SIGNS OF A SHAKEOUT IN THE globalpetrochemical industry intensified in 1997.
While demand and prices for manykeypetrochemical remainedhealthy-indeed, robust for some products-many analysts noted that the capacity-building boom of the mid-1990s continued in 1997 and was likely to persist in 1998.
An expected cooling of the global economy may have begun by then, crimping demand. An especially worrisome sign for petrochemical producers is the prospect of an economic slowdown precipitated by a currency crisis that began sweeping East Asia late in summer 1997. It was the superheated economies of the East Asian "tigers" and the related surge in demand for consumer products that propelled much of the petrochemical capacity expansion-especially in that region, which paced the rest of the world in capacity growth.
Softening demand and prices for petrochemicals during the next few years could coincide with feedstock oil and gas prices remaining relatively healthy, which presages another slump in petrochemical margins and profitability.
That trend, in turn, suggests another round of consolidation in prospect for the petrochemical industry. Early signs of that consolidation also appeared in 1997, as producers in Europe sought to cope with overcapacity.
But the doldrums that could materialize in 1998-2000 could well evaporate after the turn of the century, as the petrochemical cycle begins anew, with capacity growth slowing from scuttled projects and resurgent demand once again tightening markets for key products.
European consolidation
The continuing consolidation of Europe`s petrochemical industry in 1997 focused on two massive joint ventures, Montell and Borealis, that were themselves the products of earlier steps toward consolidation.
Royal Dutch/Shell acquired Montedison SpA`s 50% interest in their Montell joint venture (JV) for $2 billion. Montell, created in April 1995 by Shell and Montedison, is the world`s biggest polypropylene producer and marketer, with total production capacity of 3.6 million metric tons/year.
Meantime, Shell in 1997 took steps toward a dramatic restructuring of its petrochemical business, creating a new unit, Shell Chemicals Ltd., with authority to furnish business strategies and operations guidance to all of Shell`s global chemical operations. The new structure was to take effect Jan. 1, 1998.
As for Borealis, original partner Neste Oy pulled out of the JV when it sold its 50% stake to Austria`s OMV AG and Abu Dhabi`s International Petroleum Investment Co. (IPIC) for $750 million. Statoil retains the other 50%.
Borealis also agreed to buy PCD Polymere GmbH, Schwechat-Mannsworth, Austria, which strengthens the JV`s hold on the top spot among European polyolefins producers, pushing total production capacity to more than 3 million tons/year. This acquisition adds 445,000 tons/year of polyethylene capacity and 410,000 tons/year of polypropylene capacity in Austria and Germany.
Meantime, joint ventures continued to mark the way to a more-rationalized industry in Europe.
Shell in 1997 agreed to a JV with BASF AG, which follows the exit of Montell from the polyethylene business in 1996. Shell and BASF had acquired Montell`s polyethylene business at that time. The new JV will incorporate an existing JV of BASF and Shell, Rheinische Olefinwerke GmbH, as well as Montell`s former European polyethylene business and BASF`s polyethylene operations. Total combined capacity will be 1.4 million tons/year.
Meantime, BASF agreed to a JV with BP Chemicals Ltd. to build a world-class acetonitrile purification plant alongside BASF`s acrylonitrile plant at Seal Sands, Middlesbrough, U.K.
Softer prices
Global petrochemical prices are apt to be weak for the rest of the decade, according to a 1997 study by Probe Economics Inc., Millwood, N.Y.
The fundamentals underlying petrochemical prices had been softening at the time of the forecast, a situation likely to worsen as more capacity comes on stream, especially in 1998-99.
Probe Pres. Fred Peterson noted in the study that there already had been steep price and margin erosion in the paraxylene-to-polyester chain, but prices for ethylene and its derivatives remained healthy in 1997.
Peterson contended that declines in ethylene prices were forestalled by increases in oil and gas prices at yearend 1995 and 1996, which briefly hiked the floor under petrochemical prices. When China jumped back into petrochemical trade in a big way early in 1997, markets received another temporary boost.
While feedstock price spikes are likely in the future because of continuing volatility in oil and gas prices, the general trend for petrochemical prices and margins will be downward during the next few years.
Probe offered forecasts for some key petrochemicals and polymers (Table 1).
Under its base case, Probe assumes no recessions and a further softening of crude oil prices as more oil supply capacity comes on line. Under a second case, oil prices and inflation escalate, recessions occur, and chemical prices move higher through the up cycles. Peterson sees the base case as much more likely.
Probe sees Asia as the culprit in the emerging petrochemical capacity glut, noting that until recently, "Asia has been the fast-growing market that never has enough capacity and can absorb just about any chemicals that are sent its way."
But times have changed, and Asia has overexpanded in a number of industries, from consumer electronics to autos to chemicals.
"Economic growth rates there are cycling downward, and in the longer term, they will have trouble keeping up," Peterson said, noting that 1997 growth rates in Thailand and Singapore won`t be half the double-digit rates they`ve shown in recent years.
The so-called economic "tigers" of East Asia in particular have based their high growth rates on cheap labor, getting a big boost in output when they put an underpaid person to work on a high-productivity machine, Probe contends. In the longer term, however, wage rates in these countries will escalate to the point where such rapid growth and strong competitiveness in manufacturing will no longer be the case. The study points to Japan, where high wages will push more manufacturing capacity to other countries. In 1997, this was also beginning to happen in Taiwan, according to Probe, and South Korea and Singapore are not far behind.
Peterson notes that two things happen when excess capacity emerges: First, capacity disappears, or further construction is delayed; second, prices fall, and demand is correspondingly boosted.
In this case, help is coming from a third source: the economy. Despite the cyclical slowdowns in the Asian economies, world economic growth will accelerate during the next few years, which will boost chemical demand significantly.
Probe contends real growth in gross domestic product (GDP) will jump to 2.6%/year in the U.S. by 2000 from 2% in 1995; to 3% in Japan in 2000 from 0.8% in 1995; and to 2.7% in western Europe in 2000 from 1.6% in 1996.
At the same time, growth rates will moderate during 1995-2000 in such countries as South Korea (to 7% from 9%), Indonesia (to 6.5% from 8.1%), and China (to 9% from 10.2%).
During the past few years, Probe points out, world economic growth was depressed by the shrinkage of economies in eastern Europe and the former Soviet Union and by economic stagnation in western Europe and Japan. These problems are now being resolved, meaning that worldwide growth overall will accelerate.
Probe predicts worldwide GDP, corrected for inflation, will grow at a rate of 3.5%/year during the next 4 years, compared with an average 2.5-3%/year during the past 4 years.
Accordingly, petrochemical markets will again tighten up early in the next century, and perhaps earlier for the fast-growing polyester chain, Probe said.
Cycling renewed
Other analysts focused on 1997 as a transition year in the next cycle of the petrochemical industry.
After seeing margins for ethylene and propylene erode late in 1996, producers of these light olefins and their derivatives were heartened by a resurgence in margins in 1997, noted Chemical Market Associates Inc. (CMAI) in a 1997 study.
However, prospects for the years beyond are bleaker.
The concern stems from a flurry of capacity expansions-ostensibly justified by healthy earnings during 1994-95-that CMAI feels is coming on too quickly.
Put simply, demand in the late 1990s will not keep pace with the number of world-scale plants (more than 600,000 metric tons/year) being constructed.
CMAI notes that ethylene cash margins vary greatly from year to year, depending upon market conditions, feedstock costs, and co-product values. Periods of very good profits are followed by periods of poor profits as new capacity is added faster than the market can absorb.
Cash margins in western Europe and the U.S. peaked in 1988-89, then fell quickly in 1990-92 as demand growth slowed. In 1994-95, prices increased while costs fell. That rocketed 1995 margins to an average $389/metric ton in western Europe and $414/ton in the U.S.
Margins fell late in 1996, as feedstock prices were unexpectedly strong.
Early in 1997, CMAI noted, it became evident that insufficient capacity was added in 1996, and margins recovered to an average $240-340/ton in both regions.
In subsequent years, new capacity currently in engineering or construction phases for commissioning in 1998-2001 will push ethylene margins back down to a low of $120/ton in western Europe and $175/ton in the U.S. In turn, this will set the stage for another margin peak in 2005 as the rate of new capacity additions slows dramatically.
Capacity additions
Confirmed capacity additions suggest that the average annual world capacity to produceethylenewas79.6million tons/year. By 2001, predicts CMAI, this capacity will top 109 million tons/year, with almost one half of the increase coming in the Asia-Pacific region (more than 13 million tons/year).
North America has the potential to add 7.5 million tons of capacity during 1996-2001. In addition, numerous incremental capacity additions are already under way or planned in North America for this time.
By comparison, western Europe is adding a little more than 2 million tons/year during 1996-2001. This region has become judicious in adding capacity because its ethylene market is much more mature than that of Asia and will be under an ever-increasing threat of imports.
During 1996-2001, olefins plants will be constructed or commissioned for the first time in Kuwait, Egypt, and the Philippines, and a second or third plant will be added in Indonesia, Bulgaria, Algeria, and Singapore.
In all these instances, notes CMAI, significant new derivative capacity is being added to reduce dependence upon imported products or to allow enhanced participation in derivative export markets.
If operating rates fall to the low levels it predicts, CMAI thinks prices for derivatives such as polyethylene will drop, setting the stage for rapid demand growth near the end of the decade.
"Reasonably high profits could appear 2-3 years after the turn of the century," the analyst said. "CMAI`s expectations reflect a profit recovery beginning by 2001, following marginal performance in 1998-2001."
Conclusions
Among its conclusions, CMAI`s study found:
- During 1996-2001, demand growth will average for ethylene 5.4%/year and propylene 5.5%/year. With propylene to ethylene ratios falling to 0.38:1 by 2001, propylene supplies from sources other than steam crackers will become critical to propylene demand growth. Expanded use of FCC and DCC propylene will be critical to meeting future needs.
- Accelerated expansion of light olefins capacity in Southeast Asia will make this large importing region 100% self-sufficient by 2001, meaning that the region will not need imports of ethylene or ethylene derivatives to satisfy a rapidly expanding demand. This will hit international prices for these products hard as low-cost ethylene producers in the Middle East and western Canada vie for a declining export business. At the same time, export-oriented capacity added in the Middle East and western Canada will increase pressure on producers in these markets to respond to international demand stimulated by very low prices.
- Exports of light olefin derivatives from western Europe and the U.S. will decline through the end of this decade, except for ethylene dichloride and vinyl chloride monomer from the U.S. due to chlorine cost advantages. In western Europe`s case, net imports of light olefins and their derivatives will be substantially higher in 1998-2001 than today.
- Ethylene operating rates, after averaging 93% in 1994, will decline to only 89-90% in 1999-2001, and international prices for ethylene and its derivatives will suffer as too much capacity is added in most exporting markets.
- Following a tight market in 1997, olefins nameplate operating capacity utilization in the U.S. will fall to 87% in 2000, as 4.3 million tons of new capacity is added in 1998-2001. Prices and margins will revert to the poor returns of the early 1990s.
- World trade in propylene was severely depressed in 1997 at a little more than 200,000 tons before rebounding to 400,000 tons in 1998. Increased import demand from consumers in western Europe and Asia will enable a return to the 1990 propylene trade peak of 700,000 tons by 2000. Trade volumes of ethylene also will track this pattern.
- World markets for polyolefins will weaken under the pressure of too much capacity. The next cycle`s peak will not occur until after 2001.
- Western Europe will become a growing net importer of light olefins and derivatives. Net equivalent ethylene trade will move from net exports of more than 193,000 tons in 1994 to net imports of 1.343 million tons in 2001. This region also will require an extra 1 million tons of propylene from local refineries or imports, with half coming from imports.
- Tight supply and elevated prices of light olefins lasted only until early in 1995 as new and repaired capacity was commissioned. The global olefins price and margin weakness, which began in second half 1995, carried over into much of 1997, with the exception of import markets in the U.S. and Southeast Asia. By 1998, however, the large number of expansions and additions justified by the 1994-95 profits surge will cause utilization rates to plummet, and prices for olefins and key derivatives such as polyethylene will fall to levels last experienced in 1992-93. Low prices, however, will spur demand for these products, setting the stage for a return to market strength by 2002.
Ethylene outlook
The outlook for the most essential basic petrochemical, ethylene, usually serves as a strong indicator of the where the entire industry is headed.
While the global ethylene industry continuesacapacityexpansionboom, demand is expected to fall short of capacity growth. The upshots: softer markets and crimped utilization rates.
CMAI predicts global ethylene capacity will increase to about 105 million tons/year by the turn of the decade. To keep markets healthy, demand would have to grow 5.4%/year, about 1.7 times the growth of the world`s GDP.
Overall demand growth is projected at 4.8% during the next 10 years. However, demand growth is expected to lag behind capacity additions during 1995-2001 in the key markets of the Asia-Pacific region (8.6%/year vs. 9.5%/year) and North America (3.3%/year vs. 3.9%/year).
Worldwide ethylene capacity jumped by more than 5 million tons/year to about 85 million tons/year in 1997, an increase of 6.5%.
A joint study of petrochemicals by CMAI and Purvin & Gertz Inc., Houston, in 1997 noted that ethylene demand had doubled in the preceding 15 years (through 1995) and predicted it likely would almost double again in the next 15 years.
Ethylene capacity additions for the 10-year period ending in 2005, according to a 1997 study by Chem Systems Inc. (CSI), could total 41.3 million metric tons/year, with East Asia alone accounting for about 18 million tons/year of that total.
Styrene, butadiene outlook
Worldwide demand for styrene will continue to be strong past the turn of the century, predicted CMAI in a 1997 study. However, an expected boom in construction of styrene capacity eventually will overwhelm demand growth, squeezing operating rates after 2001.
For another key petrochemical, butadiene, the outlook past the turn of the century will be for persistent tightness in markets as capacity additions struggle to keep up with rocketing demand, CMAI concluded in another 1997 study.
CMAI contends the global styrene market underwent a complete turnabout in 1996 from where it had been the preceding 2 years.
For the most part, the analyst says, stability seen in styrene prices has not enticed styrene monomer customers to either build or deplete inventories. Historically, styrene demand has risen faster than GDP growth-double the GDP growth rate during 1985-95, in fact. For 1996-2001, growth in demand for styrene is expected to fall to about 1.5 times the rate of GDP growth.
Much of the growth in styrene demand has come in the Asia-Pacific region, which has become the world`s largest styrene-consuming region. In 1996, this region accounted for almost 40% of the global styrene market of 16.4 million tons/year. By 2001, CMAI estimates, this share will grow to 42% of the market projected at 21.5 million tons/year. This represents an average growth rate of 4.6%/year during 1995-2001,oranadditional5.1million tons/year of styrene demand, with more than 50% of the added consumption traceable to the Asia-Pacific region.
Most of the added styrene demand will be in the polystyrene sector in terms of absolute volume growth. In terms of proportionate growth, acrylonitrile butadiene styrene (ABS) resin will account for the largest relative increase, 5%/year.
Styrene supply
During 1996-2001, more than enough capacity will be added worldwide, with more than 7 million tons of capacity coming on line during the period.
Given projected demand growth, that means about 2 million tons/year of capacity will be added surplus to need. Again, the Asia-Pacific region will dominate, accounting for more than half the styrene capacity additions, followed by western Europe.
Styrene capacity addition will continue to outpace demand growth in the Asia-Pacific region, as that region continues to become more self-sufficient and could become a net exporter in 1998 (although the competitive nature of the monomers producers in North America and the Middle East will make this difficult to achieve). Nevertheless, net Asian styrene imports are expected to show a sharp decline.
Overall, the world styrene market is adding monomer capacity at 1.4 times the forecast rate of demand growth.
Styrene profits
CMAI contends that 1997 could have been the last profitable year for styrene producers for the foreseeable future.
While global demand for styrene rose 4.9% in 1996, exceeding the average rate during 1991-95, the outlook for increased capacity that year created the perception of looming weakness in the market, and prices fell accordingly.
With 1.8 million tons/year of capacity added in 1997, operating rates dropped. With a further 1.7 million tons/year of capacity projected to come on line in 1998, worldwide operating rates could drop to 87.6% and continue at this level through 2001, a level lower than has been seen in previous down cycles for the styrene market.
All of this will likely lead to a major restructuring in the styrene industry as companies reassess the situation, shutting down older, inefficient units and delaying or canceling projects for the latter part of the decade. This, in turn, will shorten the period of depressed operating rates.
Butadiene outlook
In a separate study, CMAI projected that global demand for butadiene during 1995-2001 will increase at a rate 50% greater than the rate of 1991-95.
Demand growth in butadiene will be led by countries in eastern Europe, Africa/Middle East, and Asia-Pacific.
Once again, the soaring economies of the Asia-Pacific region will become the biggest consuming region for refined butadiene, surpassing North America.
World demand for butadiene is projected to grow at an average rate of 4.1%/year during the forecast period.
This demand growth will push the butadiene plant operating rate to more than 88% of design capacity by 2001. New capacity is expected on stream in China, India, South Korea, Taiwan, and Thailand, but plant operating rates in this region are expected to be stretched to capacity.
More than 63% of butadiene demand will be concentrated in synthetic rubbers-chloroprene rubber, nitrile rubber, polybutadiene rubber, and styrene-butadiene rubber (SBR).
Demand for butadiene in the production of ABS resins will grow at the highest rate of all derivatives during 1995-2001, averaging 5.3%/year.
However, because ABS uses only a small percentage of butadiene in its manufacture, polybutadiene will lead all derivatives in volume growth during the forecast period.
Synthetic rubber is expected to improve its market share at the expense of natural rubber, resulting in an increase in SBR capacity utilization during the forecast period, despite the addition of 900,000 tons/year of capacity.
Methanol
Has the global methanol industry finally begun to settle down? Or does a further shakeout loom?
Either scenario is a possibility, according to a 1997 study by Chemical Market Associates Inc., Houston.
During 1996-97-and especially during second half 1996-volatility plagued the world market for methanol.
This was caused by the combination of methanolplantoperatingproblems around the world, strong demand for methanol derivatives in many sectors and regions, and the consolidation of the methanol industry.
During 1996-97, plans were disclosed for a flurry of methanol capacity additions, including world-scale plants in Trinidad and Tobago, Chile, and Saudi Arabia. At the time, start of construction was imminent for a methanol/MTBE complex in Qatar, as well as one of two methanol plants in Trinidad and a third unit in Chile. Also in the mix were recent or imminent start-ups of methanol plants in Germany, Norway, Saudi Arabia, and Indonesia.
Some of this added capacity will be offset by Methanex`s plans to sideline a smaller unit at Medicine Hat, Alta., and to shut down the chemical-grade methanol plant at Waitara, N.Z.
Is the outlook for a weakening market in methanol, then? CMAI seems to think so but cites uncertainties:
"When looking to expected methanol supply during the next planning cycle of 3-5 years, the big wild card remains in the eastern European countries and the former Soviet Union. These methanol producers now must operate on global market conditions and prices.
"This is no problem when global methanol prices are near or above $200/ton in major markets. But the outlook for the next few years is for softer methanol pricing and, depending at what level the market settles, we may witness some of the eastern European methanol producers dropping out of the global marketplace.
"If this occurs, then there is a rather good chance that the new production of methanol due to come on stream later in this decade and early in the next could be more easily absorbed, providing a more stable global marketplace."
CMAI contends there is very fundamental change occurring in the global methanol industry.
"Whereas, only 5-10 years ago, various producers would fight for a piece of their market share under soft global conditions, many of the producers and potential producers at that time have now been consolidated. This consolidation began with the global methanol giant Methanex but then continued on to producers in Saudi Arabia and Trinidad. This has resulted in what can only be called an oligopoly."
Beyond consolidation, CMAI also focuses on another factor contributing to the expected stabilization of the methanol industry in the near to mid-term, noting that, "for a number of reasons, the traditional independent petrochemical trading companies have much less influence on the global-and especially, deepsea-methanol marketplace."
Noting that a fleet of dedicated methanol and MTBE tankers has evolved in recent years, CMAI contends that these vessels are essentially in the hands of producers, which cuts their overall long-haul transportation costs by engaging less-expensive and sophisticated tankers than what is generally required by the overall global petrochemical industry.
"The independent international trading companies can not usually guarantee point-to-point shipments of methanol or MTBE over a period of a year. They therefore must engage in an occasionally higher-cost spot freight market or consolidate with other cargoes in order to arrive at a full-vessel`s quantity, which could possibly generate an overall more attractive freight rate for the products carried.
"Therefore, we have witnessed a dramatic exit of many of these international and independent petrochemical trading companies in the global methanol marketplace, which tends to strengthen the consolidation of the industry."
Despite the likelihood of reduced methanol capacity utilization worldwide in the near to mid-term, CMAI does not reckon global methanol prices will crater:
"The market is currently too highly controlled, and adjustments of production to demand are much more easily made.
"However, it is quite possible that, as new global methanol producers surface in the more distant future and/or as some of the consolidation falls apart, the oligopoly could disassemble, and methanol prices could start to soften rather dramatically."
CMAI points out that such a prospect falls outside the 5-year forecast period of its 1997 methanol study.
The analyst predicts that global methanol demand during the period will stabilize compared with the previous 5 years.
During 1992-96, global methanol demand rose at a rate of about 6.7%/year; nameplate capacity increased 4.9%/year in the same period.
"However," said CMAI, "for the period 1997 through 2002, global methanol demand is expected to increase at only about 3.7%/year, compared with a nameplate capacity increase of 4.6% annually.
"Without a doubt, the maturing of the global MTBE industry has contributed greatly to this stability in global methanol demand growth. In fact, for the past 5 years, annual aggregate MTBE production growth was about 19.1%, compared with a forecast of 3.5% for the next 5 years."
Whether even that modest outlook for MTBE growth comes to pass remains to be seen. After weathering a storm of controversy in recent years over health claims related to airborne emissions from reformulated gasoline containing MTBE, the highly favored oxygenate is facing a renewed call for bans after a rash of water-contamination incidents in California have raised anew the specter of MTBE possibly posing a public-health hazard.
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Yukong Ltd.`s refining/petrochemical complex at Ulsan, South Korea, is one of a number of sites in that nation where significant petrochemical capacity expansions are planned this decade. South Korea is among the chief contributors to a massive global capacity building boom that is expected to contribute to another down cycle in the petrochemical business by the turn of the century. Photo courtesy of Yukong.
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