International
Chemical industry girds to defend exports U.S. petrochemical companies European petrochemical industry is point to economy of scale and better technology in answering European charges of low-priced imports Earl V. Anderson C&EN, New York
U.S. chemical exports are soaring. Through the first half of the year, they were running at an annual rate of more than $16 billion, 39% ahead of last year's pace. Paradoxically, this success in the world marketplace could lead to the next major trade confrontation for the chemical industry. Trade experts in the industry are starting to prepare for it. The problem lies in Europe, where chemical and political leaders are starting to voice strong concern about the large volumes of "low-priced" U.S. chemical exports that are flowing into Europe, particularly petrochemicals. Last month, BP Chemicals chairman Len Burcheil noted that the
"scared to death" about the threat of U.S. imports. Pointing to the U.S. industry's huge feedstock cost advantage, he claims that nothing is being done by European Community (EC) officials because they either misunderstand the situation or "are trying to avoid the problem altogether." Later, during a speech in New York City, EC Commissioner of Industrial Affairs Etienne Davignon said that U.S. companies are able to sell their products at two thirds the price of comparable European products because U.S. oil and gas price controls amount to an indirect subsidy for the U.S. petrochemical industry. At a press conference in Frankfurt, Hoechst chief executive Rolf Sammet says that his company is feeling the improved competitiveness of U.S. chemical producers "for some product groups and on specific markets in Europe." He is concerned about the uncertainty and dangers that this could pose for Hoechst sales. And at the recent European Petrochemical Association meeting in Venice, R. G. J. Telfer, chairman of ICI's petrochemicals division, warned his audience that "our downstream customers are already suffering from
Europeans claim that U.S. . . . give U.S. chemical firms regulated crude prices . . . a price advantage Relative prices 3
Price differential, $ $ per metric ton
Feedstock Naphtha, contract Naphtha, spot Ethane, contract Propane, contract Aromatics Benzene, contract o-Xylene, contract p-Xylene, contract Styrene, contract Styrene, spot Phenol, contract Terephthalic acid Olefins Ethylene, contract Propylene, contract Butadiene Ethylene glycol
2
1
0
-1 1970
71
72
73
74
Source: Shell Oil
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C&EN Oct. 22, 1979
75
76
77
U.S.
Europe
145 200b 99 100
195 280 — —
285-330 275 350 495 790 540 460
360 345 425 605-620 940 680 620
285 200 460 440
470 300 530 540
a First-quarter 1979. b Naphtha isn't traded in the U.S. Some supplies are made under contract and the U.S. price is only 71 , nominal. Source: British government report "The Effect of Controlled Oil & Gas Prices in the U.S.A. on Competition in the Synthetic Fibres and Petrochemical Sector.' '
U.S. exports. "Looming on the horizon," he adds, "is a real threat to our business." Such statements aren't really new. They are, however, a new chapter in a book that started earlier in the year when European fiber producers started voicing similar angry complaints against cheap exports of U.S. synthetic fibers, "subsidized" by government price controls on oil. European producers wanted EC officials to take action against these U.S. fiber exports under Article 20 of GATT (General Agreement on Tariffs & Trade). In effect, they were asking EC to impose countervailing duties on U.S. synthetic fiber exports because of the alleged advantage (subsidy) that U.S. producers receive from government-mandated oil prices. Since then, the anger with which European fiber producers had been condemning the flood of cheap imported synthetic fibers from the U.S. has been replaced with a more conciliatory attitude on the part of European and U.S. trade officials. Coming so soon after what they consider to be the successful conclusion of the multilateral trade negotiations, both parties want to keep the European fiber complaint from escalating into a major trade war. And, according to some trade experts, that's exactly what could happen if EC takes retaliatory action against U.S. fiber exports. But the U.S. chemical industry isn't taking any chances. It knows all too well that, if the Europeans were able to make their "subsidy" charges stick, if U.S. fiber producers do, in fact, enjoy an unfair advantage from regulated oil and gas prices, and if EC were to slap countervailing duties on U.S. fibers, a dangerous precedent would be set for all U.S. petrochemical exports. The stakes are high. With U.S. chemical exports expected to hit $16 billion to $17 billion this year, and with imports estimated at $5 billion or less, the industry is looking forward to a trade surplus of $12 billion. For U.S. chemical companies, Europe is an important export market. A sizable 28% of all chemical exports go to EC alone. Much of this is petrochemicals.
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As a result, experts in many U.S. chemical companies will be working over cost figures for petrochemical fiber intermediates and other petrochemical products. They hope to show that oil and gas price controls contribute little, if anything, to the disparity that exists between U.S. and European fiber prices on the European market. They want to document their contention that many other factors, such as better technology and economy of scale, influence U.S. fiber (and petrochemical) prices much more than government energy price regulations. Since trade experts in the chemical industry have been aware for some time of the implications that the European fiber complaint had for petrochemicals, they probably should have been doing their homework long ago. A few have. But most of them say that they have been waiting for all the facts. Says one company official, "We didn't want to start a shouting match with the Europeans based on press accounts [of the problem] alone." Presumably, the industry now has the facts. Early this month, a "technical level" trade delegation from EC visited the Office of the Special Trade Representative (STR) in Washington to discuss the fiber problem. At press time, an ad-hoc committee from the chemical and fiber industries received a briefing on the conference from STR. With the briefing under their belts and with European complaints aimed directly at petrochemicals rather than at a downstream product such as fibers, chemical industry trade experts can't afford to wait any longer to develop their rebuttals. When they do, no doubt they will point out that at least part of the European problem lies in Europe. Unlike the U.S. petrochemical industry, European producers have been—and still are—handcuffed to naphtha. Recently, this dependence on naphtha has created problems for European chemical producers. Early last year, Saudi Arabia started exporting medium and heavy crudes along with its cherished light crudes. European refineries had to start running heavier crudes through their units. With inadequate conversion capacity, a shortage of light distillates developed. The shortage came just as demand for gasoline in Europe was increasing. But the naphtha crunch really hit Europe early this year when Iranian oil supplies were cut off. Iran supplied about 14% of Europe's crude last year. When these shipments dried up, naphtha became scarce in Europe.
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Synthetic yarn and Synthetic filaments, thread (except strips, fibers, monofilament, glass) and waste
Polyester fiber
Polyester Polyester textured yarn woven fabrics (continuous) (continuous)
Source: Bureau of the Census
Prices on the Rotterdam spot market reflected the shortage. Naphtha surged upward from about $125 per metric ton in mid-1978 to about $250 by the middle of the first quarter this year. And, when the U.S. government started to encourage imports of light and middle distillates by offering a $5.00 - per - bbl subsidy, European naphtha prices took off again. They climbed to a lofty $360 per metric ton by early summer. In time, Europe's naphtha supply problem will correct itself. European refineries are busy installing new cracking and hydroreforming capacity. When this new capacity is in place, naphtha supply likely will improve and prices probably will start coming back down. U.S. chemical trade experts also are likely to dwell on the advantage their industry has in feedstock flexibility. In Europe, olefins and aromatics are produced simultaneously from naphtha in pyrolysis furnaces. In the U.S., despite the hoopla about a trend toward heavier feedstock, olefins producers still rely heavily on light feedstock, such as natural gas liquids. These lighter feeds still account for about 65% of all U.S. ethylene output. And they provide the most economical route to olefins. Aromatics, meanwhile, come from extracting benzene, toluene, and xylenes from gasoline reformer units. As a result, say U.S. chemical experts, comparing basic chemical intermediate prices in the U.S. to those in Europe is like comparing apples to oranges. Factors such as economy of scale, higher operating rates, technological superiority in some petrochemical processes, and a better inter-plant-
distribution network will be among the advantages that the U.S. chemical companies will point out to explain their lower costs. The low value of the dollar relative to European currencies certainly will be high on the list. But these arguments beg the basic question. They also will have to respond to the basic European complaint that government price controls amount to an unfair subsidy. Whether or not price controls amount to a subsidy is a legal question. Lawyers feel confident that they can handle it. But there's no disputing the fact that U.S. chemical companies do enjoy an advantage, if not a subsidy, from regulated prices. This advantage has ranged from $1.50 to $2.50 per bbl, compared to world crude prices. It is probably more than $3.00 now. About the best that the industry's analysts can do is to develop figures that minimize the impact of price controls on petrochemical and downstream products. European fiber producers, for instance, have claimed that price regulations account for one third to one half of the price advantage held by U.S. producers. It probably isn't anywhere near that high. One preliminary calculation estimates that a $3.00 difference in crude oil results in only a 1.7-cent-per-lb increase in the cost of polyester. Most responsible trade observers hope that the problem simply will disappear. To their credit, neither U.S. nor EC trade officials are hitting the panic button. Meanwhile, decontrol is on its way in the U.S. The European naphtha situation is expected to improve. And the entire issue of U.S. "subsidized" oil prices may become a nonissue. •
