International consultant Chem Systems Inc., Tarrytown, N.Y., brought together its principle specialists from around the world to assess the state of the petrochemical industry earlier this year.
Although the global industry is in a cyclic downturn, Chem Systems sees the current situation as being at the bottom of the cycle. Prices and margins are low. They are, however, in most regions, expected to recover somewhat in the coming years.
The company's most recent annual seminar, Jan. 19-20, Houston, included presentations covering three of the most active regional petrochemical markets: the U.S., Asia, and Latin America.
U.S.
The U.S. is the largest producer, consumer, and exporter of petrochemicals, and international prices frequently are determined by U.S. prices. U.S. profitability, therefore, is a major factor in defining the state of the global industry, according to Bruce H. Pickover, vice-president of Chem Systems Inc.
MARGINS
Fig. 1 shows that operating rate is the single most important factor in determining return on investment (ROI), which translates to margins. Operating rates have decreased sharply since 1988, as capacity has grown faster than demand.
Chem Systems has noticed that margins decrease rapidly when operating rates decline, but recover slowly when operating rates increase. In addition, says Pickover, the U.S. industry's actual ROI is less than that predicted by Fig. 1.
A mentality of investing at the top of the cycle prevails in the developed countries, contributing to current low profitability. And companies in other countries invest for purposes of import substitution or competitive strength, says Pickover.
The increased availability of competitive technology also is a key profitability issue. Historically, technological advancements have been significant and highly proprietary, thus tending to inhibit noncompetitive companies from expanding.
But more recently, technology has become more widely licensed; in part, because companies developing the technologies lack the resources to exploit their achievements globally, says Pickover. Companies obtaining technology licenses believe they can expand with a competitive advantage.
Another reason for recent low margins is that there has been little global rationalization in the current cycle, compared to previous cycles. And although several plants have changed ownership, few have shut down.
The market structure has changed adversely in recent years, says Pickover. The number of industry competitors has increased on a global basis, as it has for most products in the U.S. And non-U.S. ownership of U.S. assets has increased for most products. Many non-U.S. companies--especially those building new plants--must cut prices to build market share, says Pickover.
He added that the merchant market also has shrunk.
The U.S. has become the largest importer of chemicals, putting downward pressure on prices. And finally, what Pickover calls the "largely irrational capacity buildup in South Korea" also has reduced margins.
The good news, said Pickover, is that margins are beginning to increase from mid-1993 lows. The U.S. operating rate has remained constant at 84% for the last few years. In 1994, U.S. and world operating rates are forecast to increase for the first time in several years. This will eventually lead to higher margins, predicts Pickover.
Chem Systems predicted ethylene margins for two cases: cycle and trend. The trend case follows a flatter cycle curve than the cycle case.
By 2000, margins will increase by 7-8/lb in the trend case and as much as 16/lb in the cycle case, according to the company. These correspond to ethylene prices of, respectively, 22 and 28-29/lb, in constant dollars, in the late 1990s.
PRODUCTION
Chem Systems' forecast for the production of major petrochemicals and polymers is shown in Table 1. Demand growth is expected to exceed gross domestic product (GDP).
Plastics consumption, however, is projected to increase at a multiple of economic growth. The reason: petrochemicals are priced favorably compared to competitive products such as paper, glass, and metals.
U.S. production figures for 1993 were slightly less than the forecast 8-year average, says Pickover. There was a disproportionate decline in exports, and inventories were reduced as prices of crude oil, refined products, and petrochemicals decreased.
Chem Systems' U.S. ethylene supply/demand balance is shown in Fig. 2. U.S. production was about 42 billion lb in 1993. Capacity is 45.8 billion lb/year, which is expected to result in a year-end operating rate of 92% for the U. S.
Two new units are being added: one by Dow Chemical Co. and one by Formosa Plastics Corp. In addition, says Pickover, several companies, including Amoco Corp. and Exxon Chemical Co., are debottlenecking plants. As a result, operating rate is forecast to decrease to 90% by 1995.
In the future, Chem Systems sees naphtha as the high-cost feed for ethylene production. Considering yearly average values, the cash cost of manufacturing ethylene from naphtha is expected to be slightly higher than that from ethane, says Pickover.
When ethane is more economical, companies with naphtha crackers can switch to a lighter slate. Companies with ethane crackers generally do not have that luxury. On average, therefore, a company operating a naphtha cracker will have a lower cash cost over a year. If ROI or working capital is considered, however, the ethane cracker is clearly superior, says Pickover.
PROPYLENE
Refineries provide the incremental source of propylene, beyond petrochemical plant production. Propylene price, therefore is based on recovery by fractionation from a refinery stream, using its fuel product value in alkylate or dimate. These values are, in turn, set by the cost of incremental octane.
Because alkylate is propylene's largest alternative use, it is appropriate to discuss propylene margins based on alkylate value. Propylene cash margins are subject to considerable fluctuations related to changes in motor gasoline cost, isobutane prices, and supply/demand balances.
Propylene margins and prices have been relatively weak. Chem Systems projects margins for polymer-grade propylene to increase to more than 6/lb by 2000. As a result, prices will be about 15.8/lb in 1995, in constant 1993 dollars, and 16/lb by 2000.
Because propylene price relates to fuel value, there should not be a pronounced cycle. If, however, ethylene price is subject to a dramatic increase, propylene price will increase, as will prices of derivatives of ethylene and propylene. In this "cycle" scenario, says Pickover, propylene price could reach 19/lb in the late 1990s, in constant dollars.
BUTADIENE
The incremental source of butadiene in the U.S. is imports from Western Europe. Product value in Europe therefore plays a major role in setting U.S. prices.
Butadiene demand is growing at a slower rate globally than ethylene demand, says Pickover. The world market is increasingly weak, inducing many Western European producers to recycle the C4 stream to the cracking furnace. Recently, several European companies added C4-hydrogenation facilities for this reason.
The long-term trend-case price for butadiene in the U.S. is based on Western European C4 cracking economics plus freight. This is similar to Western European price plus freight, but slightly lower, because companies normally accept lower margins for exports, compared to domestic sales. This mechanism yields a butadiene price of 19-20/lb, in constant dollars, by 2000, says Pickover.
Over the short term, however, prices will fluctuate widely, based on international supply/demand imbalances.
Chem Systems' olefins price projections are summarized in Table 2 for the trend and cycle cases. As can be seen in the more likely cycle case, prices are expected to increase to peak levels in 1998.
ASIA
By 2000, ethylene demand in East Asia, including Japan, will surpass that of Western Europe, according to Howard R. Blum, director of Chem Systems Japan Ltd., Tokyo (Fig. 3). And early in the next century, says Blum, East Asia will be the largest producing and consuming area in the world.
East Asia remains the largest importer of petrochemicals, accounting for about two thirds of the world's shipments. In spite of the new capacity being built, says Blum, deficits are expected to persist into the next century. And companies that lack a presence in the region will find it difficult to maintain global competitive strength.
The Asian petrochemical industry is expanding without any disciplined focus, says Blum. Plants of relatively small scale generally are relying on imported feedstocks and marketing in a very fragmented region of Japanese networks and Chinese connections.
And Japan is no longer the predominant Asian producer it once was. In 1986, Japan held 59% of Asian ethylene capacity and 54% of polyolefins capacity. By 1992, those numbers had changed to, respectively, 46% and 40%.
There is a common misconception that capacity has increased recently in Asia. But this increase has taken place predominantly in South Korea.
In the last 3 years, there has been only one new complex built in Japan, three small complexes in China, and one in Thailand. Furthermore, Chem Systems expects little new capacity to come on stream in the next year. There could be major problems in the 1995-1997 period, however, when nine complexes are scheduled to come on stream, all in China and South Asia.
Production, consumption, and operating rates in Japan declined in 1992 and 1993 for the first time in 10 years. Profitability is severely depressed, says Blum, particularly in local currency.
In the early 1980s, Japan was extremely concerned about its industry's lack of competitiveness. But in the late 1980s and early 1990s, says Blum, companies seemingly forgot about this weakness and planned many new plants.
Mitsubishi Petrochemical Co. Ltd., Tokyo, completed a complex in 1992. Maruzen Petrochemical Co. Ltd., Chiba, is constructing a complex with completion delayed until 1994. Two other complexes, planned by Tosoh Corp. and Showa Denko K.K., have been delayed, and many plants have been shut down or are running at reduced operating rates.
South Korea's round of expansions is essentially complete (Table 3). The country has added about 1 year's demand growth to world capacity. The country's petrochemical capacity is almost half that of Japan, and demand, although growing rapidly, is less than one third.
In only a few years, South Korea has been transformed from a major importer to the largest exporter of petrochemicals in the region. As a result of the overcapacity, South Korea's profitability has plummeted, san,s Blum, putting great strain on several companies. Korea Petrochemical Industrial Co. Ltd., for example, has declared bankruptcy.
Although some debottlenecking is possible, says Blum, the postponement of further capacity addition until late in the decade is desirable.
Taiwan's petrochemical industry has stagnated, primarily because environmental concerns have prevented construction of badly needed new facilities. As a result, the country has become a key importer.
Strong economic growth in China, however, in addition to low-cost olefins internationally, has stimulated Taiwan's petrochemical demand. Chinese Petroleum Corp.'s fifth complex CPC 5, recently started up (OGJ, Apr. 4, p. 83). And Formosa Plastics Corp. has begun construction of its complex which includes reclaiming land and constructing a refinery before building the petrochemical plant.
Petrochemical production is not scheduled to begin before 1998, says Blum, and the cost of the entire project will be several billion dollars. Three companies--Formosa, Tuntex, and CPC--are studying building additional complexes.
PACIFIC RIM
Some complexes are being completed in Pacific Rim countries, but the biggest capacity surge will come after 1995, according to Chem Systems.
In Indonesia, Petrokimia Nusantara Interindo recently started up a polyethylene plant and is planning an expansion. PT Chandra Asri obtained financing and resumed construction of its complex. And government regulations requiring overseas financing are delaying other projects.
Petronas is operating LPG dehydrogenation, MTBE, and polypropylene plants in Kuantan, Malaysia. Titan Petrochemical started up the country's first polyethylene plant last October at Pasir Gudang. And a naphtha cracker is under construction with completion scheduled for late 1994 or early 1995. The ethylene complex at Terengganu (Petronas, Idemitsu, BP) is scheduled for completion in 1996.
Singapore has the largest chemical complex in the Pacific Rim. And Mobil Corp.'s aromatics complex is scheduled for completion this year. A second aromatics complex has been approved and financing is being arranged.
A second olefins complex is scheduled for final approval shortly, said Blum. It has been delayed, however, pending a commitment on Phillips Petroleum Singapore Chemicals Ltd.'s polyethylene plant.
Thailand has the only ethane cracker in the region. But a naphtha-based olefins plant is under construction there and an aromatics complex is planned for the late 1990s. A third complex is under consideration, according to Chem Systems.
China's petrochemical industry will redefine itself based on a more moderate government that is attempting to transform the country into a "socialistic market economy," says Blum. Under this scenario, gross national product is projected to grow at 8-12%/year during the remainder of the decade. Accompanying this high level of growth will be the continued deficit of many petrochemical products, predicts Blum.
Fig. 4 shows the many petrochemical plants planned in China. At least 12 complexes are proposed, but it is not clear how many will proceed or when they will be completed.
The Philippines is planning polypropylene plants and an olefins complex. Feasibility studies will be necessary to obtain financing.
ASIAN IMPACT
Even after all these regional projects are operating, says Blum, Asia will need to import petrochemicals. Asian demand is growing so rapidly that deficits for most products in the region should remain the same or increase.
The events in Asia have reduced petrochemical prices. Since the Persian Gulf War, prices have decreased for 2 1/2 years to historical lows. There has recently, however, been a slight increase, as most of the South Korean material has been absorbed, according to Chem Systems.
The U.S. plays an important role in determining Asian petrochemical prices, but Saudi Arabian, West Canadian, and South Korean companies are becoming increasingly, significant, says Blum.
The Asian industry faces a problem concerning its lack of cost competitiveness. This situation can be illustrated by the cost of supplying typical ethylene derivatives to Asia from various regions.
Most plants in Asia use naphtha as feedstock. And because naphtha is shipped internationally, it has a world value.
Most Asian countries have to import crude oil or naphtha, thereby putting them at a cost disadvantage compared to countries that have material resources. Asian producers are at an even greater disadvantage compared to companies in Saudi Arabia, Venezuela, Western Canada, and the U.S., which have abundant ethane supplies.
In Saudi Arabia and Venezuela, natural gas has a low value at the wellhead, resulting in favorable ethane costs and ethylene economics. Asian plants have the additional drawback of being somewhat highly financed and relatively small. For these reasons, says Blum, governments have had to provide investment incentives and tariffs to protect the industry there.
Blum concludes that prices in the region should have bottomed out and are expected to increase again.
LATIN AMERICA
Andrew B. Swanson, senior consultant, Chem Systems Inc., outlined major developments affecting the petrochemical industry in Latin American countries.
Historical factors, including inflation, currency instability, and high national debt, have been met with responses such as privatization and deregulation. Combined with global overcapacity, this situation has led to slower industry development.
Petroleos Mexicanos, for example, had plans for major investments in new ethylene, aromatics, methanol, and MTBE plants, which have been slowed or postponed. The sale of selected Pemex assets was suspended late last year because of their low values, given the current point in the petrochemical cycle.
Mexico also is opening its petrochemical industry to private investment. The Mexican petrochemical industry faces major trade changes brought about by the North American Free Trade Agreement (Nafta) and the General Agreement on Tariffs and Trade.
Expected effects of Nafta include:
- Increased chemicals trade between Mexico, U.S., and Canada
- Increased U.S. and Canadian investment in Mexican petrochemicals
- Better access of U.S. industry to Mexican feedstocks.
Chem Systems predicts Mexican ethylene demand will grow at 5%/year until the end of the decade, with additional capacity coming on line in about 1997 (Fig. 5).
Venezuela's economic indicators are weaker than Mexico's, says Swanson, and depressed oil prices there will reduce domestic growth further. Low oil prices also are likely to accelerate this country's trend toward privatization.
Venezuela's planned massive capacity buildup has been reduced greatly. Most of the original projects have been delayed until the late 1990s or after 2000. The remaining projects are:
- 150,000 mt/y of linear low-density polyethylene capacity at El Tablazo (1994)
- 122,000 mt/y of polyvinyl chloride capacity at El Tablazo (1996)
- Two methanol plants (1994 and 1995) at Jose.
In Brazil, the availability of domestic crude oil is increasing--from 700,000 b/d in 1993 to an estimated 1 million b/d in 2000, according to Chem Systems. Deregulation also is in progress:
- Tariff barriers have been reduced by 50%.
- Nontariff barriers (taxes and import procedures) have been reduced or eliminated.
- Subsidies have been withdrawn, most notably from the last two ethylene-from-ethanol plants.
- Brazil has benefitted from the Mercosur free trade agreement by selling into Argentina.
Petroquisa, wholly owned subsidiary of state oil company Petroleos Brasileiros SA, has participated in the country's privatization efforts. Stakes have been sold in many Petroquisa companies, including a 63% stake in Copesul, sold for $797.1 million in 1992, according to Chem Systems.
Chem Systems projects Brazilian ethylene demand to grow at 6.3%/year until the end of the decade, with debottlenecking coming on stream in 1998 (Fig. 6).
Ethylene demand in Argentina is forecast to grow by more than 2%/year until 2000, with additional capacity coming on stream in 1998. Argentina, like Mexico, has stabilized economic conditions, and its GDP per capita is the highest in Latin America, says Swanson.
The country has embraced privatization and deregulation, although with some difficulty. Yacimientos Petroleos Fiscales (YPF) is being progressively privatized, says Swanson. But because aromatics producer Petroquimica General Mosconi was so debt laden, its assets and debts were taken over by YPF.
Ethylene producer Petroquimica Bahia Blanca also is struggling with high debt.
Its privatization plans have been postponed and its expansion plans shelved.
OUTLOOK
Although these three regions present somewhat different pictures, they are all important in determining the health of the global petrochemical industry.
Companies operating in the U.S. and Asia are expected to have improved bottom lines in the coming years. And Latin America is a region with great potential.
Political and economic conditions in this area, however, will play a big role in the vitality of the petrochemical industry.
Copyright 1994 Oil & Gas Journal. All Rights Reserved.
