collapse, less profitable units will be under pressure of closure.

"All these effects will combine to produce a tightening of the supply/ demand balance in 3-4 years, although this may vary across products."

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