The petrochemical sector's recent boom period is over, and the industry's characteristic cycle is once again at bottom.
Increasingly under economic threat are petrochemical producers with neither size nor a unique selling point for their products, analysts say.
It appears prices are unlikely to fall further, and there may even be a small revival in earnings toward the end of this year. However, this will be short lived, considering new capacity scheduled for start-up in 1997 and 1998.
Behind the surge
David Glass, director of Chem Systems Ltd., London, sees stockbuilding by customers, although hard to quantify, as one of a number of major reasons for the recent petrochemicals boom.
He said, "We had a surge in profitability in 1994, which peaked in second quarter 1995 across the board. This was a result of demand improvements and supply constraints caused by loss of various plants."
There also was a continued surge in polymer demand, boosting exports from the U.S. and Europe to the Far East. China showed particularly high consumption.
"Then China announced in May 1995 it would reduce imports," Glass said. "China had been importing 1.3 million metric tons of polymers a quarter and suddenly cut back by 300,000 metric tons a quarter.
"This move triggered a price collapse. Now, China has raised its imports once more, but prices haven't followed. Producers are less confident of raising prices while stocks are high."
Glass said the current polyethylene is 0.95-1 deutschemarks/kg, (66-69/ kg), having peaked at about 1.85 deutschemarks/kg ($1.28/kg).
"Polymer prices are now similar to early 1994," Glass said. "At this level, producers are not making much money, but they cannot afford to go much lower, either. Prices have hit bottom."
Glass said although the petrochemical industry is at a low point in its cycle, it is not in recession. He expects little new capacity to be brought on stream this year and consumer countries to maintain relatively robust economies.
"Prices are likely to rebound, but not a great amount," Glass said. "Profitability, which had halved last year, will stabilize and possibly improve. Profitability will not be as bad as in 1993."
Profits are likely to improve toward the latter part of 1996, Glass said, but beyond that the outlook is "...not so rosy. In 1997-98 new capacity will come on line. There will be consolidation and maybe price recovery this year, but for 1997-98 don't hold your breath."
European downturn
Richard Freeman, chief economist at Imperial Chemical Industries plc (ICI), blames a downturn in European petrochemicals on reduced consumer spending and lower exports.
"Concerns about job insecurity as industries restructure have caused consumer confidence generally to fall and to remain low," Freeman told a Jan. 11 U.K. Chemical Industries Association conference. "Also, governments tightened fiscal policies considerably last year. Higher taxes imparted a general deflationary impact in the region."
There was involuntary stockbuilding throughout Europe in 1995 as domestic and export demand weakened more than expected. At the end of 1995, stock levels were still quite high.
Freeman expects western Europe's gross domestic product to expand an average 2.5% this year as consumer spending rises and taxes fall.
He said, "Most stock adjustment should now be coming to an end. So chemical production is expected to be growing at a faster rate than gross domestic product through this year."
Business cycle
Frost & Sullivan, London, said 1994's upturn saw Europe's petrochemical capacity utilization rebound to more than 90% and prices rise by 50%.
A total 46 million metric tons of petrochemicals was sold in 1993, compared with 49.6 million metric tons sold in 1994.
"The most striking aspect of these values," Frost & Sullivan said, "is that while demand grew by a very respectable 7.7%, revenues increased by 64.1%, illustrating the dramatic swings characteristic of the petrochemical business cycle."
The overall European market for petrochemicals is expected to be worth $37.49 billion by the end of 1999, up from $31.16 billion in 1994. Yet revenue growth rates are not expected to top gross domestic product increases of 2-3% this decade.
Frost & Sullivan said petrochemical companies face a tough time because of increased competitiveness in the international market and increasing production in traditional export markets.
"Companies with a significant market share of 15% or more and/or a major feature of excellence such as lowest cost process, lowest cost feedstock, or best market support, will continue to do relatively well," Frost & Sullivan said. "Middle of the road companies need increasingly to examine their business options."
