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Shifting sands

The Middle East has been so active investing in resin manufacturing in general, and polyethylene in particular, that analyst Graham Harris made light of the frenetic activity at a recent conference.

As we speak, there have probably been announcements while I was out of the office," Harris half-joked with the crowd of 130 gathered for Chemical Market Assoc. Inc.''s (CMAI; Houston, TX) second annual Plastics Processors Conference, held during the summer in Chicago.

Harris, director of Europe and Middle East polyolefins research for CMAI, recently traveled in the region, including to Iran, and said that press reports regarding investment were beyond planning stages, with brick-and-mortar facilities springing up throughout the area, the ultimate goal being global domination of polyethylene production.

By CMAI''s account, more than half of the global capacity additions for ethylene will come in the Middle East/Africa region, tripling from 12.2 million tons of ethylene capacity in 2004 to 32.7 million tons by 2010. All told, 20.5 million of the 38.4 million tons added worldwide will come from the Middle East. By comparison, the Americas and Europe will only add 2.9 million and 2.2 million tons of ethylene capacity, respectively (China is second with 12.8 million tons).

According to CMAI, 58% of the world''s ethylene winds up in polyethylene (PE), which, if taken together in all forms, constitutes a majority, 39%, of the world''s thermoplastic resin use (polypropylene is second at 24%). The Middle East is now making a power grab for PE, using its incredibly cheap natural gas as a weapon to stifle competition.

As of September 2004, North American ethylene cash costs were the highest in the world at $464/ton, compared to $350/ton in Western Europe, $315/ton in Northeast Asia, and only $130/ton in the Middle East. According to Nick Vafiadis, CMAI''s PE director in North America, the difference in 1995 between the U.S. and the Middle East in terms of PE production costs was $100/metric ton.

At that time, the Middle East didn''t have the capacity to leverage that cost advantage and North America could still export at will, which it did under the assumption that low-cost natural gas would always be around. From 1990 to 1999, its exports of PE averaged 1.3 million tons/yr.

By 2000, that production cost difference tripled to $300/ton, and the Middle East continued to add ethylene capacity so that today, the advantage is $500/ton. "The Middle East is building a platform to dominate the export world," Vafiadis said.

Those Middle East additions come at a time when the North American PE industry has stalled expansions. From 1994 to 2001, North America averaged 750,000 tons/yr in PE capacity additions, but starting in 2002, its PE capacity has dropped each year, including Dow''s decision in 2004 to idle 1 billion lb of PE capacity in North America.

According to CMAI, there are 18 PE producers in the U.S., but the top five or six dominate, producing 80% of all the material used. By 2008, U.S. heavyweights Dow and ExxonMobil will remain one and two in the world in terms of capacity with 7.4 billion and 7.2 billion lb/yr, respectively, but Saudi Arabian polyolefin producer Sabic will go from not being in the top 10 PE producers in 1998, to number three overall with 4.2 billion lb of annual capacity. Vafiadis said that jump can be attributed to the fact that every other pound of added capacity from 2002 to 2010 will come in the Middle East, with 33% being put into Saudi Arabia and 29% going to Iran.

The future

Long-term, CMAI sees two overriding trends in PE: North America will become a net importer of PE, with material shipped from the Middle East, and China will dominate demand growth, with most of that resin converted for exports.

Total Middle East PE exports are projected to hit 13 million tons by 2010, from a base of 2 million tons in 1998, with North America becoming a net importer of PE resin and goods by 2009, as material comes from the Middle East and a flood of bags arrives from China. In 2004, imports of PE bags and film rose to more than 2 billion lb in spite of tariffs on Chinese bags. Going forward, Asia-Pacific is forecast to have nearly 70 billion lb/yr of demand for PE, compared to around 40 billion lb/yr in North America and Europe.

CMAI makes a strong case for why PE will soon head west to the U.S. It costs an integrated North American producer like ExxonMobil $740/metric ton to manufacture PE, plus $65/metric ton in domestic logistics, for a total North American cost of $805/metric ton. Saudi Arabia pays $65/metric ton for domestic logistics as well, and the costs of importation and duties add $195/metric ton that U.S. producers aren''t subject to.

In spite of this, the fact that it only costs $240/metric ton to manufacture means that the total cost for a producer in Saudi Arabia to supply the U.S., even when accounting for shipping, is just $500/metric ton-38% cheaper than U.S. producers can provide PE. Such a differential is hard to ignore.

Tony Deligio [email protected]

TAGS: Business
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