OUTLOOK '10: US olefins industry headed for transition in 2010

28 December 2009 16:38  [Source: ICIS news]

Chocolate BayouHOUSTON (ICIS news)--The US olefins industry had a rough ride in 2009 and there is more to come in 2010, as market participants expect the sector to go through a year of transition due to incoming capacity in Asia and the Middle East.

The US will have to adjust to competition from other regions, and those with greater exposure to the export market will feel the biggest impact, a market participant said during an industry event in December.

The US relied heavily on exports in 2009 to offset weakness in the domestic market, particularly in ethylene and polyethylene (PE), and that allowed the industry to absorb part of the impact from the latest financial crisis.

The US dependence on foreign markets comes to light as industry statistics show a record outflow of US products, such as resin, to countries in Asia and Latin America.

Helped by a weak US dollar and competitive feedstock costs, US PE producers were exporting nearly 30% of their total sales late in 2009, a market participant said, quoting data from the American Chemistry Council (ACC).

The pressing question for the industry as the New Year begins is how the US will cope with extra capacity once it begins to lose market share in regions it relied on for its exports for most of 2009.

The outlook offered by some in the industry is simple.

“There will be more [cracker] shutdowns next year,” an olefins producer said, pointing to a continuation of a downsizing process that began in late 2008.

That view is in line with line with a projection by an industry consultant, who sees the US dealing with oversupply issues next year.

The US will have to cut ethylene capacity by as much as 10% “and that will have to happen in 2010”, the source said.

The cut in production will come on the back of reductions that were already implemented in the last 14 months, when four US crackers were decommissioned and two others taken off line indefinitely.

Among the shutdowns were LyondellBasell’s 544,000 tonne/year unit in Chocolate Bayou and Flint Hills Resources’ (FHR) 348,000 tonne/year plant in Odessa, both in Texas. Other's include Sunoco’s 113,000 tonne/year cracker in Claymont, Delaware, and Dow Chemical’s 390,000 tonne/year plant in St Charles, Louisiana.

Those units accounted for around 5% of some 28.6m tonnes/year of US ethylene capacity at the start of the 2009.

Including Chevron Phillips Chemicals’ 295,000 tonne/year Sweeny 22 cracker and Eastman’s Longview 141,000 tonne/year plant - two other units in Texas that were idled indefinitely - the amount of capacity that went offline since late 2008 increases to 6.4%.

Chevron Phillips has not disclosed whether it plans to restart Sweeny 22. Eastman plans to keep its small cracker off line.

But not all is gloom and doom for the US industry.

While expansions in other regions will impact the market, the cost advantage of natural gas liquids (NGLs) over naphtha puts the US in a much more comfortable position than high-cost producers in Europe and parts of Asia.

The US olefins industry now relies on NGLs for around 75% of its feeds and that number is unlikely to slip as US natural gas supply is expected to remain ample and more affordable than crude oil in the years to come.

Also, the degree of how bumpy a ride the industry will have in 2010 will depend on how well the US economy performs next year.

Should the economy get back on its feet, the US may end 2010 with a leaner olefins industry, better suited to meet its own demand and perhaps still capable to effectively compete abroad.

For more on ethylene and PE visit ICIS chemical intelligence
ICIS has launched weekly pricing reports in Africa for polyethylene and polypropylene. For more information contact Nadine Spoeri
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