Issue Date: March 20, 2006
Petrochemicals Keep Up The Pace
The North American petrochemical industry will remember 2005 for the hurricanes that pummeled the U.S. Gulf Coast toward the end of the year. But despite setbacks in that particular region, 2005 turned out to be profitable for petrochemical makers.
Furthermore, factors have been shaping up to make 2006 another lucrative year for the industry. Producers expect strong demand for ethylene and propylene. Natural gas prices have eased, making North American producers more competitive. And because no new petrochemical projects are planned in North America for the remainder of the decade, the good times could last for years to come.
When Hurricanes Katrina and Rita hit the Gulf Coast less than a month apart last year, they took out a substantial portion of U.S. petrochemical production. According to Houston-based petrochemical consultancy Chemical Market Associates Inc. (CMAI), Hurricane Katrina forced ethylene crackers with a combined 2.6 million metric tons per year of capacity to shut down. That output represented about 7.5% of North America's capacity.
Then the petrochemical-producing corridor along the Texas-Louisiana border took a direct hit from Rita, which made an even stronger impact on the industry than Katrina did. In the days following the storm, more than 35% of North American ethylene capacity was down, according to CMAI. Similarly, more than 50% of U.S. capacity of propylene was shut down, says Steve Zinger, the firm's director of heavy olefins and elastomers.
Other petrochemical products were severely impacted as well. Greater than 30% of the North American capacity for ethylene oxide, acrylonitrile, benzene, and high- and low-density polyethylene; more than 40% of polypropylene and polybutadiene rubber; and a majority of styrene butadiene rubber capacity laid idle, CMAI says.
Many chemical plants suffered some physical damage. The storms also knocked out much natural gas and oil production in the Gulf of Mexico, crippled railways and other logistics, dislocated plant workers, and paralyzed utilities such as electric power and communications.
The storms also had a strong influence on energy costs in North America. Prices for natural gas on the New York Mercantile Exchange hit about $11 in September and $14 in October after hovering between $6.00 and $8.00 per million Btu for most of the year. The price of West Texas intermediate crude oil climbed from $42 per barrel at the beginning of the year to peak at nearly $70 in the days following Hurricane Katrina.
CHEMICAL PRICES also skyrocketed after the hurricanes. According to CMAI, prices for North American contract ethylene hit a high of 56.5 cents per lb in November, an increase of 36% from the previous January. Prices of polymer-grade propylene hit a record high of 52 cents per lb in October, an 18% increase from the beginning of the year.
Recovering from the hurricanes was a complex problem for some petrochemical makers. For example, Shell Chemical's large Norco, La., cracker was down for more than a month following Katrina because of infrastructure problems in the New Orleans area. Robert Chouffot, Shell's lower olefins business manager in the U.S., says his company had to make do with very low inventories of its products because of the outage. "We were running on empty across our system," he says.
Despite the problems, about three weeks after the storm, all but 9% of North American ethylene capacity was back on-line. With plants coming back onstream, chemical prices corrected themselves somewhat but were still high, says Mark Eramo, vice president of lower olefins at CMAI. Ethylene prices, according to CMAI, had eased to 50 cents in February, while propylene prices had slipped to 46.5 cents.
By the end of the year, market conditions for ethylene and derivatives markets were favorable, given the relatively high prices. "The caveat was 'if your plant was running'-a big 'if' for certain producers," Eramo says.
The Gulf Coast downtime severely impacted demand for ethylene and propylene in the U.S., despite a strong global economy. According to Eramo, the hurricanes combined with a correction following a spike in demand at the end of 2004 to hold global ethylene growth to a mere 1.3% in 2005. He expects world demand to climb by 5% this year.
Similarly, Zinger says, U.S. propylene demand decreased by about 4.5% last year because of the hurricanes. He expects demand to bounce back by about 4-5% this year. "This is a bit of a higher growth rate than you might expect with propylene prices pretty high," he says.
Despite the hurricanes, 2005 was even more profitable than 2004 for many producers. Lyondell Chemical, which, according to Eramo, brought its hurricane-affected plants back onstream quickly, saw its petrochemical revenues grow by more than 30% last year to $18.8 billion. Its before-tax profits nearly doubled to more than $2 billion. Even Huntsman Corp., which had a long outage at its ethylene cracker in Port Neches, Texas, because of Hurricane Rita, saw petrochemical revenues rise 16% to $6.2 billion and before-tax profits increase 13% to $435 million.
Val Mirosh, president of olefins and feedstocks for Nova Chemicals, says the hurricanes tend to obscure how decent 2005 was for petrochemical makers in North America. "If it wasn't for the hurricanes, people would have looked back on 2005 as a pretty good year," he says.
The healthy demand projection combines with ethylene cracker operating rates well above 90% to point to a strong 2006 as well. "We think 2006 should be as good as 2005," Eramo says. "The underlying profitability associated with the business will be good because the overall utilization will remain high."
Mirosh agrees. "Inventories are low, demand is reasonably strong and picking up, and production rates are high," he says. "Put those together, and it will result in a pretty good year."
Another factor working in favor of U.S. chemical producers is a decline in natural gas prices following their extremely high levels late last year. In December, gas prices hit a high of more than $15 per million Btus, but because of large inventories and mild U.S. weather, they subsequently eased to less than $7.00. Meanwhile, a barrel of oil, which contains about 5.8 million Btu, has been trading steadily between $55 and $65.
The gas price decline is a windfall to U.S. chemical producers. About 70% of North American ethylene capacity is based on natural gas liquids-a mixture of ethane, propane, and butane derived from natural gas. Crude-oil-based naphtha, on the other hand, is a more common feedstock worldwide. The result is that the sharp drop in North American natural gas prices has boosted the competitiveness of the U.S. industry.
Theo Walthie, Dow Chemical's president of hydrocarbons, energy, and ethylene oxide/glycol, says the increased competitiveness further improves the outlook for the U.S. this year by boosting plant operating rates. "The U.S. is now coming back into a potential export position, and product can now flow to other parts of the world," he says. "And that will help load the U.S. plants better and create a better supply balance. This is relatively good news for the U.S."
Some producers say 2006 may potentially be the best year for a long time. In a recent conference call with financial analysts, Peter Huntsman, chief executive officer of Huntsman Corp., says his company could rake in record petrochemical profits. "Should demand remain strong and raw material prices continue to fall, we believe that market conditions throughout 2006 and into 2007 should improve," he said. "In fact, we believe that the back half of 2006 could result in the peak-type conditions for many of these commodities that have been expected for some time now."
No new ethylene capacity is planned in North America for the remainder of the decade. "If you are talking about new steam-cracking ability in the foreseeable future-between now and 2010-I don't think it is even a remote possibility," CMAI's Eramo says.
Though the industry is back on its feet after the downturn of 2001 and 2002, producers are still shy about investing in North America. They are not confident the market can absorb the new capacity and, moreover, would rather invest in the Middle East, where ethylene production costs are the lowest, or in Asia, where petrochemical markets are growing the fastest.
Observers say the North American investment picture hasn't changed, even though recently two grassroots ethylene and polyethylene projects have been canceled in nearby Mexico and Venezuela. The project in Mexico, however, is still being planned as a more modest expansion.
Instead of building grassroots plants, petrochemical producers say they will focus on smaller improvement projects at their North American facilities to squeeze out more efficiency and small increases in capacity, says A. Cenan Ozmeral, BASF Corp.'s vice president for petrochemicals, plasticizers, and solvents. "I don't see any major olefins projects coming on-line over the next four to five years," he says.
BASF's Port Arthur, Texas, ethylene cracker joint venture with Total Petrochemicals is planning one such small program this spring: a revamp of the facility's gas fractionator, as well as environmental improvements. It will, however, yield no additional capacity, Ozmeral says.
IN NOVEMBER, Nova Chemicals completed a modernization project at its Corunna, Ontario, ethylene cracker. Despite a troublesome restart that tied up the plant for two months longer than expected, the plant is now running smoothly, Mirosh says. "We had done this for modernization and energy efficiency and also expected a modest increase in capacity," he says. "We have certainly seen all three so far."
Dow's Walthie says it is unlikely that major new ethylene capacity will be built as long as large quantities can still be purchased on the merchant market at competitive prices. For example, Dow had planned to build a new ethylene cracker on the Gulf Coast to replace two it shuttered during the industry downturn. It shelved the project because it was able to meet its ethylene requirements through supply agreements. Walthie says Dow will likely continue this approach. "As long as we can buy on terms that are acceptable to us, we will not invest," he says.
Likewise, Japan's Shin-Etsu Chemical was considering the construction of an ethylene cracker to complement a $1 billion polyvinyl chloride complex in Louisiana. However, the company recently told Cx that it is instead locking up raw material supply agreements with five different ethylene makers.
The good times for the petrochemical industry will end when new capacity comes onstream in the Middle East and Asia toward the end of the decade, observers say. The Middle Eastern capacity is based on massive amounts of cheap ethane in the region that must be upgraded into transportable chemicals, such as polyethylene and ethylene glycol, to be exported.
According to CMAI, between 2004 and 2010, 20 million metric tons of new capacity-53% of the new capacity anticipated globally during that period-is scheduled to open in the Middle East and Africa. Some 6 million metric tons of new capacity is forthcoming in Iran alone, increasing the country's ethylene output more than sixfold. In Asia, some 12.8 million metric tons of capacity, or 33% of the world's new capacity, is expected by 2010.
CMAI's Eramo says the world can absorb this capacity for the first several years as long as global ethylene demand remains strong. But, he says, even a four- to five-year run of strong economic growth may not be enough to swallow all of it. "The amount of new capacity being contemplated between 2008 and 2011 is so large, especially in 2009 and 2010, that you would have to quadruple the rate of growth to absorb it."
When that new capacity is unleashed, North American producers won't be able to compete in the export market. Moreover, as BASF's Ozmeral points out, the overcapacity could mean a flood of cheap imports of ethylene derivatives, such as polyethylene sheet, from Asia. "As the Middle East crackers come on-line, ethylene made of cheap ethane will flow into Asia and will provide cheap feedstock for derivatives," he says. These derivatives, in the form of finished goods, would make their way to the U.S., decreasing demand for domestically manufactured products.
But plants in these regions could well be delayed, staving off, in turn, the next downturn. For example, Iran is building a massive integrated petrochemical industry from scratch and is doing it with local expertise rather than with experienced international project management contractors. This is a recipe for delays, Eramo says.
Dow's Walthie says the Iranian program is fairly ambitious for any company. "It is a massive undertaking for anybody to create from nothing this whole chain," he says. "The problem is not only to build the ethylene plant but they also have to build the oil and gas extraction facilities and the infrastructure. Then they all have to start up and they all have to run. If one part of the chain breaks, then it all breaks."
Holding off the downturn until the end of the decade also requires fairly strong demand growth for a number of years. An economic hiccup in any major region of the world, especially in Asia, could set the industry back. "People factor in various demand growth rates, but nobody is probably factoring in a significant downturn in the market," Chouffot says. "If that were to happen, it clearly would have an impact."
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