Overcapacity poses threat to plasticisers

25 October 1999 00:00  [Source: ICB]

Only five years ago there was a major shortage of plasticisers in Asia. Now overcapacity looms, particularly in the precursor 2-ethylhexanol, and little seems to be being done to address the problem, says Beryl Sharkey of Tecnon (UK)

In the mid-1990s, Asia, excluding Japan, was the fastest growing area in the world for flexible PVC, and hence plasticisers. Since the major shortage of late 1994/early 1995, when it was a significant net importer of phthalates, the main concern for the region has been its move towards self-sufficiency in the phthalates markets and the supply of both feedstock elements - phthalic anhydride and oxo alcohols - particularly 2-ethylhexanol.

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At the time, local production capacity for phthalates could be built up fairly steadily, but Asia still depended heavily on low priced imports of phthalic anhydride and supply contracts with western Europe and the US. To a lesser extent, the region also depended on Japanese 2-ethylhexanol producers.

When import prices peaked during the shortage, plans to build new phthalates capacity were scaled up and many dormant projects for local phthalic anhydride plants were reactivated. With western suppliers playing such a significant role, 'the quarterly import price, settled with the major DOP/phthalates producers in Taiwan, has become a benchmark for the industry - influencing not only contract and spot pricing for 2-ethylhexanol on a global basis, but also DOP and other commodity phthalates and their corresponding alcohols.

'Looking at the increases in capacity for the chemicals, both phthalic anhydride and phthalates follow similar patterns with more than two-thirds of the additions in east Asia and almost one-fifth in southeast Asia.

'In the case of 2-ethylhexanol, the spread throughout Asia is rather wider. With Petro Oxo Nusantara (PON) in Indonesia and Eastman Chemical in Singapore, to be joined by BASF in Malaysia, southeast Asia constitutes a little over a third of total global additions of almost 800 000 tonne/year. East Asia, incorporating Korea, Taiwan (Nan Ya) and mainland China, accounts for just below one half.'

In terms of supply and demand, Sharkey reports particularly dramatic changes in 2-ethylhexanol. 'While Asia imported around 350 000 tonne in 1997, with much of this volume coming from world-scale plants in Europe - built specifically for the purpose of supplying Asian DOP production - the region could start moving into a position of net export by 2000.

'Even applying an 85% utilisation rate, considered to be the commercially acceptable minimum when an oxo alcohols plant is fully operational, exports could be at 50 000 tonne by 2001.

'However, while Asia will doubtless be happy to reach self-sufficiency, this does not alleviate the problem of finding a home for the several hundred thousand tonne of product formerly imported into the region.

2-Ethylhexanol will be backed into western Europe, the US and, to a lesser extent, Japan, while other supply sources such as Saudi Arabia may need to find new outlets.'

Taking a global view of 2-ethylhexanol, even by 2001 and 2002, operation of worldwide capacity at an average 85% utilisation rate will cause a surplus of over 550 000 tonne/year, warns Sharkey. 'This illustrates very clearly the point that all plants cannot remain in operation. In fact, continued utilisation of existing and "unstoppable" 2-ethylhexanol capacity at 85% will lead to production remaining in excess of global requirements beyond 2007.'

In Asia, if 2-ethylhexanol capacity can build up to a realistic 90% utilisation rate, the region could reach supply/demand balance in four to five years' time. So the question remains as to how to deal with the excess volumes of 2-ethylhexanol (and phthalic anhydride and phthalates).

Established suppliers showed reluctance to withdraw from the market as Asian plans began to take shape and many alcohols producers saw the way forward to investment in Asia themselves. Only two, however, have done so - Eastman in Singapore and BASF in Malaysia. Also, with recovery in Asia not predicted to reach pre-1997 levels until 2002-03, it was thought that some Asian producers may not be able to survive. It seems clear, though, that in the long run, economies of scale and captive, local feedstock supply will lead to the most efficient operations.

Furthermore, according to Sharkey, 'there is the serious possibility that a new world-scale 2-ethylhexanol (and phthalic anhydride) entrant may cause some disruption to the existing market order'.

There has been much discussion of suppliers disposing of their assets. For instance, Korean alcohols producer Hanwha, which started its 100 000 tonne/year plant in late 1997, approached a number of market players in late 1998/early 1999 with the view to a possible sale. But by the middle of this year, the company began to take the view that margins were beginning to improve and that it may no longer be necessary to sell the business.

There has also been mention of companies sharing business interests to gain through cooperation. Some moves in this respect have already started taking place in Japan - both Mitsubishi Chemical and Kyowa Hakko have been suffering serious losses in the plasticisers business for a number of years. Consequently, the companies will form a joint venture from January 2000 and integrate their manufacturing and plasticiser interests.

According to Sharkey, potential mergers and acquisitions such as TotalFina and Elf (and those already in place such as BP Amoco and Exxon Mobil) 'would appear to have little impact on the oxo business apart from very marginally as regards orthoxylene feedstock and then with very little influence on supply structures'.

Sharkey concludes that little has been done to all to alleviate overcapacity; indeed additional large-scale 2-ethylhexanol capacity will come on line in Asia in the near future and significant oversupply is forecast to continue for some time.

For any return to profitability in the oxo business some solution must be found, if not necessarily the advocated capacity rationalisation, but the survivors will almost certainly be the new world-scale producers with captive feedstock and efficient operations.

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