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Industry is eyeing a recovery and planning the next phase of growth

January 12, 2004 | A version of this story appeared in Volume 82, Issue 2

Having seen positive signs in 2003, Canadian chemical producers are optimistic about a recovery in 2004. But the chemical industry there is thinking longer term, and it is grappling with how it can retain its traditional competitive advantages during a new phase of growth.

Production mostly decreased in 2003. Volumes of key organic chemicals such as ethylene and polyethylene declined slightly. And inorganic chemicals dropped more dramatically; for example, sulfuric acid tumbled 13% and chlorine, 9%.

However, shipments rose across the board--to $28.6 billion--because of higher prices for chemical products, spurred by a spike in natural gas prices in February.

As has happened every year since 1994, Canada's trade deficit in chemicals increased. In 2003, it reached $9.2 billion, an increase of about $200 million.

However, David J. Shearing, senior manager of business and economics at the Canadian Chemical Producers' Association (CCPA), says business conditions for the Canadian chemical industry have no place to go but up this year. "It has bottomed out and is starting to recover," he says.

J. S. (Steve) Griffiths, vice president and general manager of petrochemicals for ExxonMobil's Canadian affiliate, Imperial Oil, is also optimistic. "We are projecting that 2004 will be a better year than 2003," he says. "In the bigger businesses for us, such as the polyethylene business, we are looking to go back to historical growth levels--like 4 to 4.5% growth."

Griffiths isn't alone. In a survey completed last month, CCPA members said they expect volumes and sales to increase by 5% in 2004, with exports to be boosted by 13%.

However, another spike in natural gas prices would be a setback for the Canadian chemical industry, especially for Alberta's ethane-based ethylene sector, where feedstock prices are influenced by U.S. natural gas rates. Speculation, initially spurred by a cold snap in the U.S. Northeast, drove up spot natural gas prices as high as $7.55 per million Btu in December, nearly 40% higher than they opened for the month.

Canadian chemical producers are quick to point out that, despite the rising prices, gas production is up, inventories are high, and demand is projected to be low. Rick Henson, vice president of ethylene and petrochemicals at Nova Chemicals, was astonished by December's prices. "The forces that are driving prices up aren't really reflecting fundamentals," he says. "They are reflecting an emotional response to short bursts of cold weather."

Vince J. Smith, president and chief executive officer of Dow Canada, was also surprised by the run-up. "We're still going into the year with sufficient supply. To me, that tends to suggest more stability this winter than we have seen in the past," he says.

Moreover, Henson says prices in Alberta haven't risen as sharply as rates in the U.S. "The difference in prices between Alberta and the U.S. Gulf Coast in the last few weeks has been quite a bit higher," he says. "Alberta remains an attractive place, notwithstanding that in North America as a whole, gas-based industry competitiveness versus the other regions has changed. Alberta shows up well, both in the global context and certainly in the North American context," Henson says.

But more feedstocks will be needed if there is to be another round of major petrochemical expansions in Alberta. The 2.8 billion-lb-per-year cracker that Nova and Dow completed in 2000 tapped the available ethane supply for crackers. Another big cracker will have to wait until natural gas is drilled in Alaska or in the Mackenzie Delta in northwestern Canada .

Whether ethane from this gas will be available for Alberta chemical producers when it is tapped at the end of the decade is uncertain, says David Podruzny, senior manager and secretary to the board at CCPA. "We have been advocating whenever the Alaska gas pipeline brings gas from the north down, as it comes through Alberta, that some of the liquids will be available for our members to bid on."

But chemical producers aren't pinning all their hopes on northern gas. They see the tar sands in northern Alberta as a potential source of petrochemical feedstocks for the Canadian industry in the future. The most in-depth study on this prospect was completed in late 2002; it was compiled by Calgary-based T. J. McCann & Associates and sponsored by Nova, Shell Chemicals Canada, synthetic crude maker Suncor, and the Alberta Energy Research Institute. The plan calls for a $5.5 billion project to make some 1 million metric tons each of ethylene and propylene, 500,000 metric tons of benzene, 700,000 metric tons of p-xylene, and many other chemical products. The McCann study projects the internal rate of return for such an investment at 15.2%.

Dow's Smith has been cautious about the grandiose plans for the oil sands because of the magnitude, complexity, and modest financial return of the proposed project. "There hasn't been anything to suggest one way or another where the project is going to go," he says.

Nova's Henson says the plan, while imperfect, is a huge step in the right direction. "The economics of it are uncertain, but the fact you can look at conventional technology and come up with the approach that they did was good and helps advance the cause," he says.

Henson says harnessing the sands for petrochemicals will be evolutionary rather than revolutionary. "It is fair to say it won't start with a big bang like the McCann study put together, which was a many-billion-dollar effort," he explains. "We are looking more at pieces of this and having a program where over time you eventually get to multi-billion-dollar programs and partnerships."

A more immediate concern for Canadian chemical producers is the declining U.S. dollar, which lost about 20% of its value versus the Canadian dollar during the year. About two-thirds of Canadian chemical products are exported to the U.S., CCPA's Shearing explains. "With the weakening U.S. dollar and the strengthening Canadian dollar, [Canadian producers'] costs are going up but their sales are not, so their margins are being squeezed," he says.

Industry observers also are wondering if the industry is losing an important ally in Quebec for new investments. In September, Société Général de Financement du Quebec (SGF) and Spain's Interquisa completed a 500,000-metric-ton-per-year, $470 million purified terephthalic acid plant in Montreal. The plant will supply a 95,000-metric-ton Shell/SGF polytrimethylene terephthalate plant now under construction and will be fed by a Coastal/SGF p-xylene plant. However, the government of Quebec, which owns SGF, is reviewing SGF's role in the Quebec economy. Chemical makers suspect this will mean fewer investments in chemical projects.

Longer term, chemical producers are concerned about the role that Canada's entry into the Kyoto protocol on climate change will mean for them, though the treaty's future is in doubt if Russia doesn't ratify it. "How individual companies will achieve individual [emissions reduction] targets that are being set for large industrial emitters in this country without impacting their competitiveness vis-á-vis our U.S. neighbors is going to be a concern for our members," CCPA's Podruzny observes.

Chemical manufacturers are pleased that Canada's new prime minister, Paul Martin, seems willing to work with industry on implementation proposals. "I think it is encouraging that the new administration in Canada is saying what matters with [the Kyoto protocol] is that we have a good plan that can both achieve our international obligations and lead to sustainable economic development," Podruzny says.

Some companies are skeptical about the protocol altogether. "It is not really an effective tool to address global warming," one producer says. "It is an ineffective tool from an environmental perspective, and it is a tool that can have a damaging effect on the Canadian and other economies."

David Findlay, vice president of corporate development at DuPont Canada, who is based in Canada, says DuPont doesn't see the Kyoto protocol as a negative. "Because we are a multinational company, we're operating under several jurisdictions that in fact have ratified," he says. "And as we address our initiatives on a global basis, the first acknowledgment is that we accept the preponderance of the scientific evidence that the emission of greenhouse gases is a big factor. We think of Kyoto as a reasonable step in the international community to make a start toward stabilizing greenhouse gases."

Findlay says DuPont can meet initial targets for the protocol without having to incur much additional cost in many jurisdictions, including Canada. However, he does admit that the Kyoto protocol may prove to hurt Canada competitively versus the U.S., which has not ratified the treaty. "It does add a cost that U.S. facilities don't have," he says.

But factors like the Kyoto protocol will play out over the next decade. Right now, the industry in Canada is focused on enjoying the recovery.

Output of most products was down in 2003
THOUSANDS OF METRIC TONS19992000200120022003aCHANGE 2002–03
Ammonium nitrate1,0521,1101,1741,1521,056–8.3
Hydrochloric acid (100%)1571551431511510.0
Nitric acid1,0071,0741,0541,1431,113–2.6
Sodium chlorate1,0491,1071,0821,0551,1327.3
Sodium hydroxide1,0821,0941,0741,1111,059–4.6
Sulfuric acid4,1943,8043,8463,8873,371–13.3
a C&EN estimates. b Includes low-, linear low-, and high-density resins. c Includes acrylonitrile-butadiene-styrene resins. SOURCE: Statistics Canada


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