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March 17, 2003
Volume 81, Number 11
CENEAR 81 11 pp. 21-24
ISSN 0009-2347


PETROCHEMICALS

8111cover

BIGGER Shell Chemicals' 1.1 billion-lb ethylene project in Deer Park, Texas, is the only major expansion in the U.S. this year. SHELL CHEMICALS PHOTO


ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU

These are uncertain times for the U.S. petrochemical industry. The prospect of a war in Iraq and other factors outside the industry's control have had a negative impact on the industry and will determine whether 2003 will see the beginning of a substantial recovery in petrochemicals.

However, gradually improving demand is tightening supplies for some products, a positive sign for the industry. Moreover, the U.S. petrochemical industry will not likely return to business as usual. A different industry will emerge from the downturn, one that has fundamentally changed its focus from an export-driven industry fed by cheap feedstocks to a leaner industry more concerned with supplying domestic needs.

In recent months, feedstock prices have been the spoiler of the chemical industry. Prospects of a war with Iraq and an oil workers' strike in Venezuela pushed up petroleum prices at the end of 2002. According to the Energy Information Administration, the spot price of West Texas Intermediate crude oil at the end of February was $36.76, up $14.39 from the year before--increasing global costs for oil-derived feedstocks such as naphtha.

In addition to the increase in crude oil prices, the U.S. industry had to grapple with a sharp run-up in natural gas prices caused by a cold winter in much of the U.S., insufficient supplies, and dwindling inventories. At about $5.00 to $6.00 per million Btu for most of the winter, gas prices were about two to three times higher than the industry is used to. And on Feb. 25, spot prices for natural gas traded at over $18, breaking the record set two years ago by the unprecedented and painful run-up to about $10.

Feedstock costs have been a burden for the chemical industry for more than a year, as shown by a sampling of the financial results of eight global petrochemical businesses. Out of the eight, five reported earnings improvements in 2002 over 2001, a year that began with high energy costs and ended with a global economic slowdown.

That recessionary year was widely regarded as the worst in the petrochemical industry since the early 1980s--with demand plummeting 10% during the year, according to petrochemical consultancy Chemical Market Associates Inc. (CMAI). In comparison, 2002 was much better and showed overall gains; however, earnings at each of the eight companies declined from the third quarter to the fourth. These companies blamed feedstock and energy costs for the lost momentum.

Mark A. Eramo, business director for light olefins at CMAI, says the fourth quarter was worse than anything seen in 2001. "Things are pretty rough, and we've come out from probably the worst period we've seen yet since the downturn started in the middle of the year 2000," he says.

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TALL ORDER The 3.2 billion-lb BASF/Atofina olefins cracker in Port Arthur, Texas, is a big new source of propylene in the U.S. BASF PHOTO

THE IMPACT of the feedstock situation may not be as dramatic as the crisis of two years ago. Unlike oil, natural gas isn't a globally priced product. When natural gas prices quadrupled at the end of 2000, petroleum prices didn't go up as fast. This put ethane--on which about two-thirds of the U.S. ethylene industry is dependent--at a disadvantage to petroleum-based feedstocks. Companies in Europe and Asia that use heavy feedstocks were suddenly more competitive.

Doug Culpon, vice president of petrochemicals at Huntsman Corp., recalls the pain the spike caused. "The last time, it was a unique hit to the U.S. because it was runaway natural gas without a corresponding increase in crude oil," he says. "Therefore the U.S., being ethane-based, was severely disadvantaged," he says.

This time, crude is also climbing, giving no clear advantage to petroleum- or natural gas-based production. CMAI's Eramo says that whether or not a feed is advantaged varies unit by unit and depends on how all of a cracker's products--ethylene for ethane crackers and ethylene, propylene, butadiene, and other products for naphtha crackers--offset the cost of the raw materials fed into it. After the February gas spike, Eramo says, the difference between most units was only a few cents per pound of ethylene produced. "The last time gas spiked, it was clear that you should crack as heavy as you can."

A. Cenan Ozmeral, group vice president of petrochemicals, plasticizers, and solvents at BASF Corp., notes a slight naphtha advantage, but concedes that the two are close and that neither is currently a desirable feedstock. "Ethane is very expensive, and naphtha is a close second," he says.

Until mid-February, when natural gas was high but still only about $5.00, ethane was still an advantaged feedstock over naphtha in the U.S. because of high oil prices. "The irony is that ethane in a $5.00 gas environment was a favored feedstock," Eramo says.

The run-up in natural gas prices will not likely close plants like the run-up two years ago did. Much of the light feedstock-based capacity that was shuttered because it was unprofitable never came back on-line because business was so terrible in 2001. Two Chevron Phillips units in Sweeny, Texas; Equistar's Lake Charles, La., cracker; and Huntsman's Port Neches, Texas, ethylene plant have all been down since the first half of 2001.

BECAUSE THE CAPACITY is already off-line, Eramo says there is not much room for producers to take out more production. "At this point the incremental capacity that was shuttered in January 2001 still remains down, so I don't see a lot that can be taken off-line," he says.

Many ethane-based ethylene producers, however, are reducing operating rates. Dow Chemical says it has scaled back its Seadrift, Texas, unit--scheduled to be completely shut down later this year--to much lower operating rates recently because of feedstock prices.

A 1.3 billion-lb-per-year ethylene joint venture between BASF, Williams Cos., and General Electric in Geismar, La., is running at 75% because of natural gas prices, says BASF's Ozmeral. He says the partnership is watching the situation every day.

In addition, some idled plants might not start up again. Observers call a 650 million-lb Chevron Phillips unit in Sweeny--one of the two that had been down--into question. The company already closed the other, older unit at the site for good. Similarly, Equistar's Lake Charles plant is down indefinitely, and the company has no ethylene derivatives at the site. "The high energy scenario really puts pressure on margins right now," Eramo says. "It forces people to make decisions."

However, ExxonMobil's Houston cracker, down for much of last year, is back onstream. Huntsman's Port Neches unit is due back up during the first quarter of next year or when market conditions improve. This date is a delay from the fourth quarter of last year, when the plant was originally expected to come back onstream.

In addition to capacity that has been shut down, the industry expects a record number of maintenance turnarounds during the second quarter of this year. Altogether, about 10% of U.S. capacity, according to Eramo--representing about 1.5 billion lb of production--is due off-line during the quarter. Moreover, little new capacity is expected to come onstream this year. The only significant project is Shell Chemicals' 1.1 billion-lb Deer Park, Texas, expansion, due to open at the end of the year.

Huntsman's Culpon sees the beginnings of a recovery. Having 10% of capacity off-line boosts what would have been an 85% operating rate to 95%, "leaving the rest of the industry running relatively hard to keep up with current demand."

Theo Walthie, business group president for hydrocarbons, energy, and ethylene oxide/glycol at Dow, thinks this is good. He says there is still more than enough ethylene capacity in the U.S., but he predicts that, with all the idle capacity, the ethylene market should tighten later this year. "If the demand stays where it is today, you can get a pinch in the second quarter on ethylene availability in the U.S.," he says.


"Natural gas affects the entire industrial base of the country. And the U.S. is running too much gas compared to its supply capability."


ANOTHER POSITIVE, from this standpoint, is Dow's decision to speed up the process of closing 2.5 billion lb of ethylene capacity in Seadrift and Texas City. The original plan was to close the plants by 2005 and build a new 2 billion-lb cracker in Seadrift by 2007. Now the company plans to shut the Texas City cracker by the middle of this year and the Seadrift cracker by the end. "We have advanced it because we see that this capacity is not needed in the short term, and so rather than keeping it longer we are taking it down earlier," Walthie says.

Eramo praises Dow's decision. "It creates an expectation," he says. "Just like the expectation of a new plant starting up has a negative impact on the market, the expectation of this much capacity coming off-line can have a positive influence."

Another positive may be firming demand in many sectors, even in ethylene. Producers have already noticed an improvement across several product lines in the petrochemical industry, including major products like polyolefins, polyvinyl chloride, styrene, and ethylene oxide.

Demand was strong in the beginning of 2002, Eramo says, but tapered off in the third quarter and sank further in the fourth. Overall, U.S. ethylene demand rose 2.8% in 2002, hitting 51.5 billion lb.

This year, Eramo projects U.S. demand to increase by about 4.5%, but the prediction assumes that feedstock prices ease by March, an assumption the late-February natural gas run-up may have changed. "We might have a weaker demand scenario than we previously thought," he says.

Huntsman's Culpon is cautiously optimistic. "At the end of this year, we will start to see a legitimate improvement in demand, and I think we'll have a strong recovery in 2004," he says. "I think some recovery in demand in the U.S. is overdue and inevitable. We need an end to all the uncertainty concerning the Middle East and energy values. Then and only then are we really going to see a recovery."

SLIPPAGE
Last year was better than 2001, but results sagged at the end
2002
2001
2002 EARNINGS
$ MILLIONS SALES EARNINGS SALES EARNINGS FOURTH QUARTER THIRD QUARTER
Borealis
$3,322
$6
$3,506
$–39 $–23
$24
BPa na 765
na
242 39 272
Dowb
12,272
169
12,515
214 –65 217
Equistar
5,537
–246
5,909
–280 –114 22
ExxonMobil
20,310
830
19,312
882
76
353
Nova
3,235
–107
3,328
–183 –29 –11
Shell
11,490
489
10,616
230 128 164
TotalFinaElfa,c
7,298
–28
7,157
236
–28 57
a BP and TotalFinaElf figures are operating results. b Dow Chemical includes only its chemicals, hydrocarbons and energy, and plastics divisions; its earnings are before tax. c TotalFinaElf's figures are for its base chemicals and polymers divisions. na = not available. SOURCE: Company reports

ALSO ENCOURAGING to the petrochemical industry is the strong market for propylene. Four propylene producers put customers on allocation recently. "It will be one of the most valued products coming out of the steam cracker, and there will not be enough propylene in the world in the short term," predicts Dow's Walthie.

Walthie says this is in part because ethane had been an advantaged feedstock, so the industry was in a "light feed mode," limiting the amount of propylene available as an ethylene by-product.

In addition, propylene demand is stronger than ethylene demand. Propylene demand was up about 5% in 2002 versus a decline of 4% in 2001, according to Stephen J. Zinger, director for heavy olefins and elastomers at CMAI. Because ethylene crackers are driven by ethylene demand, a higher need for propylene than ethylene is bound to tighten the market. Zinger expects 3.5% growth this year. Moreover, the outages that are expected to tighten ethylene later this year will also affect propylene, he says.

Propylene is also a coproduct of gasoline-making fluid catalytic cracker units at refineries, but these supplies have been limited as well. Winter is already a slow season because of refinery maintenance, Zinger says, and high oil prices, refinery problems, and the Venezuelan strike have only exacerbated low refinery output this winter.

"The industry expected it to be pretty tight because of the planned outages and some people running their inventories low at the end of the year," he explains. "Then we add a few unplanned outages and high energy prices, and the market has gotten pretty tight."

Propylene prices have risen this year. In February, the contract price was 23.5 cents per lb for polymer-grade propylene and 22 cents for chemical-grade propylene. This represents a 4-cent increase since the beginning of the year. Producers also have floated 4- to 6-cent increases for March.

The higher prices will entice refinery propylene makers into putting more propylene on the merchant market instead of consuming it internally as gasoline alkylate, Zinger says. "Refineries are making as much propylene as they can without making additional investments," he says.

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CAPACITY DUE onstream later this year is also expected to boost supplies. Later this year, BASF and Atofina will complete a metathesis unit in Port Arthur, Texas, that will convert ethylene and butylene into 700 million lb of propylene. It will be fed with butylene from the Sabina joint venture between Shell, Atofina, and BASF and ethylene from the 3.2 billion-lb olefins joint venture between BASF and Atofina, also in Port Arthur.

Ethylene makers, mostly because of high feedstock costs, are also trying to raise prices. "There are measures to push this run-up downstream as far as it can be pushed," Zinger says.

BASF's Ozmeral says ethylene prices were 24 cents per lb in December and have increased by 4 cents since then. The industry is looking for another 5 cents in increases. Ozmeral says prices in overseas markets like Asia have the same feedstock pressure as in the U.S. but have responded to them faster. "Olefins prices need to move up," he says. "That will not make us less competitive; they will make us catch up with world prices."

There have been price increases in petrochemical derivatives ranging from propylene oxide to engineering polymers. Sources say prices for polyethylene have increased by roughly 30%, and for polypropylene, by about 40% so far this year.

But petrochemical makers say the industry needs to do more than just raise prices. They are tired of having to eat feedstock costs every time oil and natural gas prices spike. Some suggest the polyolefins industry do away with price protection--the 30- or 60-day lag plastics customers enjoy when resin makers announce price increases. "We literally cannot put price increase announcements out fast enough to cover the volatility of energy prices," says Ken Mounger, vice president and general manager of polyolefins at Formosa Plastics. The petrochemical industry also has to deal with the erosion, by higher ethane costs, of its traditional role of exporter to Asia.

In the 1990s, CMAI's Eramo says, the U.S. ethylene market grew at 4 to 5% per year, but he forecasts 2.5% growth in the future. "As an industry, we can no longer be a major exporter of ethylene derivatives to the international market. We have a higher cost basis that, depending on the price of crude, can make us the highest cost producer in the world at times."

Eramo adds that the Asian market is becoming more self-sufficient. In addition, Asia is exporting many ethylene derivatives--including nondurable goods such as polyethylene bags--that affect U.S. demand. "You simply cannot grow your monomer demand at the same rate you used to," he notes.


"Just like the expectation of a new plant starting up has a negative impact on the market, the expectation of this much capacity coming off-line can have a positive influence."


DOW'S WALTHIE sees natural gas as a broader industrial problem in the U.S. "It is not only the chemical industry," he says. "Natural gas affects the entire industrial base of the country. And the U.S. is running too much gas compared to its supply capability. Gas [prices] in the U.S. are the highest in the world, and there is no immediate relief."

Rick Henson, vice president of petrochemicals and feedstocks at Nova Chemicals, shares the sentiment. "The focus on new electricity generation being almost solely gas-based has been a big contributor to demand," he says. "We really need to have a diversified portfolio of energy resources if we are to maintain security of supply at reasonable prices that continue to foster a robust economy."

The industry must diversify its own use as well, some observers say. The BASF/Atofina cracker, as well as a naphtha-based cracker Formosa opened early last year, is evidence of this trend.

However, Walthie says the trend has been ongoing. "The U.S. industry used to be ethane only, but it has diversified from ethane to ethane and propane and then to liquids and then heavy liquids," he says. For its own part, Dow's next cracker will likely be fed by ethane and propane.

Walthie also stresses what he calls asset renewal. By this he means focusing on cost-improvement projects and taking older capacity out of the marketplace when new capacity is added. Europe, he says, made a similar transition in the early 1980s, the last time the ethylene industry took such a serious dip and when the Middle East first emerged as a threat to export markets.

He cites Dow's own actions in taking out the two crackers and replacing them with a smaller cracker as an example. "We are applying this asset renewal; otherwise we are not going to stay competitive," Walthie says. "I see this industry renewing itself but at the same time getting smaller. By the time we renew, we will renew much less than what we will take out."

BP is applying a similar concept at its Chocolate Bayou, Texas, cracker. The company is planning to add 550 million lb of ethylene capacity through refinery and cracker improvement projects. Andrew Mackenzie, president of BP Chemicals' American operations, says the driver is not only efficiency and more capacity, but also reducing nitrogen oxide emissions.

"In our environment, it is much more comfortable to add incremental capacity to an existing cracker than to think about the risks of building the much larger capacity involved in a new cracker," Mackenzie says. "We are generally looking to improve our competitiveness, our environmental requirements, and add a little bit of extra capacity, which will hopefully come onstream before the next upturn."

Most observers predict that the next upturn will start at the end of this year and continue into 2004, with a peak to come in 2005 and 2006. In addition to supply and demand scenarios, Huntsman's Culpon detects intangibles that would lead to that conclusion. "There's a little bit of a shift in market mentality," he says. "It is becoming more difficult for folks to find all the product they need, which is typically what happens at the beginning of a recovery."



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Chemical & Engineering News
Copyright © 2003 American Chemical Society



 
Cover Story

PETROCHEMICALS
Observers say the market will get back up after oil and natural gas prices come back down, but the industry will still need to make changes

MIDDLE EAST FUTURE
The industry's presence in petrochemicals could be slowed by war in Iraq and by logistical challenges

Related Stories

FEEDSTOCK PRICES SOAR, FIRMS REEL
[C&EN, Mar. 10, 2003]

Another Winter Energy Price Spike
[C&EN, Jan. 6, 2003]

Modest Gains
[C&EN, Feb. 3, 2003]

PETROCHEMICALS
[C&EN, Mar . 18, 2002]

WORLD CHEMICAL OUTLOOK
[C&EN, Jan. 12, 2003]

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