In an ideal world, ethylene producers would be churning out above-average profits.
The industry is characterized by steadily growing demand. According to IBM/Chem Systems Inc., Tarrytown, N.Y., world ethylene demand will grow by about 4.7%/year during 1997-2005.
In reality, producers are trying new and old ideas to increase profits as the ethylene industry heads into a sustained period of low margins.
The reason for the expected low margins is that, although demand is growing, capacity additions are growing in parallel. Continued capacity additions to capture incremental demand are both a business necessity and a business nightmare for ethylene producers, even though they sometimes lead to periods of excess capacity, such as occurred last year, when ethylene capacity surpassed demand by 12 million metric tons/ year.
Some alternatives
Some companies have turned to joint ventures and mergers to reduce costs. BASF Corp., Mount Olive, N.J., and Fina Inc., Dallas, (now a part of TotalFina SA) are building a naphtha cracker in Port Arthur, Tex., that will be completed at the end of 2000.
Other companies have found innovative ways to reduce costs, such as so-called condo and virtual crackers.
In a condo cracker, each company owns the same share of production capacity as it shared in the capital cost. Millennium Chemicals Inc., Lyondell Petrochemical Co., Union Carbide Corp., and Eastman Chemical Co. introduced the concept in 1996. Although the idea was viable, it materialized not as a result of a cyclical industry downturn that stalled capital expenditures but rather as a means of investing in a relatively small amount of capacity while still benefiting from the economies of scale that a large plant provides.
In a virtual cracker, the ethylene consumer purchases ethylene capacity on a long-term basis at formula cost for an up-front capital charge. This idea was not wildly popular, either.
New alternative
At the beginning of this year, Eugene R. Allspach, president and chief operating officer of Equistar Chemicals LP, announced the company was looking for a partner for its time-share cracker.
Compared to the aforementioned options, the time-share concept requires a shorter commitment period and smaller increments of capacity. The partner pays for this commitment as if it were making a capital investment in a debottlenecking project. The fee is based on feedstock flexibility, length of contract, and capital value of the capacity.
The ethylene purchase would be used to bridge the supply gap until the partner has enough incremental demand to warrant the construction of its own new world-scale cracker. After the partner has built its world-scale cracker, Equistar may turn around and purchase time-share capacity from the new cracker.
Although he has no commitments, Allspach says that response to this inquiry has been good.
"As with all new concepts," he added, "much discussion must occur for participants to understand its merits. A strong selling point of the inherent value of a time-share cracker is Equistar's willingness to play both the role of buyer and seller and the fact Equistar is making the concept a part of its capacity planning."
Thi Chang
Refining/Petrochemical Editor
