INSIGHT: Preparing business models for a smaller world

15 October 2013 17:22 Source:ICIS News

By Nigel Davis

LONDON (ICIS)--New business models are needed as the supply of ethylene derivatives shifts and the world becomes, in chemicals terms at least, a much smaller place.

New cracking and ethylene derivatives capacity is driving change in the North American chemical industry. Crackers planned in the US are likely to prompt market share battles downstream based on derivatives’ properties and price. China’s push to produce more olefins from coal creates concern among derivatives suppliers worldwide.

But even these potentially large slugs of capacity might not necessarily represent anything more than a blip on the olefins landscape – a downward push to the petrochemicals cycle.

As the new capacities come on-stream, new supply routes and sales and marketing channels will have been developed, altering the petrochemicals landscape.

“As world-scale capacity comes online, exporting producers will need to develop business models that assume a smaller world,” says Accenture’s Paul Bjacek in a chemicals sector study released earlier this month.

The study presents a number of scenarios for olefins and aromatics supply and demand over the next decade and describes some of the uncertainties that could significantly alter outcomes.

Tomorrow’s world will be one in which Asian markets, which are currently linked to supply lines with the Middle East, become more connected to North America.

Bjacek suggests that the lifetime of China’s many (planned and executed) coal, and methanol, to olefins (MTO and CTO) plants could be relatively short given that China’s extensive coal reserves are being depleted so rapidly.

Demand for the products finally made from ethylene is expected to grow at only about 2% in North America, Accenture says, maybe more if North America’s re-industrialisation continues, and way below the 64% increase in ethylene capacity (an additional 11m tonnes/year of ethylene) there might be if all announced capacity additions come on-stream.

Net derivative ethylene-equivalent exports from North America could be around 8m tonnes by 2023, it adds. Much of that supply could be targeted at Asia.

At the same time China could add 3m tonnes of olefins capacity from MTO and CTO plants. But Accenture estimates that only a few of the between 60 and 100 plants of this type announced for inland regions in China will come on-stream. And the development of CTO/MTO in China may not continue past the next decade given that China’s coal reserves are estimated at only 33 years because of its rate of consumption.

“If all the likely ethylene expansions around the world come to fruition by 2023, the global supply will still be short by about 32m tonnes, based on expected global derivative demand,” Bjacek says.

“Altogether then, it seems that today’s concern about oversupply in the next decade may well be unfounded. And it appears that incremental supply to meet Asia’s growing needs will continue to come from the Middle East and increasingly North America.”

Couple what is happening in North America with the shift towards liquids cracking and the development of a broader product slate in the Middle East, and it is clear that logistics, sales and marketing channels have to change.

Dow described last week, for instance, how it is developing supply chain logistics for the products from the giant Sadara joint venture project in Saudi Arabia. The supply chain for the new shale-based cracker the company is planning to build on the US Gulf Coast is being developed also.

Accenture believes that operators in North America will need to develop efficient, optimised US Gulf coast to Asia supply chains. (Gulf coast to Asia freight rates to Asia may fall when the widening of the Panama Canal is completed in 2015.)

At the same time the sales and marketing effort will need to be supported by effective customer relationship management (CRM) systems. Producers will need to connect to the market at the global level.

“As China increases its presence in value-added durable goods manufacturing, there will be strong links to global chemical customers (ie finished goods manufacturers) in this market. Therefore, consistent policies, levels of service, and products will be needed as are present in North America, Europe and Japan,” Accenture says.

Global ethylene balance 2023

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By Nigel Davis