INTERNATIONAL BUSINESS
European Petrochemical Producers Face More Modest Growth Next trough may be in 1986, BP executive warns; firms should opt out of weaker lines, concentrate their efforts on smaller number of products "With improved [chemical company] results in 1983 and 1984, some people already are talking happily of the light at the end of the tunnel," comments Ray R. Knowland, managing director of London-based BP Chemicals International. "My thought is, 'Beware of the headlights of the oncoming train.' "Most will agree that we are going through a peak in the chemical cycle. The next trough, perhaps in 1986, is likely to coincide with the arrival on the petrochemical scene of a number of new producers with real competitive advantages. Decisions must be made before the next recession causes financial mayhem for us all. It is vital that we look beyond the immediate prospect and plan for a profitable industry in the 1990s." In a hard-hitting talk presented to the European Chemical Marketing Research Association's annual meeting held this year in Amsterdam, Knowland urged his fellow West European managers to follow three basic principles. "Forget about the past, think about the future; forget about weaknesses, think about strengths; forget about short-term gains, think about long-term profit," he suggests. "Lack of lateral thinking is probably the greatest shortcoming of our industry in Western Europe today," he contends. "Some of the important t h i n g s we should consider when developing a strategy for the
future must include the discarding of outdated ways of thinking no longer relevant to the problems of today. Above all, we must continue to think about consolidation of the industry. But planning is not the whole story. The theory must be put into practice." The basic strength of petrochemicals is that there are no new substitutes in sight. Consequently, they are not likely to suffer the problems of such basic industries as steel and timber. "Realism dictates, however, that any growth in demand will be modest at best, and slower than in the past," he warns. In the case of ethylene, a fundamental building block of the petrochemical industry, Knowland anticipates that West European consumption will rise at an average annual rate of 0.8% between 1983 and 1990. On the basis of the 24.3 billion lb-ayear mean average consumption between 1978 and 1983, demand in 1990 likely would rise to about 25.7 billion lb. At that level, however, use would remain well below Western Europe's 1983 effective capacity of 33.2 billion lb. The underlying growth in consumption of ethylene derivatives in Western Europe is similar to the industrial production index, although growth in ethylene demand is lower. Knowland notes that "this results from an expected decline in net exports with the advent of the new producers [in the Middle East and elsewhere], and, to a lesser extent, lower ethylene usage reflecting, for example, linear low-density polyethylene substituting for LDPE." The prospect for propylene is more encouraging. Knowland pegs the annual average rate of growth at 2.5% from 1983 to 1990. This would raise demand to about 15.4
billion lb from the 13.0 billion lb-ayear mean of 1978 to 1983. Shortage is unlikely in light of Western Europe's effective output capacity of 18.73 billion lb for the olefin in 1983. "The better picture for propyle n e / ' Knowland points out, "is due to higher growth of polypropylene, and, to a smaller degree, in propylene oxide with no threat from new producers. Propylene derivative growth will be dependent on the availability and price of propylene." Knowland points up the problem that, compared with the U.S., there are too many producers of individual petrochemicals in Western Europe vying for markets of approximately the same size. In the case of acrylonitrile, for instance, the 10 European makers of the chemical have an average plant capacity of 264 million lb per year, less than half that of the four U.S. producers. More dramatic is the case of propylene oxide, in which the eight European companies in the business have an average annual output capability of
Europe has more, smaller makers of major petrochemicals than U.S.
Acrylonitrile U.S. Western Europe Low-density polyethylene U.S. Western Europe Polypropylene U.S. Western Europe Propylene oxide U.S. Western Europe
Number of producers
Total annual capacity (billions of ib)
Average capacity per producer (millions of lb)
4 10
2.20 2.64
550 264
11 19
9.68 11.88
880 625
12 17
5.28 5.28
440 311
2 8
2.86 2.20
1430 275
Source: BP Chemicals International
November 5, 1984 C&EN
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International Business 275 million lb, about one fifth that of each of the two corresponding U.S. concerns. "The U.S. trend has been for companies to opt out of their weaker lines—Arco out of polyolefins, and Ethyl Corp. out of polyvinyl chloride are recent examples. But there are nothing like enough examples in Western Europe," he says. Admittedly, steps have been taken by European companies to realign their product mix. BP Chemicals itself has shed its PVC activities, for instance. More recently, West Germany's Hoechst decided to lease its LDPE units to Italy's EniChem (C&EN, Aug. 27, page 8). "These precedents need to be followed again and again," Knowland stresses. "Our target should be to reduce the disparity between us and the U.S. To bring this about must be the objective of our petrochemicals strategy for Europe. The advantages of a wide product portfolio, which could be marketed in groups together, have declined. With finite resources, it is wise after identifying our weaknesses to concentrate
our efforts on a smaller number of products in which we have percieved strengths. To obtain optimum competition, we will need to see some very significant and almost inconceivable rationalization moves." Nationalism in its many forms is an important competitive disadvantage in Western Europe, Knowland admits. "Unfortunately, politicians discovered years ago that jobs could be saved in the short term by delaying decisions. We now have a situation in which much of the chemical industry within Europe is plugged into politics. The closure of a cracker will lose a few seats in Parliament; therefore, hand out a subsidy has been the reasoning. However, the respite is short lived. "We must make g o v e r n m e n t s aware that we cannot afford to allow Europe to lag behind its competitors in terms of efficiency. The industry continues to need restructuring. This will occur only if individual companies are rigorous in their analysis of their portfolios, and are prepared to remove weak products as they are identified." Dermot O'Sullivan, London
Prospects stay dim for European ethylene oxide One thing ethylene oxide producers in Western Europe have failed to do is make money, contends George Ewart, general manager of Imperial Chemical Industries' chemical products unit. "Unless the industry acts quickly, this difficulty will remain," he told the recent European Chemical Marketing Research Association's meeting in Amsterdam. By his estimate, European companies have lost a cumulative total of some $1.5 billion on ethylene oxide and derivatives in the four years 1980-83. The pattern continues, even though 1984 is likely to be a peak year in the production cycle. Nor is the near-term outlook promising. "A cyclical pattern of demand will persist, and the current trend appears to be downward," he notes. Moreover, he warns, "A revival of U.S. exports is likely in 1986 as U.S. domestic demand falls away." At first glance, it appears strange 16
November 5, 1984 C&EN
that European ethylene oxide makers are losing money, considering the wide variety of products that the oxide's derivatives—glycol, glycol ethers, ethanolamines, and ethoxylates—go into. Included are adhesives, antifreeze and deicing fluids, detergents, explosives, inks,
A cyclical pattern of demand will persist, and the current trend appears to be downward polyester fiber, film and bottles, and polyurethane foams. Ewart lays much of the blame for the poor economics on the companies themselves. "We are living with a legacy of overinvestment invariably justified on the back of an ethylene cracker. Some old plants apparently are being retained because they are a leg for supporting
an olefins complex," he says. Barriers to exiting from the business "are reinforced by political and social considerations." Last year, he notes, 12 European producers shared a combined nameplate capacity of 4.45 billion lb of the oxide, 2.84 billion lb of glycol. In the case of the oxide, the 3.06 billion lb produced in 1983 was only about half the U.S. output, which also is served by 12 companies. This means that European oxide plants operated on average at 69% of their capacity level. Europe's 1983 glycol demand of 1.78 billion lb accounted for a mere 63% of installed capacity. Some 48% went into polyesters, 36% to the antifreeze market, and the 16% balance was c o n v e r t e d to various derivatives. Although European demand for glycol continues, he foresees a slower pace of annual growth for its outlets in the second half of the decade compared with the first. An added factor is the prospect of competition from Saudi Arabia. Next year, two glycol units will come on stream there with planned annual output totaling 1.1 billion lb. As much as half that could find its way to Western Europe, Ewart believes. Looking to 1990, Ewart foresees Western European glycol demand amounting to 1.98 billion lb. Imports might supply 660 million lb of this need—perhaps 550 million lb from the Middle East, and 110 million lb from Eastern Europe, and North and South America. West European output, therefore, would drop to about 1.32 billion lb provided by plants with a combined overall nameplate capacity totaling some 1.56 billion lb. On the basis of this reasoning, European capacity would need to be reduced 1.28 billion lb, down 45% from the current level. "The European industry has very little time to eliminate capacity surpluses, soften the impact of Middle East glycol, and develop a betterquality business for the late 1980s," he says. He proposes closure of uneconomic ethylene oxide plants, and continuing investment in research and technical effort. "Uncompetitive business should go, and go quickly," he urges. Dermot O'Sullivan, London
