Hope on the horizon

19 February 2001 00:00  [Source: ACN]

This year could offer a better market environment for the aromatics industry than 2000. However, producers believe that they may have to wait until 2003-04 for the next boom in the aromatics cycle to materialise, reports Malini Hariharan

Asia's aromatics players have for the last five years been carrying a heavy burden of overcapacity. Profitability for some of the products has nearly disappeared. And the squeeze on margins has inevitably led to a reduction in production.

The trough in the aromatics cycle has been deep. But the industry's players have persevered. And driving them forward is the belief that strong growth in demand for major downstream products will eventually absorb the oversupply.

All eyes are on 2003-04, when the next boom in the aromatics cycle is expected to materialise.

Take the case of paraxylene (PX). The inability of polyester producers to absorb higher prices has not allowed the entire chain to make profits.

But the going has been especially tough for producers at the top of the chain, as they have been squeezed by high feedstock costs and the refusal by downstream players to absorb these increases. Through most of 2000, they fought a losing battle to implement price hikes which would at least cover a portion of the increase in feedstock costs.

'PX producers barely made money and most of them probably incurred some losses in 2000 as PX contract prices remained flat for most of the year,' says Bert de Guzman of DeWitt & Co.

Spot prices were even lower than contract prices for much of last year. The main reason for this was the weakness in purified terephthalic acid (PTA) prices. PX operating rates were slashed to 80-85% but prices were still weak at end-2000, he explains.

And if Q1 is any indication, then the fight in 2001 could be as intense as last year. A few producers have already succumbed to buyer pressure and agreed to a US$50/tonne drop in contract prices for January and February.

But a recovery in PTA demand has prompted them to ask for a US$30/tonne hike in March prices (ACN 12 Feb, p32).

DeWitt forecasts the Asian contract price to be US$485/tonne cfr Asia in Q2 and US$419/tonne cfr Asia in Q3. It is expected to rise to US$463/tonne cfr Asia in Q4.

So will 2001 be a profitable year?

A major producer is fairly confident that 2001 will offer a healthy market environment. PTA markets are expected to perform better and some of this would rub off on to the PX sector, he explains. An added advantage is that there are no substantial PX capacity additions this year.

The producer, however, rules out the possibility of raising operating rates and believes that they will have to be maintained at 80-85%. 'Hopefully, responsible players will control themselves and not raise production as every producer cannot run their plant at 100%,' he adds.

However, one industry observer who is not optimistic of the outlook for aromatics this year, says: 'Producers either lost money or, at best, broke even last year. We will probably see the same in 2001.'

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A hopeful Japanese producer forecasts a better year but says that an improved 2001 will depend on the recovery of PTA markets. 'We anticipate the PTA demand-and-supply balance will tighten this year. The balance in PX markets is unlikely to improve significantly but margins will show some recovery,' he says.

High energy prices exerted tremendous pressure on the industry in 2000. And behind all the forecasts of margin improvement in 2001 lies the assumption that crude-oil prices will be lower and more stable this year.

A Southeast Asian producer has estimated Dubai crude at an average US$20/bbl and average Mean of Platts Japan (MoPJ) naphtha price of US$210-220/tonne cfr Japan in 2001. This would require PX prices of at least US$410-420/tonne for producers to cover costs.

But for non-integrated producers, the cost of mixed xylenes is a cause for concern. Prices were extremely volatile last year and impacted both PX and orthoxylene (OX) players. OX producers were trapped between depressed phthalic anhydride (PA) markets and firm mixed xylenes prices. Weak PA demand saw PA producers across Asia reducing production, which in turn forced OX prices to drop to levels that could not justify production.

Mixed xylenes are expected to be expensive this year. A large Japanese trader forecasts that imports of mixed xylenes from the US will be costly. Kohap, Asia's largest importer, plans to increase its reliance on Asian supplies and has already started discussions with traders. But with Asian supply running short of demand, non-integrated producers may still have to bring in deep-sea cargoes if they are interested in running their plants at full capacity.

The key to the recovery in PX and PTA margins is polyester. Every industry player is bullish about this sector. Polyester demand registered strong growth in the last two years and it is widely anticipated that PTA supply will start running short of demand by 2002. And if this materialises, PX producers could well see a change in fortunes in 2003.

'PX demand is likely to grow by 6.1%/year, driven by strong polyester growth,' estimates Guzman.

Come 2003-04, the market scenario is brighter and operating rates should climb to more than 90%, says an optimistic producer.

However, in the short term PX margins are expected to languish. 'Global operating rates are expected to be at the mid-80% level over the next two years,' says Guzman.

Given this bleak scenario, it is perhaps not surprising that plans for new capacities are still on the backburner (see p20).

'Margins are insufficient to justify re-investment. They have to be at a level where we can present a case for a new plant to our board of directors,' stresses a harassed PX producer.

'If the PTA industry is concerned about feedstock falling short, then they should ensure that PX producers make sufficient money,' he argues. However, he says the problem is that no buyer is willing to pay an extra dollar for a secure future. Ultimately, buyers are willing to pay only what the market dictates.

The larger players may not have announced plans for new plants but they are certainly contemplating additional capacities. And after suffering for the last three years, the PX producer rules out the possibility of new entrants in this industry. 'It is now understood that PX is not a game for small players. It is for large integrated players as synergies are necessary,' he explains. Among the plants due for commissioning this year, Thai Paraxylene's much-delayed 300 000 tonne/year project could be finally completed by Q4 2001.

Last year, S-Oil added 100 000 tonne/year to its 600 000 tonne/year unit in Onsan, South Korea.

Formosa Chemicals and Fibres Corp (FCFC) started a second PX facility at Mailiao, Taiwan, the capacity of which is 450 000 tonne/year.

Aromatics Malaysia commenced production at its 420 000 tonne/year plant.

And in Iran, National Petrochemical Co commissioned a 180 000 tonne/year plant at Bandar Imam.

As most of these volumes came onstream in H2 2000, the full impact of the addition to capacity will be felt this year.

'PX will be in surplus for the early part of 2001, says Guzman, 'but supply could tighten by the end of the year.'

When supply will tighten would depend on when Fcfc completes work on doubling the capacity of its 450 000 tonne/year PTA plant at Ilan, Taiwan, and also on when its new 600 000 tonne/year PTA facility comes onstream. Both plants are scheduled for startup in Q4. China American Petrochemical Co is also scheduled to commission a 700 000 tonne/year plant in Taiwan in Q4.

There is talk that Singapore Aromatics Co (SAC) could restart PX production at its 350 000 tonne/year plant. The plant had been idle in December 1999 due to poor economics.

'It is only a matter of time before SAC restarts,' believes one industry source.

Meanwhile, China will continue to play a critical role in the Asian PX and PTA markets. Chinese PTA imports crossed 2m tonne last year. Polyester capacity is rapidly increasing in China and although the country intends to achieve self-sufficiency in PTA, imports are expected to continue in the short term. PTA imports in 2001 are expected to reach 2.5m tonne.

The market outlook for benzene is not very different from that of PX. Prices are expected to be lower this year than in 2000 and higher freight rates could result in lower netbacks. Asian prices will be closely tied to those in the US, where benzene availability is more than adequate.

Many of the contracts for 2001 have been settled slightly below last year's levels.

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The commissioning of Fcfc's second aromatics unit has placed Taiwanese buyers in a strong position. Fcfc was a large buyer through most of 2000 as its styrene and phenol plants started production ahead of its 470 000 tonne/year benzene plant. The company was covering its average monthly requirement of 35 000 tonne from the spot market.

Sabic has been another large buyer since H2 2000, sourcing 15-20 000 tonne/month from South Korea and Malaysia. The company will continue to meet its requirement for low nitrogen-content benzene through imports. Sabic is reported to have signed contracts with three Asian traders for sourcing 110-160 000 tonne this year. It will also procure 100 000 tonne from Petrochemical Commercial Co of Iran.

Moving to new capacities, LG Caltex Oil added 150 000 tonne/year of benzene in July 2000 and Aromatics Malaysia commissioned a 150 000 tonne/year plant in Q2.

This year, ExxonMobil is expected to restart the sulfalone unit of SAC in April to produce 90-100 000 tonne/year of benzene. Pyrolysis gasoline will be supplied to the unit from the new 800 000 tonne/year cracker, which is likely to be commissioned in Q1. Benzene will be supplied to neighbour Mitsui Phenol Singapore's new 200 000 tonne/year phenol plant once it starts operations in Q2. Mitsui will rely on other suppliers in Southeast Asia to cover the balance of its requirement.

Clean gasoline regulations in Canada, Western Europe and some countries in Asia are expected to add extra volumes in the marketplace, but not at overwhelming levels, says Guzman.

Asia had a benzene surplus of 322 000 tonne last year. The surplus is expected to rise to 566 000 tonne this year. But Asia faces a deficit of 110 000 tonne in 2003.

Exports to the US will continue to play a key role in keeping Asian benzene markets balanced. Last year, approximately 206 000 tonne was moved from South Korea, Japan and India to US markets. South Korean exports accounted for slightly over 70% of the total.

This year, most traders are expected to renew their contracts with South Korean producers for shipping material to the US Gulf. But a wide difference in price ideas has delayed the settlement of the contracts (see p32). These contracts total approximately 200 000 tonne.

Aromatics producers relying on pyrolysis gasoline as feedstock are expected to face problems in covering their requirements at the right price. Asian pyrolysis gasoline availability was tight last year and the situation is likely to continue into this year.

Availability will depend heavily on Asian naphtha cracker operating rates, points out a Japanese trader. The outlook for the olefins market is bleak as the new gas crackers in the Middle East will put pressure on the operating rates of Asian naphtha crackers, he adds.

'We saw this happen in Q4 when South Korean and Japanese naphtha crackers were forced to lower production as olefins and downstream product prices fell below acceptable levels,' he says. Even a 5-10% cut in cracker production would result in a reduction of 200-250 000 tonne in pyrolysis gasoline supply.

High freight costs could make it uneconomical to move US or European material to Asia.

Expensive pyrolysis gasoline would leave aromatics producers with no alternative but to lower production.

The market scenario for benzene derivatives is mixed. Guzman expects global styrene demand growth of more than 3.5%/year which would result in benzene demand rising by nearly 3%/year.

Asian styrene markets recorded a strong performance in H1 2000 but languished in Q4. If markets do not pick up this year, there is a possibility that benzene consumption will be affected.

Phenol markets face oversupply and producers are gearing up for production cuts (see p17).

In the long term, developments in technologies may to some extent ease the pressure of a margin squeeze when the industry is passing through the trough of the petrochemical cycle.

Enhancements in traditional processes have helped improve BTX processing economics, points out Mark Morgan of ChemSystems (IBM).

For the various stages in the BTX loop, there have also been a number of catalyst developments, says Morgan. Toluene disproportionation uses zeolites such as ZSM-5 by ExxonMobil. However, for transalkylation reactions where C9 and C10 molecules are also found, larger pore unidirectional zeolites such as mordenites have been developed. Mordenites are usually metal modified with platinum and hydrogen and must be used in the process to preserve catalyst life and lengthen the onstream time between regenerations, explains Morgan.

IFP's Oparis technology represents a more recent development. The technology is said to boost paraxylene recovery from mixed xylenes in a given process loop and improve catalyst onstream time and overall life.

But the Cyclar process from BP and UOP remains the most significant development in aromatics technology in the last few years, says Morgan. The technology produces aromatics from propane and butane.

Sabic's joint venture Ibn Rushd, which produces 375 000 tonne/year paraxylene and 350 000 tonne/year benzene, was the first to implement Cyclar. It started operations in Q4 1999. However, technical problems have prevented the plant from scaling up operations. The plant is due to undergo a two-month shutdown in Q2 to sort out the difficulties.

Other recent innovations in toluene conversion to xylenes include GT-TolAlk by GTC Technology Corp. In this technology methanol is reacted with toluene to manufacture xylenes.

The aromatics industry is keeping a close eye on the performance of Asian economies and the US economy in 2001. The pace of economic and corporate reform in Asia has been a cause for concern. It is still unclear whether recent political developments in Indonesia, Thailand and the Philippines will affect economic and therefore petrochemical demand growth.

Economic data from the US suggests that the country's economic slowdown is taking place faster than expected. The interest-rate cuts announced in January are expected to prop up GDP (gross domestic product) growth in Q1 and Q2. However, fears of a recession have not faded.

Given these economic uncertainties and overcapacity in the industry, the path to profitability is unlikely to be easy.

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