Commentary: US petrochemical producers face global crosswinds

The US petrochemical industry is facing a challenge in 2015 and beyond as it deals with the new reality of low oil prices, the strong US dollar and weaker growth in China.

The mood at the American Fuel & Petrochemical Manufacturers (AFPM) International Petrochemical Conference (IPC) in San Antonio, Texas, US was relatively optimistic but bullishness was contained as the impact from oil prices was the number one point of discussion.

However, the sector still retains a significant cost advantage from natural gas liquids (NGLs) – just not as spectacular as before. While petrochemical and polymers prices and margins have fallen with oil, NGLs are expected to remain abundant.

Al Greenwood Delegates network at the AFPM Welcome Reception

“NGLs in North America have been a game changer and we see significantly higher production growth rates,” said Matt Aguiar, senior vice president at ExxonMobil Chemical.

NOVA Chemicals is planning a 20-50% expansion of ethylene capacity from the current 1.85bn lb/year (839,000 tonnes/year) at its cracker in Corunna, Canada by around 2018, including a move to 100% ethane, said Naushad Jamani, senior vice president of olefins and feedstock.

“The expansion is strategically driven as we see incremental ethane coming into the market,” said Jamani. “If you want to be a competitive ethylene producer in North America, you have to go with 100% ethane.”

The crude oil decline has not had a major effect on the availability of NGLs, he said. “We haven’t seen a drop. Supplies are flowing through the pipelines as expected. The long-term fundamentals in North America look good for NGLs and petrochemicals,” said Jamani.

“We look at the supply curve worldwide for ethylene and PE [polyethylene], and North America [production based on ethane] is still significantly advantaged versus Europe naphtha,” said Neil Chapman, president of ExxonMobil Chemical. He spoke with ICIS at ExxonMobil’s new headquarters near Houston, Texas.

SUPPLY CHAIN THIN

Short term, the plunge in oil prices that gained momentum in October 2014 led to earlier inventory destocking than usual in Q4 2014, and stocks remain low across the supply chain as players fear another leg down in crude.

“Our sense globally is that the supply chain is very thin. Most of our customers are holding very little inventory. With Goldman Sachs predicting $20 oil, why build inventory now?” said Peter Huntsman, president of Huntsman Corp, at the company’s annual breakfast at the AFPM IPC.

Chemical companies temporarily benefiting from lower oil-based raw materials are facing customers clamouring for price drops of their own from suppliers. Yet it takes time for the impact to move down the chain, executives said.

“We should be understanding and also talking to our customers about deflation. This involves order delays [on the part of customers as they expect lower prices], inventory costs and pricing delays,” said Huntsman.

“By the time the benzene we buy moves down the chain to produce MDI [methyl di-p-phenylene isocyanate] and polyurethanes, and [old inventories are moved out], it’s a 70-day process at the fastest,” he added.

The most recent plunge in oil prices, unlike the collapse in 2008-2009, has been driven by supply rather lower demand.

The US shale gas and oil revolution is “industrial history being made” and will not stop despite lower oil prices, Huntsman said. “The media has been told that the oil drop will strangle frackers and then oil will shoot back up again. I simply don’t believe that,” he said.

US hydraulic fracturing technology is becoming “cheaper, cleaner and more productive”, said Huntsman. An example is so-called “walking wells”, which can drill, recover hydrocarbons, “walk” a few feet, and drill again, Huntsman said.

The US shale oil and gas assets are massive, and they can be tapped cheaply – some for $10m-12m, taking just 30 days, he added.

“The shale rock is there for the oil price to stay low for many, many years,” said former LyondellBasell CEO Jim Gallogly.

China – still a major concern because of a multi-year growth slowdown – is “not as bad as many people think”, noted Huntsman.

“We sell many products directly to China customers so we have fairly good vision there. While official GDP growth is 7%, it feels like a high 5-6% growth. For the size of the China economy now, that’s pretty good,” said Huntsman.

“I wouldn’t bet on a hard landing. The government equates domestic economic growth with social stability – that is top of mind for China’s leadership, to protect the party,” said Huntsman.