The world petrochemicals industry is enjoying one of its periodic upturns this spring. All the indicators are rising strongly and producers are making serious money for the first time since 1988-89. Many in the industry can hardly believe their luck. The recovery, which started with olefins in the US in the second quarter of 1994, has now spread worldwide. Some prices have more than doubled and there is no sign yet of any slackening in demand. The recovery has taken everyone by surprise, coming much earlier and turning out to be much stronger than was expected.
‘The big question is sustainability and knowing to what extent this current good fortune will last,’ says Arvind Aggarwal, a senior consultant with Chem Systems in London. ‘There is very little to say that this is a typical upturn. It’s like a set of dominoes – one event takes place, then a whole series of other events follow.’
Analysts are reluctant to compare the current upturn with previous booms in the petrochemicals industry because it is still so young and uncertain. Many previous recoveries lasted no more than two quarters before the indicators went into reverse and the current turnaround is reaching a sensitive stage.
‘The growth in demand in the US and Europe is still not certain,’ says Roger Lee, an analyst with TECNON (UK). ‘Much of the demand is brought about by supplier restrictions.’
In Europe, the profitability index for petrochemicals companies only started to rebound in the fourth quarter of 1994 (see page 13). Operating rates also moved up sharply, bouncing over 90 per cent in the fourth quarter after a slow rise since the start of last year. As yet, there is little sign of the investment plans that invariably follow such a big improvement in the industry’s performance. One reason is that companies are still shell-shocked from the market collapse of the late 1980s. The combination of factors that contributed to the current rebound also gives rise to doubts about how long it will last and whether prices can hold their current levels.
Tight supplies began to have an impact on prices and profits in the third quarter of 1994 due to a mix of bad weather and other factors. A drought in Japan and storms in the US forced a closure of capacity while fires and explosions hit output at several other US plants. The failure of the 1993 cotton crop also turned China into a big buyer of fibres which boosted polyester demand throughout 1994. The strong demand for polyester has drawn up purified terephthalic acid (PTA) and paraxylene prices in its wake. And, worldwide demand was picking up for a whole range of products as the recovery from the recession of the early 1990s gathered speed. By the start of the second quarter of 1995, most plants were operating flat out in Europe and there was little or no spare cracking capacity. ‘Margins are good and it is very much a suppliers’ market,’ says Aggarwal.
The revival has come after a two-year slump which saw very little growth in demand for ethylene and its downstream products. European producers also had to contend with a flood of cheap products from Eastern Europe which made the problems created by their high production costs even more acute. That particular threat has now diminished. Domestic markets in the east have revived and there is no longer the urgent need to find export outlets at virtually any price. Says Aggarwal: ‘You still see lots of Russian material coming across but it’s not causing the same pain it was in the past two years.’
The industry did not stand idle during the slump and there was a wave of mergers, consolidations and swaps that has changed the face of the industry. Finland’s Neste and Norway’s Statoil have combined their petrochemical interests to create a new industrial giant, Borealis. The union has led to no immediate plant closures although chief executive Juha Rantanen is determined to improve competitiveness, closing uneconomic plants if necessary. In another union, Shell has divested its polypropylene business and teamed up with Italy’s Montedison to create Montell, a dedicated polymer company. Another option is to focus on a core business and engineer a product swap as ICI has done, trading in its nylon business in a straight exchange for Dupont’s acrylic capacity.
Boom conditions have delayed some of the expected capacity closures. Because of the sudden improvement in margins, plants that were uneconomic 12 months ago have been given a new lease of life. Any capacity that is retired will have to be replaced to keep up with demand growth but, so far, no major plans for new cracking capacity have been announced in Europe. ‘The boom has come up quite quickly and people are only beginning to look at adding capacity,’ says TECNON’s Lee. Instead, productivity gains have been achieved through debottlenecking exercises at existing plants.
Long lead times on major projects and the prospect of further consolidation in the industry go some way to explain the apparent reserve about new capacity. More Far East crackers are coming on stream and European producers are being very cautious about major new investments. Says Aggarwal: ‘Mergers and acquisitions will continue by virtue of the momentum that was there before the upturn. We will see more mergers and more capacity. It takes time for these plans to emerge and for the finance to be made available. We’ll hear more about them in the course of ’95.’
The export-oriented petrochemical industries of the Middle East carried on investing busily throughout the recent slump. The subsequent upturn was an added bonus to businesses that can rely on cheap and abundant feedstocks to ensure their profitability. ‘Middle East producers tend to do very well anyway,’ says Lee. ‘They run their plants at full capacity whatever the market conditions. Their situation is such that they were still making something when prices hit rock bottom and European producers were closing capacity and losing money.’
The benefits of the price recovery were reflected in the profits of Saudi Basic Industries Corporation (Sabic) for 1994 and its continued high investment in the expansion of primary petrochemicals capacity. Sabic is also moving into aromatics with the launch of its first worldscale PTA plant at Yanbu (MEED 9:9:94, Cover Story). There is plenty of petrochemical investment activity elsewhere in the Gulf region, notably in Kuwait and Iran. In early April, Oman became the latest Gulf country to move ahead with plans to create a petrochemicals industry by confirming a new venture with Borealis. The letter of intent calls for the creation of a 260,000 tonne-a-year (t/y) ethylene cracker and two polyethylene units with a total capacity of 260,000 t/y. Abu Dhabi has also approached international companies for its planned joint-venture petrochemical plant at Ruwais (see UAE).
The Gulf advantages in feedstock terms do not necessarily ensure its price competitiveness in all markets, however. Calculations by Chem Systems show only a $20 a tonne advantage to the Middle East in the cash cost of producing ethylene and high-density polyethylene when compared with European production costs. Once the cost of tariffs and transport are added Middle East product is at a huge disadvantage when shipped into Europe.
That is of little immediate concern as Gulf producers focus on buoyant markets elsewhere and the world petrochemicals industry relishes the end of the recession. Most analysts expect the strong performance of the industry to continue through the rest of 1995. Such doubts that are voiced focus on whether government action to keep economic growth under control will dampen demand. Another worry is whether there will be consumer resistance once the huge rises in commodity costs start filtering through into the price of finished products.