Recession, increasingly competitive global market compels US petrochem makers to axe capacity

Recession and an increasingly competitive global market is forcing US petrochemicals producers to axe capacity to drive up operating rates and recover profitability, according to our latest US Petrochemicals Report by companiesandmarkets. Performance so far in 2009 has been poor due to the decline in demand from important end-users, namely the construction and automotive industries. In the context of poor demand, petrochemicals production has been weak although there are signs that the market bottomed out by Q3-09. Businesses were still running down inventories amid weak demand, but there were signs of recovery in olefins and polymer resins. There was some good news for polymer resins in Q2 with PE and PP export prices from the US Gulf rising on the strength of Asian demand, although the uptrend was not expected to last beyond the quarter due to the strength of output growth in the Middle East. US polymers production increased in May over the previous month as destocking had largely run its course. PP output rose 2.4% year-on-year (y-o-y), but PS output was still down 3%, PVC was down 5.9%, HDPE by 1.7% and LDPE by 19.8%. However, production had bottomed out with inventories-to-sales ratios improving in Q2. The petrochemicals industry is cautiously optimistic, with financial results showing an improvement in Q2 over Q1, assisted by the US government’s stimulus program and the completion of destocking in China, where the Chinese government has launched its own package of stimulus measures. The report expects weak sales volumes for ethylene and its derivatives in H2-09, followed by a gradual recovery in 2010. LyondellBasell forecasts a 3-5% drop in ethylene demand in 2009, which is smaller than the 11% decline it estimated in 2008 due to the crash in Q4. US propylene consumption was also likely to drop by 3-5% this year, according to the company. Others are more pessimistic, predicting a recovery from late 2009 to early 2010. The ACC projects petrochemical production to fall 8.1% in 2009 following a decline of 4.7% in 2008, but will return to growth of 1.6% in 2010 and 2.2% in 2011. The recovery will be slowest in the PVC segment due to the downturn in housing and construction, while the phasing out of PS in the catering industry will limit scope for growth in styrenics. By 2010, the world ethylene market could have a surplus of 17m tonnes, which will . In the context of surging global capacity, BMI predicts that operating rates in the US will be at around 75% in 2010, up from around 70% in 2009. We estimate that ethylene capacity will need to be cut by 3.0-3.5 mln tpa to ensure cracker operating rates are restored to 85%, which we believe is necessary to maintain profitability. The problem of over-capacity will not be confined to ethylene. BMI estimates that global PE over-capacity is around 18% of world demand in 2009 and 15% in 2010, more than double the level of excess capacity seen in previous cyclical downturns in the petrochemical industry. has permanently closed 544,000 tpa of ethylene and 330,000 tpa of propylene capacities at Chocolate Bayou, Texas, Dow Chemical is shutting a number of ethylene and ethylene-derivative plants at its US Gulf Coast sites, including an ethylene plant with 390,000tpa capacity at Taft, Louisiana and Sunoco Chemicals announced is permanently shutting down its 225,000 tpa ethylene unit at Marcus Hook, Pennsylvania. Meanwhile, LyondellBasell’s plans to permanently shut down its 218,000 tpa HDPE plant in Chocolate Bayou, Texas, are subject to legal wrangling with Ineos Following the derivatives plant closures in the US it will no longer need to purchase ethylene on the merchant market, which could impact negatively on its feedstock suppliers. The report forecasts that by end-2014, capacities will fall by 1.9 mln tpa of ethylene, 265,000tpa of PP, 1.7 mln tpa of PVC and 1.1 mln tpa of PE, with plants with capacities under 200,000 tpa the most likely to close due to their lack of competitiveness on the global market. Between 2009 and 2014, 7% of ethylene, 7% of PE, 3% of PP and 24% of PVC capacities will have closed permanently. PP will fare better due to a transfer in demand away from LDPE, a product that is likely to weigh down the PE segment and negatively affecting the fortunes of Westlake and LyondellBasell, the US’s largest LDPE producers. PVC and PS will see the most rapid shrinkage in capacities. PVC operations run by Oxychem, Formosa Chemicals and Dow Chemicals are particularly under threat, while all producers in the PS segment are likely to suffer the twin effects of falling demand and the phasing out of PS in packaging over environmental concerns.