U.S. economy bottomed out in June, but fallout in petrochemicals to continue into 2010

Akron, OH—As tumultuous as 2009 has been for the global petrochemical industry, shockwaves from the credit crisis and demand collapse from key markets like automotive and construction have yet to fully dissipate. As part of a presentation on the current market at his company’s Elastomer University event, Simon Holmes, global marketing manager for ExxonMobil Chemical (Houston, TX), pulled data from a variety of sources, including charts from Standard & Poor’s and Moody’s examining the credit worthiness of debt in certain industries, including automotive, where the default rate could peak at 13-14% in the fourth quarter. “What does this tell us?” Holmes asked. “The worst is yet to come—there are a lot of people that are really struggling, who are right on the edge.”

Although much of the data were grim, Holmes did state that it’s become accepted that the trough of the current downturn likely occurred earlier this summer in June, and the recovery, although it will be a multiyear process, is beginning. Going forward, Holmes stated there are a number of variables that need to be tracked, any of which could derail the recovery. Chief among these are continued uncertainties in the capital markets and how suppliers and customers could be affected, with Holmes advising to “look left and right along your value chain,” and be aware of the fiscal health of those you work with. Holmes also said companies should keep tabs on government intervention in the market, be they subsidies to promote certain markets or regulations to punish others. As part of the potential impact of government, he acknowledged the potential threat of trade disputes escalating into trade wars with broad-reaching impacts, alluding to India’s recent action on polyethylene imports in a bid to protect its domestic producer, Reliance Industries.

In spite of the precautionary steps that can be taken, Holmes pointed out that even the most-vigilant companies could still be helpless against the forces that are now in action. “Some of the names that we’ve seen and respected for many years will not be here,” Holmes said, adding that headline-grabbing changes are likely to continue for the next 6 months at least.

Holmes said Moody’s expects the default rate within the automotive industry to drop back down to 5-6% in the second quarter of next year, but it will take longer for production levels to return. From the first half of 2007 to the first half of 2009, North American light vehicle production was off 56%, with 8.1 million vehicles forecast to be produced this year. By 2011, production is forecast to reach 12.2 million, with the market not expected to return to the 2007 peak until 2015. Globally, automobile production is off 28% from the first half of 2008 through first half 2009. The impact on resin volumes has been marked, with 349,000 tons of polypropylene demand lost in North America. “That’s an entire plant,” Holmes said. Peak to trough, EPDM is off 100,000 tons/yr, which is roughly equal to 10% of global demand for the material.

Holmes did point out that the petrochemical industry, including plastics, is more sensitive to swings in the broader economy, with a downturn in GDP producing a deeper drop in chemicals demand. Whereas petrochemicals expand at a rate 1.5 times greater than GDP in good times, during a contraction, a 1% drop in GDP extrapolates out to a 15% drop in petrochemicals. Historically, however, when the market does return, it returns quite quickly. Looking at petrochemical downturns in 1975 and 1981, Holmes found that over two to three years, demand fell by 7-10%, but in the first year of the recovery the market regained all that loss and more.

For its own purposes, ExxonMobil has taken several steps to deal with the downturn. It continues to invest in its VistaMaxx line of specialty elastomers, moving forward with plans to add 300,000 tons/yr of capacity by 2011, with another 150,000 tons/yr planned after that. The company will also increase its metallocene EPDM capacity with new plants in the U.S. and the Middle East, as well as revise its grade slate offerings. The company is communicating the move with customers, but is in the midst of updating its Santoprene family of elastomers, removing a number of grades over the next six to 12 months. It’s also converting its Exact plastomer product from an octene to a butene feed, and working to post all its data sheets online. —Tony Deligio