PETROCHEMICALS FACING SQUEEZE ON MARGINS INTO EARLY NEXT YEAR

April 2, 1990
The world petrochemical industry faces renewed pressure on margins that could last into early 1991. Behind the squeeze is slowing demand growth stemming from a world economic slowdown coupled with big capacity hikes. But the industry is in good health. Most observers see no repeat of the market collapse of the early 1980s, when arrival of new capacity coincided with a severe slump in demand. Among industrialized nations, demand growth essentially has plateaued and is not likely in this decade

The world petrochemical industry faces renewed pressure on margins that could last into early 1991.

Behind the squeeze is slowing demand growth stemming from a world economic slowdown coupled with big capacity hikes.

But the industry is in good health. Most observers see no repeat of the market collapse of the early 1980s, when arrival of new capacity coincided with a severe slump in demand.

Among industrialized nations, demand growth essentially has plateaued and is not likely in this decade to achieve the sharp increases seen in the past few years.

In Europe, response to the squeeze will be more closures of older plants and efforts to boost efficient operation of remaining units. The number of players in some areas of the European market, particularly polyethylene, also could fall.

European companies are watching closely the timetable for talks between the European Community and the Gulf Cooperation Council on a free trade agreement (FTA) between the two groups.

At yearend 1989, the EC Council of Ministers endorsed a proposal to negotiate an FTA. GCC at first feared the political climate was inappropriate for serious negotiations. But a recent EC-GCC meeting in Oman appears to have improved relations to the point that serious negotiations are expected to begin in May (see story, p. 18). Crux of the FTA talks will be treatment of petrochemicals.

Hydrocarbon rich nations, particularly some of the lowest cost oil producers in the Organization of Petroleum Exporting Countries, will seize a big chunk of the world petrochemical market at the expense of oil and chemical companies, analysts predict.

Meanwhile, concern for the environment will translate into new pitfalls as well as new opportunities for petrochemical producers-and especially sharply higher capital outlays for upgrading plants and equipment.

To Bill Urquhart, analyst with Bonner & Moore, Houston, 1990 looks like "a decent year: relatively slow growth based on slower economic growth of 1-2%."

But it won't be long before the industry's rollercoaster begins again.

ETHYLENE LEADS THE WAY

There will be excess capacity in ethylene worldwide by 1992-93, predicts a study by Probe Economics Inc., Mount Kisco, N.Y.

Probe Pres. Fred Peterson believes the ethylene glut will not be prolonged, however.

"We've seen six ethylene plants announced for a still small South Korean market through the early '90s," he said. "Obviously, not all are likely to be built.

"Once you look at the numbers and assess the strength of the potential producers, the projected avalanche of ethylene looks much less alarming."

Some analysts, however, foresee a severe downturn for olefins in the 1990s (OGJ, Dec. 18, 1989, p. 24).

According to Probe analyst John Johnson, ethylene will go through one of its usual cycles, although utilization rates won't fall as far as in 1985-86. Then capacity will tighten again in 1995-96.

"Judicious shutting down of older equipment should help industry weather the downturn," Johnson said. "it won't be dog eat dog as it was 4 years ago."

Ray Ory, with Wright Killen, Houston, sees profitability for ethylene as relatively low for much of the 1990s, with at least one more cycle in the decade.

By 1995, industry probably will have absorbed the capacity excesses of the next 24 years, Ory contends. Profits will pick up again in 199495, then the business will start another cycle of low profitability by the end of the decade, he said.

Ory sees some opportunities for polyethylene to grow because of strong consumer demand for plastics, especially in developing nations.

Ory projects petrochemicals demand growth in the industrialized world will continue to lag gross national product growth of 2-3%/year, but in the developing nations it will surpass GNP growth of 4-5%/year. Much of the action in petrochemicals continues to be focused in the Pacific Rim, where large populations and high GNP growth rates will sustain increasing growth in demand for plastics and fibers, Ory said.

EXXON'S OUTLOOK

Exxon Chemical Co. predicts that world polyethylene demand will increase by 3.8%/year to almost 43 million metric tons in 2000 from 27.5 million metric tons in 1988. The fastest growing demand for polyethylene will be in Southeast Asia, climbing 6.5%/year to 6.1 million tons in 1995 and 7.9 million tons in 2000 from 3.7 million metric tons in 1988. The region's share of world demand will rise to 19% in 2000 from 14% in 1988.

During the same period North American demand will grow by 2.8%/year to 12.2 million metric tons/year, western Europe by 3.2%/year to 10.9 million tons/year, and the rest of the world, including Japan and the eastern bloc, by 3.9%/year to 11.9 million tons/year. Exxon contends that the big polyethylene surplus in western Europe in the early 1980s has been absorbed by the market, and new capacity will be needed to match rising demand the next few years.

It expects a limited number of new plants, forcing western Europe to become a net polyethylene importer as demand exceeds production.

Exxon projects worldwide polypropylene demand will grow at 5.2%/year to 19.5 million metric tons in 2000 from 10.6 million tons in 1988. Again, Southeast Asia will set the pace in polypropylene demand growth, rising at a rate of 5.9%/year to 2.8 million metric tons in 1995 and 3.6 million metric tons in 2000 from 1.9 million tons in 1988. North America and western Europe each will see a polypropylene growth rate of about 4.9%/year to push their demand respectively to 5 million metric tons and 5.2 million metric tons by 2000.

For the rest of the world, demand for polypropylene will jump to 5.7 million metric tons in 2000 from 3 million metric tons in 1988--a 5.4%/year growth rate.

PROPYLENE IN TRANSITION

A study by Probe warns that investments in propylene plant construction could sour by the end of the decade for a business in transition.

"Right now, propylene is long in the U.S. and short in export oriented economies, such as South Korea," Johnson said. "But by the end of the 1990s, the situation will be reversed."

Because propylene demand growth is expected to outpace the ability of ethylene plants to supply propylene coproduct, it is widely assumed that construction of new propylene capacity will be almost a sure bet in an increasingly uncertain petrochemical market, he contends.

Johnson believes producers should take another look.

"A broader view of the global economy shows a rapid rise in the use of automobiles in Japan and in emerging export oriented economies," he said. "To meet the demand for gasoline, refiners in these fast growing economies will install more refinery cracking capacity."

Cracking yields propylene feedstock that can be recovered and upgraded into chemical and polymer grade monomers, Johnson pointed out.

"We believe these countries will upgrade an ever larger proportion of their refinery propylene to satisfy regional demand."

Because expected moderate oil prices will enable demand for heating oil to outpace demand for gasoline, the supply of raw propylene from refineries is likely to tail off through 1995, Johnson predicts. He expects the U.S. to produce enough propylene to be a significant exporter through 1995 and to meet its internal demand through 2000. But markets elsewhere will be much tighter through most of the decade, Johnson said. That will spur some producers to focus on yielding propylene as a main product through propane dehydrogenation.

After 1995, export oriented, oil rich countries increasingly will be able to tap new refinery propylene supplies for chemical use. Since those countries constitute the fastest growing market, they will focus on upgrading domestic refinery propylene feedstocks. That will result in a surplus of derivatives for export competing with main product propylene manufacture.

"Strategically, companies should be trying to minimize their capital investment and buy the least expensive propylene from whatever source they can in order to export propylene derivatives," Johnson said.

"In other words, this isn't the time to invest in on-purpose propylene."

NEW TRENDS

One bright spot for petrochemicals in the 1990s will be in the area of high tech product development.

"We are continuing to show breakthroughs in copolymer and resin applications in areas never thought possible before, such as replacements for wood in housing and plastic engine components," Ory said.

He sees another key development shaping the market for commodity petrochemicals in revitalized environmental issues, particularly concerns over municipal waste disposal. Ory expects expanded uses for recycled and biodegradable synthetics, not just in industrialized nations, but also in the developing world.

"We have no idea how big this market could be," he said. "if 20% of high density polyethylene were recycled, that would be a really big dent in the market for producers of that commodity. At the same time, it would create a new business."

Changes spurred by environmental concerns will require capital in areas where industry has not spent much money before, and in the long run will help industry, Ory said.

"Companies will have to revitalize these facilities or shut them down," Cry said. "That will greatly increase the price of entry into some of these businesses. With the same or fewer players, that will help stabilize profitability."

MARKET DOMINANCE SHIFTS

Shifting market dominance also will command industry's attention in the 1990s.

"This is a fickle business, and there are more irrational players than ever before, especially as we become a more global industry," Ory said.

He contends that although resource rich hydrocarbon exporters have a huge potential to produce plastics, they also have a high potential domestic demand that will absorb much of that increased output. Those exporters pose a greater concern to U.S. commodity petrochemical exporters than to the U.S. market.

"The U.S. may lose export business in commodities but make it up in export of higher tech products such as copolymers," Cry said.

Probe contends the 1990s will see a dramatic shift of capacity to export oriented nations such as those along the Pacific Rim, Argentina, and Egypt. Probe's Peterson cites vigorous competition from these new export oriented producers, such as Taiwan's Chi Mei Industrial Co., which in 1990 will become by some estimates the world's largest producer of acrylonitrile butadiene styrene resin, surpassing General Electric Co., Monsanto Co., and Dow Chemical Corp.

"These new competitors will be extremely well entrenched in protected home markets and will spend whatever it takes to increase market share in those unprotected markets still open to them," Johnson said.

EUROPEAN OUTLOOK

Royal Dutch/Shell Group sees continued but modest petrochemical growth in European demand, coupled with an increase in supply the next few years.

This trend could trigger a surplus, leading to reduced margins and a round of closures of less efficient plants.

The company does not see a major depression and collapse of the market but instead increased cost effectiveness of processes driven by competitive pressures rather than by environmental pressures.

Ray Knowland, former chief executive of BP Chemicals and now a BP main board managing director, said the 20 polyethylene producers in Europe ought to be reduced to single figures.

BP is a major player in the ethylene business and is currently more than doubling the size of its ethylene plant at Grangemouth, Scotland. The expansion is to be on stream by 1992. BP also is starting up a 125,000 metric ton/year linear low density polyethylene plant at Grangemouth and debottlenecking its Rigidex high density polyethylene plant there.

STATOIL PLANS

Norway's Den norkse stats oljeselskap AS takes an optimistic view about the future of the European market for petrochemicals.

The company is expanding from its Scandinavian base into continental Europe with a major construction project in Antwerp in partnership with Himont Inc. Its 180,000 metric ton/year polypropylene plant will go on stream in the fall and will be followed in 1991 by a 400,000 metric ton/year propane dehydrogenation plant to provide feedstock for the polypropylene plant. The balance will be sold on the open market.

Statoil sees some slackness in the polyethylene market for a couple of years but good prospects overall. The company is considering a 300,000 metric ton HDPE plant at the Antwerp site.

Statoil also is assessing the feasibility of a 500,000 metric ton/year methyl tertiary butyl ether plant in continental Europe and is a partner with Conoco Norway in a proposed 840,000 metric ton/year methanol plant in Central Norway.

A decision on the methanol plant is expected in May, and a decision on the MTBE plant will follow in the fall.

Statoil is prepared to invest 8-10 billion kroner ($1.23-1.25 billion U.S.) in petrochemicals in the first part of the 1990s. Although Statoil is a major force in the Scandinavian petrochemical business, it ranks only 15th or 16th overall in Europe. Statoil says its proposed investment program should promote it to fifth or sixth place.

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