Ten Reasons Why US Petrochemicals Should Think Again

Business, China, Company Strategy, Economics, Europe, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US

CrackersUS3Nov2014

By John Richardson

IT is incredibly hard to “stare a gift horse in the mouth” when your share options have soared in value and you annual bonuses, based on your company’s record-breaking profitability, have been nothing short of fantastic for the last few years. Why on earth, also, even bother to rock the boat when everyone from your CEO downwards is talking the same language?

But there are some very good reasons to doubt the wisdom of capacity expansions if you work for a US petrochemicals company and plan to still be in work in five years’ time.

I have often heard it argued that whilst the US might end up adding as much as 60% to its ethylene capacity (see the above table of all the new planned crackers) this would not a big deal in the context of global supply additions. And, anyway, only 36% of brown and greenfield capacity additions seem to be definitely happening, which would be a relatively small 9.92m tonnes/year of new capacity.

But this assumes we are still in a supply-driven market, where all you have to do is build new supply and demand will inevitably catch up. This isn’t the case the case today. We are in world where the demand drivers are very different from those we have become familiar with over the  last 20 years.

I have already given you 30 reasons why there will no ethylene up-cycle from now until 2019.

Now please see ten reasons below – some of which are, of course, connected with my earlier 30 reasons – of why I think it is essential to also look beyond 2019 and ask this question: Is the US industry at risk of making a very, very big mistake?

This is only the negative side of the story. Tomorrow, as I have already done with Europe, I will discuss what can be done to guarantee the long term prosperity of the US industry. The opportunities are nothing short of fantastic.

But, first of all, here are my ten reasons why the industry should think again about its approach, compiled with the help of people who work for US petrochemicals companies:

  1. We are entering a sustained period of global deflation, driven primarily by China as it seeks to export its huge manufacturing surpluses as compensation for weaker growth at home. Japan’s decision to hugely expand its programme of quantitative easing will only add to these global deflationary pressures.
  2. For the key ethylene derivative, polyethylene (PE), China’s policy of supporting growth through exports will create a “Catch 22” situation for the US. The more that they export to China in the way of resin, the more that this resin is likely to be returned to the States in the form of finished plastic products. This will, obviously, hurt converters in the US and thus domestic resin sales.
  3. One source went as far as to suggest that global PE pricing might eventually be driven by gas rather than oil, as so much gas-based capacity is being added over the next ten years in the US and the Middle East, in the context of an entirely different global economy. Then, of course, you would have a “race to the bottom” on pricing.
  4. Possibly, yes. But I think it is more likely that energy costs as a whole will decline (the falling cost of energy, led by oil, is another driver of global deflation). This will have the effect of making petrochemicals in general, both gas and oil based, a lot cheaper.
  5. Cheaper oil will provide a lot of support for naphtha cracking, as will surplus feedstocks from refineries.
  6. European governments, in this deflationary environment of constantly weaker demand, will face a stark choice over the next decade: Let our refineries close down or provide incentives for these refineries to stay open in order take advantage of these surplus feedstocks. I believe that most European governments will choose the latter option. This could  become a model for other regions.
  7. Petrochemicals companies will also take the lead here. They will make greater efforts to persuade legislators of the value that petrochemicals contribute to wider economies. New win/win partnerships between governments and companies will be forged in Europe and in Asia.
  8. Naphtha cracker operator  everywhere will also continue to push the envelope out on cost savings. Pressure within global companies is being exerted to transfer the greater expertise learnt in Europe since 2008, on managing inventories and controlling costs in general, to Asian operations.
  9. And the more that governments work with companies, and the more that the cost envelope of naphtha cracker operators is extended, the greater the risk that producers elsewhere will cry foul. The rise of trade protectionism seems almost inevitable in a deflationary work. You should also look at this another way: Trade protectionism will be viewed as another means of adding to competitive advantage.
  10. In this deflationary environment, can we guarantee that higher value cracker derivatives will remain higher value? There are no guarantees, of course. This would erode the advantage of US producers in derivatives such as metallocene grade linear low-density PE.
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