PET: sitting pretty as growth goes on

21 June 1993 00:00  [Source: ICB]

Recent PET capacity hikes reflect European producers' belief that regaining ground on eroded margins is around the corner. And though oversupply elsewhere may dampen the outlook short term, growth in the long term is the name of the game.

THE FIRST major PET polymer capacity hikes in years have been brought onstream in the last 12 months in Europe. So long have they been in coming that, despite the entry of a brand new player and a 50% boost in production capability, the dynamics of the market continue to be dictated by a supply shortfall of 100 000 tonne/year.

Yet the growth prospects are glittering compared with even the most optimistic of outlooks for such stars of the commodity world as PP. Minimum average annual growth of 8% through to 1998 is anticipated, with areas such as southern Europe likely to see rates closer to 12-14% a year in the near future at least. Ironically for one of the few European sectors where imports are sought rather than feared, material coming in is nonetheless low priced enough to help depress local netbacks.

Aside from US exports--which in the last year have been largely ascribed to Eastman prior to the startup of its UK expansion - imports into Europe are originating from Asia where local overcapacity as much as European demand is stimulating global movement of material. Estimates suggest as much as 100 000 tonne may have moved from Asia into Europe in the last 12 months.

Devaluations pressure market

More significant than this in depressing European markets in the short term however has been the swift erosion of margins following the currency devaluations of last autumn. Europe has been a two-tier market since Black Wednesday, with returns in Italy, the UK and Spain significantly lower than those from Benelux and France, for example.

A 6% hike in Q1 this year was held in the UK and Italy, ECN understands, but a second initiative in Q2 failed. Prices currently stand at FF7.9/kg in France and BF 48/kg in Belgium - roughly equivalent to DM2.35/kg. But the UK is rather lower at £920/tonne, and Italy a long way down at Lira2000/kg. These two form the focus of a Q3 initiative to equalise prices across the Community. 'At this level (DM2.35/kg equivalent) we are not ecstatic, but it is OK,' one player told ECN. 'But if the whole market sank to the bottom level there would be no new plants going up.'

Spain has been described as a disaster with prices as low as Pta155/kg and is effectively being disregarded at present.

The prospects look good for regaining some ground on margins now that seasonal tightening is underway. Plants are running flat out across Europe now that summer has finally started.

In any case, the squeeze on margins has not been sufficient to push weaker players out of the market, one player emphasises. 'Less efficient players may be starting to squirm a little,' he says. 'Probably everyone is covering cash costs, but whether they are covering capital costs is less clear.'

Meanwhile the continuing supply/demand shortfall continues to encourage ambitions - notably from market leaders Eastman Shell and ICI. The continued position of players such as Akzo and Hoechst remains less transparent. And earlier this year Enichem put its preform business up for sale, suggesting a focusing of PET polymer strategy. Eastman estimates 1993 demand at 110% of capacity this year in Europe, despite the addition of between 140 000 tonne/year and 180 000 tonne/year of capacity in the last 12 months.

ICI has just commissioned its 14 000 tonne/year additional solid stating capacity at Wilton in the UK, raising its UK total to 75 000 tonne/year and giving it around 100 000 tonne/year with the 25 000 tonne/year at Rozenburg in the Netherlands. A major strategy review is now underway, a spokesman confirms, with expansion options in both western Europe and the US under consideration. ECN understands investment in both regions is likely, but ICI refuses to comment on speculation that two 60 000 tonne/year units are being considered. A decision is expected by the autumn.

A further 10-15% capacity may well be available over the next two or three years through debottlenecking at existing ICI plants in Europe, though no formal project exists at present to implement this.

Further afield, ICI is also clearly looking at options around the Far East. It already has a strong PTA presence now its worldscale unit in Taiwan is on-stream, and also has technology links and marketing agreements with emerging Chinese PET players. But continuing oversupply in the region and the tendency of entrants to build many sub-worldscale plants breed caution in the minds of prospective Western investors.

World PET leader Eastman is also maintaining a watching brief in the Far East whilst pushing ahead with fresh expansion plans in North America and Europe. Earlier this year the company brought onstream the second phase of the Workington, UK, complex, boosting capacity at the site to between 115 000 and 120 000 tonne/year. In addition, the polyester fibres plant at Hartlepool acquired by Eastman from Lucky for conversion to PETg production is now producing standard PET polymer from lines with some 22 000 tonne/year capacity. PETg production from two lines currently being converted is expected to start in early and mid-1994, respectively.

Eastman looks south

The talk now is of a second worldscale European complex in southern Europe, based on Eastman's proprietary technology which allows construction of a 60 000 tonne/year unit with built-in potential for low-cost doubling of capacity. The choice of site has been narrowed down to one of two, ECN understands, and a final decision is expected in two or three months. Startup of the 100% Eastman plant is anticipated in late 1995/early 1996, depending on negotiations.

Eastman is also well underway with its joint venture 60 000 tonne/year plant in Mexico, which it is building with Mexican group Industrial Alfa. Ground breaking at the site will start in August, and the unit should be onstream in mid-1995. Product is intended to supply the local Mexican market, and potentially South America if anticipated demand materialises. Like the proposed south European complex, the Mexican unit will offer easy doubling of capacity.

Most dramatic of the expansions has been the meteoric rise of Shell, from no presence whatsoever to world number two almost overnight. Last July it started production at its UK solid stating subsidiary Crystal Polymers, in September the 60 000 tonne/year base polymer plant in southern Italy owned 85% by Shell Italia came onstream, and in December Shell's US subsidiary acquired the 240 000-250 000 tonne/year Goodyear PET business with a 75 000 tonne/year expansion due on in Q1 1994.

The Shell entry has been opportunity driven, PET manager Rob Crawshaw says. Its Italian partner Mossi & Ghisolfi, which owns the remaining 15% of plant operator Sipet, had been looking to tie up spare solid stating capacity as a long-term tolling contract drew to a close. The result was the joint venture Sipet 60 000 tonne/year base resin plant, of which Shell takes 51 000 tonne/year, that links into the existing solid stating capacity operated by M&G associate Cobarr.

In the UK, Shell was approached by Carters, then the UK's fourth largest soft drink producer, which wanted to back-integrate into polymer to secure supplies to its bottling plant. In the event, Shell took sole responsibility for the project and, now that Carters has been taken over by Swiss food and drink group Hero, retains no links with its erstwhile downstream partner. The 30 000 tonne/year UK operation is solid stating only, with base polymer currently sourced on aq medium-term contract from ICI.

Already Shell is considering what to do next. Options for expansion of the UK site to 60 000 tonne/year are now under study, while in Italy the focus is on just how high an output can be achieved with the existing plant. So far capacity is exceeding expectations, Crawshaw says, and Shell is gradually working it up month by month. In principle the UK plant will supply the UK domestic market and Ireland, while continental Europe will be supplied from the Italian unit.

The US operation comes under the auspices of Shell's US subsidiary Shell Oil, and as such is operated separately from Europe and the Far East. Already in European HQ, however, the potential of the Far East is being pondered, and longer-term global development may mean a closer pooling of strengths between the US and European organisations. Already, technical complementarity is being studied for synergies.

Looking ahead, feedstock remains a questionmark. During the 1980s pressure on PTA and MEG forced prices up to the extent that despite booming growth PET producers were unable to make the margins necessary to fund reinvestment in the sector. Now, ICI - integrated into PTA in Europe - is warning of rising PTA costs, even as large purchasers like Shell and Eastman see plentiful supplies in forthcoming years benefiting their buying position. Both major purchasers say they would find it hard to justify back investment into a feedstock position, even though Eastman is closely integrated in its US operations.

Interestingly, PTA is the only link missing at Shell for full integration back to oil, but clearly building the 350 000 tonne/year necessary for worldscale in PTA brings different factors to bear.

By: Mary Heathcote, Asian Chemical News
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