28 April 2009 00:00 [Source: ICB]
Idling or mothballing plants can be an effective device for producers fighting the economic downturn
ALTHOUGH THE boom times of the past decade have encouraged unprecedented investment, big money mergers and acquisitions, coupled with expansion throughout the globe, the current downturn is causing much deliberation among the chemical sector.
Dismal demand has been culpable for the succession of production cutbacks announced over the past few months. Operating rates have been slashed and numerous plants closed to stem expenditure. Faced with burgeoning costs and faltering consumption levels, producers are increasingly choosing to idle and mothball their plants.
"In the last two recessions, there was an awful lot of pain before anyone closed anything," says Mike Clements, director at international consultancy PricewaterhouseCoopers (PwC). "It was a year or two into the trough before you saw anything, but this time, there have been a lot of very early announcements almost as soon as we've gone into the downturn. Quarter four 2008 was certainly very bad; the speed and depth of the drop has been worse than before.
"If you look at some of the bulk chemicals businesses, particularly those supplying into construction and automotive, volumes are well down. There's definitely a recession effect," says Clements.
"Some plants are also 30-40 years old and were going to close anyhow. If supply and demand were different, there might be the case to reinvest, bring them up to spec and keep them running, but as they're not the latest technology or the right scale, they were always going to drop off," he says.
Paul Hodges, chairman of UK consultancy International eChem, agrees, but says the current downturn merely compounded the situation and forced people to consider their options.
"Even if we were still in a global boom, we would still need capacity to shut down," he says. "We've clearly got far too much capacity and there's a lot of new capacity still to come. In most building block products we've got 20% or more overcapacity."
Nevertheless, it can prove incredibly expensive to shut down a plant, he says, and although there are some standalone plants that can be shut without impact, most are integrated into a refinery, so it is not feasible.
US major Dow Chemical and Germany's BASF have decided to idle hundreds of plants between them in the past few months. As part of sweeping plans to restructure, Dow CEO Andrew Liveris revealed last December that 20 plants were to close, while another 180 facilities would temporarily shut. The idled plants represent about 30% of the company's units globally and are split relatively evenly between North America and Europe, he said.
BASF, the world's largest chemical producer, has reduced its worldwide capacities by more than 25%. Last November, it announced plans to shut down 80 plants - 50 in Europe, 20 in Asia and 10 in North America - due to a slump in consumption. It also cut output at around 100 more facilities.
In March, it said weak demand was behind plans to idle the smaller of its steam crackers in Ludwigshafen, Germany. The No. 1 cracker - with an ethylene capacity of some 220,000 tonnes/year - will be offline for at least three months.
According to the company, five production lines have been idled at the site, with another 60 lines at reduced operating rates. The financial crisis has severely affected several of its key end-use markets, primarily the automotive, construction and textile sectors.
Faltering demand contributed toward the decision by German firm Bayer MaterialScience (BMS) to halt production at its methylene di-p-phenylene isocyanate (MDI) unit, in Brunsbuttel, Germany, from April 1. The plant, which can produce 160,000 tonnes/year of MDI, will resume operations according to market demand, says chief operating officer Tony van Osselaer.
"We're taking a close look at our supply/demand situation globally; if less demand is there, we of course also take a look at the supply side because the last thing you want to do is build up inventory and bury your cash into working capital," he says.
"We are looking at this globally, then taking a look at the regions. Then inside each region, we would idle the capacities with the highest variable cost," van Osselaer adds.
Elsewhere, the company announced in March that it had decided to idle one of its toluene di-isocyanate (TDI) facilities in Baytown, Texas, US, taking out 100,000 tonnes/year.
BMS has also temporarily closed six polycarbonate (PC) lines globally with a combined capacity of 300,000 tonnes/year.
In February, titanium dioxide (TiO2)producer Cristal Global said it would have to indefinitely idle a plant near its headquarters in Maryland and another in Grimsby, UK. It intends to restart both facilities in the future.
Netherlands-based LyondellBasell Industries, meanwhile, hit the headlines in March, when it announced the permanent closure of its Chocolate Bayou olefins complex in Texas. The company, which filed for bankruptcy protection in January, blamed ailing demand projections for US olefins and limited feedstock flexibility at the site.
The plant had been out of service since mid-December because of weak market conditions and is scheduled to be decommissioned by August 4.
There are also reports that US-based producer INVISTA plans to permanently close its Millhaven polyethylene terephthalate (PET) plant in Ontario, Canada.
INVISTA idled its 195,000 tonne/year facility in November 2008, because of the worsening economic outlook and weak demand for PET bottle resin. It said that it had hoped to restart when conditions improved.
BENEFITS OF IDLING
Temporarily closing plants offers producers some respite from the barrage of costs they face, particularly amid falling consumption and oversupply. However, although the process is technically relatively straightforward, from a business standpoint there are many factors to be considered.
What will happen to your customers when the site closes? How will it benefit your competitors? Will there be any legal difficulties with consumers or suppliers? And what about other facilities downstream that rely on that plant's output?
"When temporarily idling a plant, the consequences within the BASF 'Verbund' and the duration of the shutdown have to be considered," says Gerald Molz, BASF's head of maintenance consulting & turnaround management. "The shutdown of a plant may have effects on the existing value chains and the whole infrastructure [such as] utilities, logistic processes and personnel," he says.
Depending on the length of the closure, additional technical measures also have to be considered - for example, evacuation and flushing of systems, conservation or winterization measures - to ensure a smooth start-up of the plant.
"The preparation for a shutdown of a plant depends on the dimensions, complexity and nature of the production process," says Molz. "In some cases, special technical equipment - cranes, hydroblast equipment - is necessary. The preparation for the shutdown of a steam cracker, for example, can last weeks [or] for a small plant only a few days."
According to PwC, the cost of idling a unit is about 5-10% of its annual running costs. Idling for a matter of months allows producers to react quickly to any pickup in demand. As soon as the economic outlook improves, output can be ramped up quickly and cheaply. Personnel typically remain on site, with the unit "kept warm" until required.
"It's important not only to talk about the assets but also the people," notes van Osselaer. "For a short crisis, you don't want to lose your people. You've invested a lot in their training and education, so our focus is always to keep them on board. Using the time for an accelerated turnaround or a training program makes good use of their free time."
BENEFITS OF MOTHBALLING
The mothballing option is a longer-term strategy that sees petroleum products removed from a plant, the tanks purged with nitrogen, and pumps and compressors kept lubricated and turning slowly to prevent damage. Teams may be disbanded and systems shut down, perhaps with equipment being transferred to other sites. In theory, systems can be restarted if needed, although in practice, many mothballed plants remain shut, says Johan Van Den Arend Schmidt, a partner at PwC (see box below).
"It does cost a lot to mothball a plant and start it up again, but let's not forget that the alternative is closing it down permanently and then, in many jurisdictions, you are immediately charged with clean-up costs. You're left with a brownfield site, and if you have to dig out all the soil and clean it, it's very expensive," he says. "In this economic climate, many of the parent companies may actually prefer to mothball the plant and then do the cleanup five to 10 years later."
Clements points out that aside from not incurring all the remediation costs, it can also provide some market leverage. Any problem buying raw materials from other suppliers at a sensible price, and the threat of restarting that asset and adding more volume into the market provides a decent bargaining tool, he says.
Clearly, these are troubled times. Established firms are failing, debts are mounting and ambitious growth plans are being reined in. Temporarily closing assets remains a powerful tool for producers. The challenge is being in a position to restart them again when things pick up.
"We have a severe crisis on our hands and therefore I'm not surprised that we've seen a lot of idling of capacity," says van Osselaer. "Right now, nobody has a crystal ball. It's all very difficult to predict what is going to happen and if you asked 100 experts, you'd get 200 different opinions. I've been working 29 years in the industry - this is my fourth crisis, but the present crisis is always the worst."
Mothballed plants rarely come back online, largely because of cost and technical difficulty.
An exception to the rule was seen in October 2007, when Romanian oil refiner Rompetrol restarted its high density polyethylene (HDPE) line in Navodari, after more than a decade.
The procedure started towards the end of the previous year, and systems were overhauled and modified. The refurbishment project cost Rompetrol $14.5m (€11.2m).
Cosmin Cocean, vice-president of refining, said that the 60,000 tonne/year plant made the company a significant player in Central and Eastern Europe.
The original HDPE unit was forced to shut due to a lack of ethylene feedstock. It was mothballed in 1996.
This is the temporary closure of a plant, perhaps lasting only a few months during a period of poor demand. Systems at the site are kept running and personnel remain on site, ready to start up the facility quickly when needed.
The long-term closure of a plant, often for an undefined period. Systems are shut down and put in a state of hibernation. Petroleum products are removed, tanks are purged with nitrogen, and pumps and compressors lubricated to prevent damage. With equipment inactive, maintenance minimal, or teams perhaps disbanded, restarting the plant can be problematic.
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