United States Petrochemicals Report Q3 2009

The US petrochemical industry is suffering the effects of a contraction in house building and car production, with output set to contract in 2009 and into 2010, according to BMI's latest US Petrochemicals Report.

The US petrochemicals industry will continue to suffer as a result of a glut in world supply, a situation that is being exacerbated by new capacity and falling demand. As a result, many companies are struggling, especially those that entered the downturn with a high degree of financial leverage. The PE market is particularly badly hit, with over-capacity projected to reach 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. This is includes the 9mn tonnes per annum (tpa) of capacity due to be taken out over the next five years to tackle the problems caused by surplus capacity.

Performance so far in 2009 has been poor due to the decline in demand from important end-users, namely the construction and automotive industries. Unsurprisingly, the drop in demand and squeeze on margins has had a negative effect on petrochemicals revenues and profitability. The one positive aspect of recession is the decline in energy prices, which will bring down feedstock costs for petrochemicals producers, although this trend will not make up for the pace of declining demand.

Plummeting margins are leading to temporary and permanent plant closures. LyondellBasell will permanently shut down of its 218,000tpa HDPE plant in Chocolate Bayou, Texas by the end of July 2009.

However, this reduction in capacity is not expected to have an impact on the market. The plant produces HDPE of blow moulding grade, for which domestic demand has been weak. The cracker that supplied the plant and relied on heavy feedstock had also been closed down. Meanwhile, in April, Texas Petrochemicals it planned to reduce its overall C4 processing and butadiene production capacity by 30% through the idling of assets at its Houston and Port Neches, Texas plants. The company said the decision was made in the context of a challenging environment for C4 processing, which continues to be hit by reductions in contract crude C4 supply due to olefins operating rates and lighter olefins feedstocks. A 180,000tpa PP facility owned by Sunoco in Bayport, Texas, closed in April as it is no longer financially viable, although three other units at the site will remain open. It is unclear how much capacity is likely to be taken offline during the recession as trends are difficult to anticipate.

BMI anticipates a prolonged recession with output down 4.0% in 2009 and a further 1.6% in 2010, followed by growth of just 0.3% in 2011. This gives an indication of how the recession will affect the petrochemicals industry's end-use markets. Even as the US industry emerges from recession in 2011, BMI foresees problems for petrochemicals producers until 2013. Indeed, by that time ethylene capacity will have fallen to 27.8mn tpa.

BMI forecasts that by end-2013, capacities will fall by 1.5mn tpa of ethylene, 540,000tpa of PP, 500,000tpa of PVC and 600,000tpa of PE, with plants with capacities under 200,000tpa the most likely to close due to their lack of competitiveness on the global market. Small-scale crackers with capacities of under 100,000tpa will certainly close. Between 2008 and 2013, 5.1% of ethylene, 3.9% of PE, 6.5% of PP and 7.0% of PVC capacities will have closed permanently.

As well as the ongoing effects of recession, the industry is faced with radical changes in the regulatory environment. The shift towards the Democrats in Congress and the election of President Barack Obama have created a new policy climate with greater stress on tackling climate change through reducing carbon dioxide emissions. This move has major implications for the energy-intensive petrochemicals industry. A bill seeking to make a 17% greenhouse gas emission reduction through 2020 has raised objections from the chemicals industry lobby. Concerns revolve around the base-line for the targets, the technological ability to cut carbon emissions and the need for better access to more competitively priced ethane feedstock. The industry could find it difficult to maintain both competitiveness on global markets and meet its carbon targets.