Unprecedented realignment underway in global petrochemicals

By Tony Deligio
Published: April 1st, 2010

Traditional oil majors pushed to the sidelines, rising "petronationalism," and the increasing importance of the developing world both for its resources and market potential are just some of the factors reshaping the global energy industry and its downstream accompaniment—petrochemicals and plastics.

"I have to admit, I was surprised by the depth and the speed of the realignment," said Juan Luciano, Sr. VP Dow hydrocarbons/energy, basic plastics, and JVs. Addressing the full conference as the keynote speaker at Chemical Market Associates Inc.'s (CMAI) World Petrochemical Conference (WPC; March 23-25, Houston), Luciano, who joined Dow Chemical in 1985, told the audience about the massive shift currently underway that will fundamentally alter the petrochemical industry for decades to come. "I believe we're seeing a resource realignment unlike any we have ever seen before," Luciano said, noting that the biggest names in oil—ExxonMobil, British Petroleum, and Total, among others—now only control 10% of the world's petroleum. On the consumption side, Asia's share of the petrochemical market has gone from 15%, to 35%, to more than 50%.

Juan Luciano, Dow Chemical
Dow Chemical's Juan Luciano delivers the keynote address at CMAI's World Petrochemical Conference in Houston.

As part of that realignment, older, undersized petrochemical facilities in places like Japan, North America, and Western Europe will be shuttered, with rationalization already under way and likely to accelerate in coming years. Gary Adams, CMAI president, told the WPC attendees that it's his company's perspective that the global industry remains in a consolidation/closure phase, with the pricing power for plastics and chemical producers that comes from better balanced supply and demand not likely to return until 2013.

CMAI's Mark Eramo noted that in terms of ethylene, which is a key feedstock for a number of plastics, including the world's most consumed, polyethylene, 9 million metric tonnes/yr, or about 18% of capacity, is unused, with the U.S. currently leading the way in capacity closures to correct that imbalance. Out of a forecast 32 million tonnes/yr of ethylene rationalization, CMAI forecasts that 23 million tonnes will be shuttered in the U.S., Canada, France, and Italy from 2008-2011. The full impact of new ethylene, which will be built out by petronational companies in the Middle East and Asia, will come this year, with an additional wave of 12 million tonnes/yr slated to come online in Northeast and Southeast Asia in 2012.

Eramo said the oversupply will push global utilization rates for ethylene to 80% in the short term, but demand growth and rationalizations will drive it back to 90% by 2014. CMAI believes 8 million tonnes/yr of ethylene capacity will be taken offline in the coming years, with 3.2 million tonnes/yr already shuttered.

Steve Zinger, who acts as managing director Asia for CMAI, said in spite of the closures, 2010 will see additions outstrip demand growth. "It's going to take a number of years for this overhang in 2010 to be absorbed," Zinger said, noting that the 80% operating rates Asia will be enduring for a couple years haven't been experienced for quite some time. "Some companies are just going to have to give up or restructure," Zinger said, "there just isn't room."

In polymers, CMAI's Howard Rappaport said that as the Middle East's polyethylene exports rise from 4.5 to nearly 11 tonnes/yr, the region will have around 3.7 tonnes/yr that Asia will not be able to take on, with the excess further straining the global PE supply system.

"Asia can't absorb everything," CMAI's Dave Witte said. The Middle East and Asia were balanced in trade in 2009, but that will change in coming years with repercussions globally. "Ultimately, CMAI expects this will lead to rationalization as utilizations rates in other regions are pressured." 

 

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