Taken as a whole, 1995 could serve as a case study in the cyclicality of the U.S. petrochemical industry. Borrowing from the momentum of late 1994, producers started the year in a state of euphoria. Despite running their plants full throttle, producers struggled to make petrochemicals fast enough to satisfy the market's voracious appetite.
But by midyear, producers were surprised to find that the market had reached the peak of the cycle. Consumption levels dropped, yet plants were still running flat out, throwing the supply-and-demand balance off kilter. Inventories snowballed as consumers of basic feedstocks stopped buying, turning instead to the products they hoarded in late 1994 and early 1995 when prices were rising rapidly. As a result, prices for basic petrochemicals such as ethylene, propylene, styrene, and benzene began a late spring slide that lasted until the end of the year.
However, unlike during many past downturns, market conditions never really reached disastrous levels. Apparently, each independent producer has been more prudent in setting operating rates, planning capacity additions, and managing prices, which seems to have helped the markets land softly rather than crash.
Commodity markets "hit the trough in January and now we are just starting to rebound," observes Paul F. Reilley, worldwide marketing manager for olefins and derivatives at Chevron Chemical. Moreover, producers expect the industry to rebalance itself and prices to slowly regain momentum throughout the year.
"Our profits in 1996 probably won't be as strong as in 1995," notes Ronald J. Schuh, senior vice president for petrochemicals at Occidental Chemical, "but I think that by the time we get to November or December, it will have turned out to be a pretty decent year."
"An upswing toward the end of 1996 would also be broadly in line with the longer term projection that we have been using for our base-case scenario in recent years," notes Walter Sedriks, technical director at SRI Consulting. However, he disagrees with others who believe the 1995 upswing was part of the basic petrochemical cycle pattern. According to SRI's analysis, it was a supply-driven "blip" in prices caused by a series of unexpected plant outages.
Another plus is that 1996 is an election year, "and history tells us that election years tend to be reasonably good years for economies," Schuh adds. However, "we expected a higher and earlier uptick in demand for petrochemical products than we have experienced," he says. "So it remains to be seen what the election impact will ultimately be on business."
The market for ethylene seems to be showing some promise. After sliding precipitously since last April, pricing seemed to have found its floor in January. It appears that ethylene prices remained flat in February and will rise 1 cent per lb in March.
The time for a price increase may be right, now that inventories are finally receding, demand has held steady, and supply interruptions continue to be inevitable. And in the face of rising feedstock costs, ethylene producers tell C&EN they need a price increase to preserve their profitability. Cold weather has tightened supplies of natural gas liquids (NGLs), which are used as heating fuels as well as feedstocks, pushing up prices of propane in particular.
But some buyers say they are willing to accept the price increase announcements only as a signal that ethylene prices need to plateau. "[Buyers] have no intention of paying any increase," according to a recent monomers report issued by Houston-based consultants Phillip Townsend Associates. Townsend reports, too, that other ethylene producers have said "they will not push for a price increase, because they feel it is not supportable with the industry running at 90% of capacity or less."
Indeed, late in 1995, at least some olefin producers cut production at their crackers. Rising feedstock costs have made ethylene production a losing proposition for many producers. And with ethylene and propylene inventories having risen to record levels, producers may have begun to ask: "Why push our equipment just to break even or even lose money?" As a result, some producers apparently decided to change the severity of cracking, throttling back to 80 or 90% operating rates, Schuh says.
At least partially because of these moves, ethylene production dropped from 11.9 billion lb in the second quarter to 11.4 billion lb in the fourth quarter of 1995, according to the National Petroleum Refiners Association (NPRA).
Reduced production during the second half of 1995 seems to have paid off. Ethylene inventories - a good indicator of supply-and-demand balance - have finally begun to come down. According to NPRA's latest figures, ethylene inventories in the fourth quarter dropped - for the first time in 1995 - 8% compared with the third quarter. Still, fourth-quarter inventories of 1.96 billion lb were a whopping 75% above those of fourth-quarter 1994, when they had been drawn down to precarious levels.
Due partly to future supply constrictions, ethylene producers believe inventories will continue to drop over the next few quarters. This year, there will probably be more planned and unplanned outages than last year. Producers who postponed maintenance shutdowns during late 1994 and early 1995, when ethylene supplies were severely short, find themselves unable to wait any longer.
In addition to the work it completed on its Chocolate Bayou, Texas, plant in September and October, OxyChem has scheduled a "big, 35-day maintenance turnaround" for its Corpus Christi, Texas, plant to begin in March. And Schuh says the company is considering taking down its Lake Charles, La., cracker in the fall for maintenance. Meanwhile, Lyondell has a turnaround scheduled for one cracker at its Channelview, Texas, site before midyear, after completing maintenance on the other one there in November.
And olefin producers are not slated to add excessive capacity this year. No grassroots ethylene crackers are set to start up in 1996. Instead, capacity increases will be brought on by way of incremental expansions. A number of companies - including Shell Chemical, Phillips Chemical, Quantum Chemical, and Lyondell - have committed to incremental expansions to go onstream sometime this year. These expansions, should they all come to fruition in 1996, will add roughly 1.75 billion lb, according to company reports, but they won't overburden the market.
For every 1% increase in gross domestic product growth rate, producers expect to see a 1.3 to 1.5% increase in ethylene demand on a base of about 50 billion lb. With an economy growing at 2.5%, the U.S. market should need a total of between 1.6 billion and 1.9 billion lb of ethylene just to keep pace with demand this year, according to Vincent F. Villani, Union Carbide's vice president and general manager for hydrocarbons.
Indeed, demand for ethylene held up last year even when pricing didn't. During the latter half of 1995, "volume didn't fall all that much - just enough to provide more than adequate supply leading to weaker pricing," says Jack Doerr, a senior consultant at Pace Consultants in Houston.
Although pricing and margins are not as attractive as they were just a year ago, says Donald J. Stanutz, vice president for olefins and performance chemicals at Huntsman Corp., "demand for product isn't that different than it was a year ago."
And some producers expect demand to hold up at least for the next few months. Derivative producers are finally stepping up their ethylene purchases after relying heavily on the derivative stocks they hoarded to stay ahead of the run-up in ethylene prices in late 1994 and early 1995, notes Doerr.
Demand for polyethylene has regained some momentum after a dismal November and December, observes J. G. (Jim) Johnson, Chevron Chemical's business manager for olefins.
And demand for key derivatives ethylene oxide and ethylene glycol will be particularly strong in 1996 and 1997. Interestingly, supplies of ethylene oxide and ethylene glycol tightened last year even while supplies of almost all other products along the petrochemical chain loosened, Schuh points out. The reason: Very little capacity has been added around the world although demand for fibers and polyethylene terephthalate resins - two big ethylene glycol end uses - has been strong. Further bolstering ethylene consumption is strong demand for polyvinyl chloride and vinyl chloride as producers of these derivatives gear up for the home building season.
Likewise, buyers of propylene are starting to buy again after several months of "living off old inventory," says Chevron's Johnson. They obviously sense that propylene prices are destined to drop no further. Spot prices have already risen from 11 cents per lb to 17 cents between January and early March, Johnson notes. Not surprisingly, propylene contract prices are likely to roll over for the month of February and then move up slightly in March or April "to reflect what was truly happening in supply and demand in the marketplace aside from the [drawing down of derivative inventory] that was going on," says one source.
At the same time, propylene inventories have stopped rising and begun to drop slightly. As with ethylene, the fourth-quarter NPRA data show that propylene inventories dropped for the first time in at least a year. Totaling 1.53 billion lb, last quarter's inventories represented a 5 to 6% decline from the third quarter, but remained more than double what they were a year earlier.
But producers seem confident that propylene supply and demand "will come into balance as it always does," says Huntsman's Stanutz. On the supply side, production of propylene has dropped from a 1995 high of 6.63 billion lb during the second quarter to 6.00 billion lb during the fourth quarter, according to NPRA. OxyChem's Schuh says, "If ethylene performs well, then often propylene will perform better."
In contrast with the ethylene business, which is demand-driven, the propylene business is supply-driven. "In the ethylene business, you make ethylene on purpose to satisfy demand, you manage your inventories, and you achieve pricing and margins based on that fragile balance between the demand for the derivatives and the inventory of the product," explains Stanutz. "However, propylene is not generally made on purpose; it is produced primarily as a coproduct of ethylene or recovered from refinery streams.
"So as that supply of ethylene continues to go up and down, it has a very strong influence on the propylene market," Stanutz continues. "And now that ethylene supply is becoming a bit tighter, propylene supply is growing snug and we are beginning to see an inevitable improvement in pricing of propylene."
And recent olefin plant expansions will add less propylene than ethylene. Many have been at the industry's light, NGL-reliant crackers, which maximize ethylene production at the expense of propylene production.
At the same time, fluidized catalytic crackers are now being shut down for scheduled maintenance as refiners prepare for the gasoline blending season in the spring. "That will limit the availability of refinery-grade propylene and we'll be in a tight situation again," Johnson predicts.
To meet their propylene needs, some derivative producers will have to look increasingly to refiners in the West and the Northeast regions of the U.S., or even Canada. Although U.S. refineries have the capability to recover substantial quantities of chemical- or polymer-grade propylene, doing so is neither easy nor inexpensive. It means tinkering with refinery balances, taking propylene out of gasoline and replacing it with something else. And more important, refiners have to invest capital for recovery and splitter capacity. So refiners will have to be convinced that producing chemical- or polymer-grade propylene makes sense and that demand increases will last more than a couple of weeks or months.
However, some refiners are coming through. In September, Diamond Shamrock and Fina Oil & Chemical teamed up in a joint venture to add a 730 million-lb-per-year propylene splitter at Diamond's Mont Belvieu, Texas, facility by late 1996. The propylene splitter will receive refinery-grade propylene by pipeline, rail, and truck, and upgrade it to commercial propane and polymer-grade propylene. In addition, last month Houston-based Enterprise Products Co. said it had completed preliminary design and engineering for a new 900 million-lb-per-year propane/propylene splitter, which it will build and operate at its Mont Belvieu site by the first quarter of 1997.
Future olefin expansions are also expected to contribute additional propylene to the market, with the next big surge expected in late 1997 and 1998. For example, Chevron's project to increase annual ethylene capacity at its Port Arthur, Texas, plant by 700 million lb to 1.7 billion lb will result in only a 30 million-lb-per-year boost in propylene capacity. That project likely will be completed during third-quarter 1997. And Chevron is "looking at what we can do to recover additional pounds from our Cedar Bayou (Texas) and Port Arthur olefin plants," says Johnson. From Cedar Bayou alone, he thinks, the firm could pick up an additional 100 million to 150 million lb annually. "But that work," he adds, "would not likely be done until the next scheduled maintenance shutdown in 1998."
Johnson points out that derivative capacity is being added much more quickly than propylene capacity is being brought onstream from olefin plants or refineries. Totaling up some of the polypropylene announcements, "you could have a 25 to 30% increase in capacity over the next two to three years, but at the same time, there's very little propylene being added," says Johnson. "So 1997 could turn out to be a very tight year."
Although olefin producers are well aware of the potential for propylene shortages, they are not as likely to commit to big expansion projects too far into future. "A 1996 decision is a 1999 entry, and so it's always a gutsy call," says Reilley. "And the people who are running the chemical companies today have been on the firing line during the times when the industry has overbuilt."
"In the past, when we were coming off one or two years of strong profits, we would have had grassroots projects coming out of our ears," Reilley adds. "Instead, the industry is relying more on incremental expansions and joint ventures." For example, late last summer Union Carbide, Lyondell, and Quantum teamed up to conduct a feasibility study for building a 1.5 billion-lb-per-year ethylene plant at Lyondell's Channelview petrochemicals complex by mid-2000. And late last month, Carbide and Nova Corp. embarked on a venture to build a 2 billion-lb-per-year ethylene plant at Nova's complex at Joffre, Alberta, (C&EN, March 4, page 9) by 2000. "Today, the industry is planning capacity increases more cautiously, so that we can still grow, but we don't bring on the past problems of oversupply. We as an industry have definitely put some discipline back into the system," says Reilley.
Producers have also learned from the past when it comes to setting prices. Ten years ago, it wasn't uncommon to see a producer "panic and cut its price way down just to sell its last increment of capacity," says Pace's Doerr. "In doing so, the company would momentarily come out ahead, but would undercut the whole market in the process. It only takes one company to drop the price and another to acknowledge it by meeting that price. And then, market pressures seek lower levels. Competitors can't risk losing market share by sticking with a higher price." But producers are generally smarter now, Doerr believes. They know that dropping prices in knee-jerk reactions to maximize short-term profits only results in a drop in total revenue and longer term margins.
Indeed, "a steady hand" is really key to maximizing earnings growth in good times and bad, says Huntsman's Stanutz. "It's important not to get carried away with the cycles - by thinking [the market] is better or worse than it really is. You have to manage the business over the life of the cycle, not over just a couple of quarters."
Chevron's Reilley agrees. "I think in the past when business conditions have begun to improve, we as an industry have let our guards down a bit. We might have added people here or overspent there, because we were making enough money. But I think now the industry has undergone a basic cultural change that makes cutting costs and staying lean an integral part of almost every organization at all points in the cycle. We are constantly asking: 'Are we still carrying out this process in the most economical way?' or 'Are we still getting the maximum out of our plant?' I don't think we're going to see the fat and the sloppiness creep back into business because now we are all trained to watch for it."
At the same time, it's more important than ever to be focused on customers, Reilley adds. "You can have all your plants running efficiently, but you've also got to be out there understanding the customers' needs." Partnerships with customers are crucial, he says. "In the past, we as an industry have been guilty of building a new plant first and then after it is up and running, we start worrying about where to sell the additional product. But now, before we commit to a new plant, for example, we want to know where the additional capacity is going to go."
To become more customer-focused, Chevron Chemical is currently realigning its management structure so that each of its six businesses - polyethylene and pipe; polystyrene; light and heavy olefins; benzene-toluene-xylene and styrene; fiber intermediates; and &agr;-olefins and acetylene black - will have its own dedicated general managers and a team of professionals.
Downstream integration is another factor important to success in today's market. OxyChem, for example, has made a concerted effort to "integrate our petrochemical business with our chlorovinyl chain and manage that on a worldwide basis," says Schuh. "Growth in chlorovinyl products is extremely strong in the Far East," he says, noting that "we move a lot of product in the form of ethylene dichloride, vinyl chloride, and polyvinyl chloride."
By respecting these business fundamentals, petrochemical producers hope to use 1996 as a time to catch their breath, according to Reilley, and position themselves to serve new derivative plants that are slated to go onstream in 1997 and 1998.
They seem resigned to the prospect that 1996 won't be a stellar year. But it is likely to behave as the mirror image of 1995 - strengthening with each consecutive month. "And if that turns out to be true, I guess I'd rather be in a year that's got an up-tick to it rather than a downturn," says Schuh. "Because in December, you always have a new year to worry about, and it's good to have the momentum to carry you forward."
[ACS Home Page]
[ACS Publications Division Page]