SABIC DETAILS OUTLOOK FOR KEY PETROCHEMICALS

World methanol markets will tighten after 1991, Saudi Basic Industries Corp. (Sabic) predicts.

Underpinning that tightness will be continuing strong growth for methanol derived methyl tertiary butyl ether.

Meantime, the Saudi state owned petrochemical company expects environmental concerns and slower economic growth to keep polyethylene markets soft the next 2 years.

In addition, Sabic foresees a return to stability for ethylene oxide/ethylene glycol markets after volatility in the latter 1980s.

METHANOL SOFTNESS SHORT LIVED

Methanol supply has caught up with demand after several years of tightness, but don't expect today's soft market to last, Sabic warns.

The rapid growth of MTBE will ensure that methanol operating rates remain strong throughout the 1990s.

Sabic estimates worldwide methanol demand will grow 3.2%/year during 1990-2000, paced by 8-10%/year growth in demand for MTBE.

"The rapid growth of MTBE, particularly in the Far East, U.S., and Europe will keep pressure on methanol producers to continue to expand worldwide capacity," said Sabic Marketing Ltd. Pres. Abdullah S. Nojaidi. "This should keep global methanol operating rates at 84-90% for most of the 1990s.

"Such high levels of capacity utilization leave virtually no margin for error."

Nojaidi cited first quarter 1990 to illustrate the vulnerability of the methanol market. During December 1989 and January 1990, a series of plant outages, prolonged turnarounds, and a surprise cold wave on the U.S. Gulf Coast suddenly tightened a soft market and sent methanol prices soaring during the quarter.

"We will be very surprised if there are no more spot shortages during the 1990s," Nojaidi said.

SABIC PLANS

Sabic, one of the world's largest methanol producers, plans to expand nameplate capacity to 2.37 million metric tons/year from 1.81 million tons/year at its three joint venture plants in Saudi Arabia and Bahrain by yearend.

Its methane feedstock comes from associated and dry gas.

In 1988, Sabic started up a 500,000 metric ton/year MTBE plant at Ibn Zahr and is now one of the world's largest merchant suppliers. By 1994, Sabic will be producing more than 1.5 million tons/year of MTBE.

"Several large MTBE plants are due to come on stream within the next few years, and they will be able to sell whatever they can make," said Nojaidi. "We believe MTBE demand would be much higher today if there were more capacity in place."

Sabic predicts world MTBE demand will jump to more than 17 million metric tons by 2000 from 8 million tons in 1990 and almost zero in 1980. MTBE's share of the methanol market will rise to almost 25% by 2000 from a little more than 15% today.

MTBE DEMAND FACTORS

Sabic points to the growth in unleaded gasoline use in the U.S., Europe, and the Far East as a key factor in climbing MTBE demand in the 1990s.

Unleaded gasoline now accounts for 75% of all gasoline sold in the U.S. but no more than 40% of any European market -less than 1 0% in Italy, France, and Spain. In addition, the U.S. has trimmed the lead content of leaded gasoline to 0.03 g/l. In Europe, maximum lead limits are 0.15-0.60 g/l.

In the Far East, Japan--the second largest gasoline consumer in the world at 600,000 b/d-has switched almost entirely to unleaded gasoline with high aromatics content. Taiwan is not far behind.

At the same time refiners have had to phase out lead use, consumers' demand for octane has climbed, boosting demand for octane blending components such as MTBE, butane, toluene, tertiary amyl methyl ether, and ethyl tertiary butyl ether.

"MTBE has many advantages as an octane enhancer," said Nojaidi. "MTBE's average blending octane rating, 109, provides lots of octane for the money. It dissolves easily in the refinery streams used to make gasoline and will not precipitate out of solution when it comes into contact with water, so it can be traded easily between refiners using existing equipment."

Fermentation ethanol is MTBE's chief competitor as an octane enhancer.

"Ethanol's 113 blending octane rating is higher than that of MTBE, but ethanol production is not economical without government subsidies," Nojaidi said. "Nor can ETBE, an excellent blending agent, be made economically without subsidized ethanol feedstock. The amount of ethanol and ETBE available for octane enhancement will always be limited by government subsidies."

VOLATILITY BENEFITS

MTBE also will benefit from efforts to cut emissions of volatile hydrocarbons, Sabic contends.

The U.S. Environmental Protection Agency took the lead in trimming volatility by ordering an 8.7% cut in Reid vapor pressure, taking most gasolines to 10.5 psi in 1989 and 9 psi in 1992. Spain, Italy, and Germany also have begun to look for ways to reduce volatility.

MTBE, with an Rvp of 8 psi, will be one of the key low volatility octane additives.

ETBE has a lower Rvp-35 psi-and TAME is lower still. But ETBE is too expensive without subsidies, and TAME production will be limited by lack of isoamylene feedstock, Sabic contends.

"We expect refiners to use a mix of oxygenates, including MTBE, ETBE, ethanol, and neat methanol, to boost octane and control volatiles," Nojaidi said. "MTBE appears the most economical way to add octane while accomplishing environmentally desirable goals.

"Over the past couple of years, the tight methanol market kept methanol and therefore MTBE prices high, which limited MTBE use to premium gasolines. As methanol prices stabilize and more MTBE capacity comes on stream, we expect to see more MTBE used in medium performance and regular unleaded gasoline.

POLYETHYLENE OUTLOOK

Nojaidi contends environmental concerns over solid waste disposal will significantly affect polyethylene demand, especially in developed nations. Sabic estimates worldwide polyethylene consumption will grow 4%/year to 45 million metric tons/year in 2000 from 30 million tons/year in 1990.

Polyethylene markets will soften the next 2 years under the combined effect of a global economic slowdown, environmental pressures to reduce waste, and large amounts of new capacity coming on stream, Nojaidi said.

He does not expect the glut to last long, however. Lower margins and uncertainty over the effects of recycling will cause some producers to reconsider capacity expansions.

In addition, some capacity will shut down during the next 3 years. Since 1986, when polyethylene margins began to rise, some producers continued to operate small, inefficient plants, Nojaidi noted. As margins decline in the early 1990s, those producers will close their plants rather than invest in necessary upgrades.

Also at risk are polyethylene plants fed by naphtha based ethylene feedstocks, which dominate in western Europe and Asia, Nojaidi said. Higher oil prices have saddled ethylene crackers that use naphtha with considerably higher costs than units cracking natural gas-such as Sabic's and most in the U.S.

ENVIRONMENTAL CONCERNS

The size of the effect of environmental concerns on polyethylene demand is hard to gauge, Nojaidi said.

Packaging, the largest of all polyethylene markets, is particularly vulnerable to source reduction. Polyethylene users thus have learned to make less material go further. Linear low density polyethylene can be downgraded by more than 40% in some applications.

Fabricators can use processes like orientation or coextrusion that require less resin per piece. And designers can create packages that use less resin, like the milk pouches that have replaced jugs throughout most of western Europe.

In the U.S. and western Europe, the plastics industry has begun massive efforts to create an infrastructure to recycle some resins, including high density polyethylene. In the U.S., one of every five polyethylene terephthalate soft drink bottles is recycled.

Sabic cited one industry forecast that the U.S. market for recycled resins by 2000 will reach 2.2 million metric tons/year, about the same size as the U.S. market for polystyrene today.

"The combination of source reduction and recycling could displace millions of tons of potential virgin polyethylene production," Nojaidi said. "All producers, especially those with marginal economics and those that do not view polyethylene as a core business, will have to assess this trend very carefully before deciding whether to add capacity."

POLYETHYLENE DEMAND

Although polyethylene packaging is likely to grow slowly at best in developed nations, it will expand much faster in industrializing nations, Sabic predicts.

The average American will use nearly 45 lb of polyethylene and polypropylene packaging in 1990, compared to 30 lb/person in western Europe and Japan. Per capita polyolefins packaging consumption is only 11 lb in Latin America, 8 lb in eastern Europe, and 3.5 lb in Asia. As per capita income rises, these regions will be able to afford the convenience of better packaging, Sabic said.

Lldpe will continue to expand its share of the market at the expense of conventional low density polyethylene because its superior properties permit less polymer to be used in most applications. North America, where Lldpe accounts for about 30% of the total LDPE/Lldpe market, leads the world in Lldpe market penetration. In no other region does Lldpe penetration exceed 15% of the total LDPE/Lldpe market.

Lldpe demand will grow 0.50/6/year in the 1990s as it continues to penetrate global markets once dominated by LDPE. LDPE could remain flat or perhaps grow 1%/year. HDPE will grow 4.5%/year, with fastest growth in film and sheet, pipe, shopping bags, and detergent bottles.

A REPLAY OF 1989-90

The combination of low growth due to an economic slowdown and uncertainty over changes in underlying demand will cause some producers to delay or scuttle polyethylene projects, while others simply close old capacity, Nojaidi said,

"As a result, we believe markets will start to tighten as soon as 1992 and will remain in balance for much of the 1990s," Nojaidi said.

"In many ways, the early 1990s could be a replay of the past 2 years. Most analysts believed polyethylene prices would collapse when China cut imports and a wave of new capacity began coming on stream in 1988. Instead, cold waves, plant outages, and explosions kept supply and demand much tighter than was expected.

"We would be wise to expect the unexpected. When worldwide capacity utilization reaches the 85-87% level, there is less room for error, yet errors happen. We expect the mid-1990s to be a period of spot regional shortages and availability problems in certain grades.

"In the past, buyers could source overseas when they ran into supply difficulties at home. If there was a shortage in western Europe, for example, there was likely a surplus in the U.S. or Japan.

"That is no longer the case in the global market. Unlike the past, when producers looked solely at regional markets, today they routinely assess world supply/demand balances before launching new projects. Today, world supply and demand are in greater harmony than ever before.

"As the global marketplace grows still more efficient in the 1990s, there will be fewer regional surpluses for buyers to dip into to top off their needs. Buyers will need a more diverse supplier to assure supply stability during the 1990s."

Sabic produces 950,000 metric tons/year of Lldpe/ HDPE at,three plants in Saudi Arabia. It has three plants producing 2 million metric tons/year of ethylene feedstock. In 1988, it started up a 50,000 metric ton/year butene-1 plant to supply comonomer for its Lldpe operations.

EO/EG TO STABILIZE

Ethylene oxide and ethylene glycol have ridden a rollercoaster of rapidly rising and falling demand and prices the past 4 years.

Sabic, which produces 740,000 metric tons/year of EG, expects more stability in the market during the 1990s.

Sabic expects demand during 1989-2000 to grow 3.6%/year for EO and 4%/ year for EG. It sees EG demand driven by polyester fibers and PET bottles and films while antifreeze demand remains lackluster and nonglycol uses of Eo grow moderately.

"This will stabilize operating rates in the mid-80% range for most of the next 5 years, since some announced capacity will be delayed to reflect market realities," Nojaidi said. "After 1995, we expect utilization rates will begin to climb once again."

ON THE REBOUND

Sabic thinks EO/EG has begun to rebound from its current weakness.

During 1981-86 EO/EG showed the poorest return of all ethylene derivatives. Demand was stagnant, especially in developed countries, and prices were weak enough to drag down returns from other ethylene derivatives. Poor returns convinced some producers to leave the business or close plants. Sabic's Yanpet and Sharq plants, started up in 1985, were among the few new plants built during the mid-1980s.

During 1987-89, demand caught up. Supplies tightened, and prices and profits rose dramatically. Producers who had shunned the business rushed to announce new plants.

But since mid-1989, EO/EG demand has slowed, and prices have fallen sharply. In part, demand fell because rising EG costs made downstream products less competitive. Polyester fiber lost ground to cotton, and PET gave up share to aluminum and glass bottles.

ETHYLENE FEED PROBLEMS

"We believe underlying EO/EG demand has held fairly steady over the past 4 years," Nojaidi said. "Many of the EO/EG market problems can be traced back to ethylene feedstock shortages."

The result, starting in 1987, was a global ethylene shortage that propped up prices. EO/EG buyers reacted by building inventories as a hedge against further price increases. When new capacity began to come on stream and prices began to fall in 1989, buyers cut back on orders and began to liquidate stocks.

Sabic contends worldwide stocks of EO/EG have returned to normal levels and demand will start to bounce back soon.

Nojaidi believes most of the new EO/EG capacity needed the next 10 years will come from companies that either have low cost hydrocarbon feedstocks or consume EG. EO/EG producers in the U.S., western Europe, and Japan face a tough decision on future expansions, he said.

About 35% of all EO is converted to EG for polyester fiber, and the business is growing fastest in Asia. Asian polyester fiber producers are interested in integrating back into EO/EG to control their own feedstocks. Several new projects have been announced in South Korea alone.

Producers in developed nations could build export oriented EG capacity because EG is the most economic way to ship ethylene worldwide.

"But they would compete at a disadvantage with producers who have access to inexpensive feedstocks," Nojaidi said.

A more likely course for producers in developed nations is to switch EO output to produce ethoxylates, ethanolamines, polyglycols and other higher margin products for domestic consumption, he said.

Sabic operates two of the world's largest EG plants-Yanpet's 350,000 metric ton/year plant at Yanbu and Sharq's 390,000 ton/year plant at Al-Jubail.

POLYESTER POTENTIAL

Slightly more than 60% of all EO is upgraded to EG, and about 65% of all EG is upgraded into polyester fibers, bottles, and films.

Polyester fibers account for the vast majority of polyester sold.

World demand for polyester fiber rose about 6%/year during the 1980s. Sabic estimates fiber consumption will rise less than 1%/year through 2000 in the U.S. and western Europe but more than 6%/year in Asia, whose labor advantages have made it the center of the world's textile and apparel industries.

Asia will remain a major importer of EG for polyester fiber throughout the 1990s.

"Producers who cannot export profitably to the Pacific Rim must think twice about expansions," Nojaidi said.

BOTTLE AND FILM GROWTH

Thermoplastic polyester resins based on PET are the fastest growing EG derivative segment. PET bottles and film absorb about 10% of all EG production. Demand for PET bottles is growing at 10%/year and for PET films about 6%/year.

Although high EG costs made PET bottles an easy target for aluminum and glass containers in 1988 and early 1989, PET once again began to gain market share in late 1989 and in 1990.

A more serious long term threat could be recycling of PET bottles, which could reduce demand for virgin material.

ANTIFREEZE DEMAND SLIPS

Antifreeze accounts for about 30% of all EG output, but that percentage will decline during the 1990s.

In general, recycling systems have helped extend antifreeze life. In the U.S., by far the world's largest antifreeze market, the average size of an auto engine and radiator continues to decline.

EG also continues to be vulnerable to competition from propylene glycol. While EG is generally less expensive, PG is considered safer to work with, and several European countries permit only PG based antifreezes to be sold to the do it yourself market.

The issue is far from decided, however, because EG breaks down faster than PG in municipal water systems, Nojaidi said.

Most of the EO that does not go into EG is upgraded to ethoxylated alcohol, ethanolamines, and polyglycols.

Together, these products are growing at only 2%/year, Sabic said.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.