By John Richardson
AS the US contemplates raising its ethylene capacity by up to 29 percent by 2017, we would be fascinated to know whether the companies involved in these proposed expansions, and the “cheer leader” chemical industry observers spurring them on, have ever considered a chart such as the one below:
First used in workshops during our New Normal seminars last year, the slide illustrates the point that petrochemical projects outside the West are not always only about economics. They are also about the Michael Porter concept of ‘Shared Value’, which we discuss in our e-book, involving delivering wider benefits to society.
The Japanese built petrochemical plants in the 1960s onwards to achieve security of supply of raw materials for auto and other downstream industries. Building these plants was not always, therefore, only about the economic efficiency of the plants themselves.
Then came the South Koreans who followed the same model, and to some extent Thailand through its petrochemical master plans in the 1980s and 1990s.
Now we have a new wave of projects, which are also at least partially “social and political” - i.e. they have a wider agenda beyond just making money.
China has aggressively expanded its petrochemical industry, again for security of supply reasons. Sinopec has a poor rate of investment return from it petrochemicals business, as making money is not its main objective. Instead, it has been tasked by the government with once again guaranteeing supply of plastics etc to the country’s vast manufacturing industry. This is why, even when market conditions are bad, Sinopec still tends to run its plants flat out.
The Middle East petrochemicals industry has, up until now, been a license to print money, thanks to feedstock-cost advantages. But its new agenda is also social and political through cracking heavier feeds, including naphtha, enabling downstream diversification, as the region seeks to create jobs to deal with the challenge of youthful populations.
And finally, there is Petronas and its $20bn Refinery and Petrochemical Integrated Development (RAPID) project, which is set to include a 300,000 barrel a day refinery, a worldscale cracker and a wide range of derivatives, including speciality chemicals. We are not saying that the project, due on-stream at end-2016, will not make money. But is the objective entirely about profitability, or is this again partly to do with nation building? Strong government support might be one reason why foreign investors are reportedly queuing up to invest in RAPID.
If you are sitting in Houston, contemplating an expansion based on low-cost shale gas-based ethane, you need to think about how many of these social, or semi-social, projects will be built over the next decade. The assumption that you will always be able to export your surpluses to an ever-hungry booming Asia - and to Latin America where “nation building” is also on the agenda - has to be questioned.
Your assessments of whether or not a rival project is going to be built cannot just take into account supply and demand analysis.
Evaluations will have to be also based on your relationships with senior government officials, and other policy and agenda setters, and your understanding of what is driving their decision-making. If you don’t develop this type of market intelligence, you are in for some nasty surprises when uneconomic projects go ahead. These are global markets, of course, and so what happens in Guangdong can matter as much, or even more, than what happens in Louisiana.
Further, when your new plant is up and running there will obviously be periods when markets are bad, leading to pressure for operating rate cuts.
How do you respond when your competitors in Asia, and in Latin America, are still running at 100 percent?
And in a broader sense, what does it mean to be confronting competitors who don’t care about losing money?
Perhaps everyone in Houston has thought this through, but none of our discussions, and nothing that we have read, points this way. Apologies if we have missed something.