C&EN BUSINESS FEATURE
One of the thorniest problems in analyzing foreign trade patterns for groups of chemicals is putting trade, domestic consumption, and capacity on a consistent, comparable basis. The usual turnover or sales figures not only include varying degrees of multiple counting of intermediates, but also include sales for export. One cannot simply add capacities for a family of chemicals and get any kind of useful figure. The approach used here avoids these problems. As well, it summarizes the situation for an entire chemical family (such as ethylene and derivatives) in just a few figures.
T
he relative position of the U.S. in ethylene derivative trade of major developed countries of the Free World has declined sharply in the past few years, although the effect is masked by moderate absolute increases in U.S. trade. No new approach is needed to show the slidealmost any method of analyzing trade patterns including the one developed here will do. In percentages, the U.S. had about 95% of the total ethylene foreign trade equivalent (a new term, which is the sum of the ethylene equivalent of all trade in ethylene derivatives with exports plus and imports minus) of the U.S., E E C (considered as a unit), Japan, and the U.K. By last year this figure had dropped to less than 40%. The gainers were E E C and Japan, going from net imports to exports (35% and almost 20%, respectively) in the same short fiveyear period. 16 C&EN JULY 28, 1969
DR. JAMES G. TEWKSBURY
Ethylene And Derivatives Trade More erosion of U.S. trade position is indicated because of a big buildup in foreign capacity
Consumption's role More important than just relative trade position, however, is a comparison of trade with domestic consumption. For example, if Europe and Japan were only increasing relative trade position proportionally with their own relatively increasing consumption, there would be little reason to be upset. The real question, then, is not whether others are increasing position, but: Are the increases out of line with domestic consumption patterns? For ethylene derivatives, the answer is emphatically yes. In the past few years, U.S. ethylene foreign trade equivalent as a percentage of domestic consumption equivalent (another new term, which is the sum of the ethylene equivalent of consumption of the final chemical derivatives of ethylene at the point where they leave the chemical industry) has been 7 to 1 1 % , with a moderate downtrend. At the same time
diis percentage jumped from net imports (negative) to 19% for EEC and 17% for Japan last year. Thus, both have gone well past the U.S., each exporting more than twice as much in ethylene derivatives, compared to local use, as the U.S. More history Before looking to the future of these trends, a little more history is useful. First, another new term is needed: capacity available for trade. This is simply the difference between ethylene capacity and domestic consumption equivalent and, as the name implies, the term measures the total ethylene capacity available for trade at all intermediate and final chemical product levels, again expressed as ethylene equivalent. Now one can compare past trends in ethylene capacity available for trade with foreign trade equivalent to see if this offers any clues to the future. A striking difference between the U.S. and EEC or Japan is immediately apparent. U.S. trade, in spite of substantial excess capacity available for trade, has been rather stagnant. On the other hand, both EEC and Japan, with relatively little excess capacity available for trade, have sharply increased trade. In the simplest terms, they have used capacity available for trade far more effectively than has the U.S. The historical trends are frightening enough, but the future offers even more cause for concern. In EEC, ethylene capacity available for trade started a spectacular climb about last year. Japan's capacity is starting to shoot upward now. If these areas continue to use their capacity available for trade anywhere nearly as ef-
fectively as they have in the past— and there is no reason to think they won't—further erosion of the relative trade position of the U.S. is virtually certain. This does not necessarily mean just erosion of net export posi tion. It could easily lead to the U.S. becoming a net importer. The actual size of capacities avail able for trade developing abroad are themselves also frightening—by 1971 EEC alone will exceed the U.S.
Ethylene capacity available for trade in terms of domestic capacity available for trade vs. actual net exports U.S. 3000
Thousands of metric tons
Complex causes
Low-density polyethylene gaskets; LD polyethylene accounted for nearly 27% of U.S. domestic consumption equivalent of ethylene in 1966
Although the method used here clearly demonstrates a problem, it does not, and was not intended to, explain why it is occurring. There are many possible causes, probably working in combination. Perhaps a key factor is simply dif fering export philosophy. The Euro peans and Japanese are very export oriented and, in fact, will often give up domestic sales to gain export busi ness. Americans are usually quite the reverse, and will often sacrifice ex ports for domestic sales. It is not that Americans aren't good salesmen, but is more a matter of emphasis. The differing emphasis on export sales certainly has strong economic roots and justifications. For what ever reason, the European and Japa nese governments are more favorably inclined toward increasing exports
Foreign trade équivalents, net exports
Foreign trade équivalent as percentage of domestic consumption equivalent
Net exports of ethylene, thousands of metric tons
Per cent of domestic ethylene consumption equivalent
1000 ι
Japan
25
2000
1500 —
Capacity available for trade
1000 —•
Foreign trade equivalent, | net exports
1963
1964 1965 1966 1967
1968
1963
1964 1965 1966 1967
1968
1965
1967
1969
1971
JULY 28, 1969 C&EN
17
The Approach My approach is based on an ethylene balance around the entire ethylene derivative segment of the petro chemical industry. The principle is that what goes on outside the dotted line, which is fairly simple—shown in the diagram below—accurately reflects the much more complex situation inside the line. In other words, ethylene capacity compared to consumption of final products (on the far right of the diagram) measures to tal excess (or shortage) of derivatives available for ex port (or to be made up by import). Of course, the approach requires that trade and consumption be expressed as ethylene equivalent. This equivalent is calculated as the amount of ethylene required to make a given derivative; this avoids having to separately include losses in de rivatives manufacture in the balance. The approach, then, boils down to three basic figures that summarize the whole situation. The first is ethyl ene capacity, which has the usual meaning. The other two are new figures, which require new names: For eign trade equivalent is the sum of all foreign trade on the top and bottom of the diagram, with exports -j- and imports —, ail as ethylene equivalent. Domestic consumption equivalent is the sum of ethylene equivalent of all the final products of the chemical industry on the right of the diagram. This figure is, of course, the sum of domestic consumption sup plied by local production and that supplied by imports. Or, looking at it another way, it is the ethylene equivalent of total domestic consumption, regardless of source, of chemical products by con sumers outside of the chemical industry. It is perhaps helpful to note that the sum of these two new figures is simply ethylene consumption (if one ignores inventory adjustments).
Ethylene and derivatives balance
7
Sample calculations, as given at the right, may also help to explain the meaning and derivation of these new figures. Note that where alternate feed stocks are involved, such as acetylene for vinyl chlo ride, only the portion made from ethylene is included. Also, for domestic consumption equivalent, if a chem ical is both a final product and a chemical intermedi ate, only the final product portion is included. Ethyl ene glycol is an example—antifreeze use is included whereas use in saturated polyester is not because the latter portion is counted separately as polyester. Still another new figure is useful: capacity available for trade. This is simply ethylene capac ity less domestic consumption equivalent and it is just what its name implies. One may reasonably ask, why not just look at ethylene alone rather than go to all this trouble? Aside from the value of looking at a group of chem icals as a whole, ethylene presents a special problem because intercontinental trade is usually not signif icant. Hence, if one just looked at ethylene capac ity and consumption alone, there would appear to be no trade at all; in actuality there is a lot of trade in ethylene derivatives tied up in the ethylene consumption figure. The approach used here of converting to ap propriate equivalents is, of course, not limited to the ethylene family. It could be used for other basic petrochemical families and, for that matter, for intermediate families. As for ethylene deriva tives, any equivalent figures must be adjusted for alternate feedstock materials. For some families, such as propylene, first derivative capacity equiva lents may be more useful because this avoids getting involved with large petroleum refining use.
Total exports
Intermediate and final product exports To ethylbenzene and derivatives plants Ethylene exports
Domestic ethylene production Ethylene Imports
\
To ethylene dichloride \ and derivatives plants /
Polyvinyl chloride and the like
To polyethylene plants
Polyethylene "~y*-
Ethylene oxide and derivatives plants
I I I ι I
Polystyrene, ABS, ' and the like
'3
ι' * ~ " ~" ~ ~~~ { Total domestic 1 consumption of final chemical products
Ethylene oxide products
To other plants Other products
Intermediate and final product imports / / / y
Total imports
Domestic consumption equivalents Sample calculation, US. 1966 P . i l · - · {> • Κ» f.->
Domestic consumption equivalents,*as ethylene
:
Λ. 4
!
ABS-SAN SBR· Polyester, unsaturated v Other styrene* PVC* Trichloroethylene* Perchloroelhyiene* Other EDO PE, low density PE, high density Polyester, saturated Other ethylene glycol Other ethylene oxide Other Total domestic consumption equivaient
/1
20 1 343 23 30 46 1132
406 88 494 306 936 4207
•Includes only that made from ethylene. * * All in thousands of metric tons.
Foreign trade equivalents
Sample calculation,
U.S. 1966 EB* Styrene* Final product, polystyrene and the like* EDC VC* PVC* Trichloroethylene* Perch Joroethyiene* PE, low density PE, high density Polyester, saturated Ethylene glycol· Ethylene oxide Total foreign trade equivalent •Includes only that made from ethylene. * * AH in thousands of metric tons.
Net foreign trade equivalents, export (import)** as ethylene
4 52 29 2 14 10 (5) (4) 130 47 2 51 21 353
(and reducing imports) than the U.S. This takes a variety of forms, the most important of which for chemicals are more favorable tariff, border tax, and export incentive treatment. The cur rent so-called Kennedy round tariff reductions and handling of ASP (American Selling Price) are making the relative position of the U.S. even worse, according to most of the U.S. chemical industry. The U.S. chemical industry also faces other not really intentional dis advantages vs. Europe and Japan. One of the most important of these (the most important, according to many petrochemical producers) af fecting lower cost petrochemicals is cheaper naphtha feedstock abroad. Domestic petrochemical producers claim that they are the unintended victims of the U.S. oil import pro gram, which artificially supports U.S. feedstock prices at well above world levels. For chemicals in total, prob ably the most significant disadvantage is lower labor costs abroad; however, this may not be the case for many of the relatively lower priced petrochem icals of prime concern here. Never theless, lower labor cost hits at many levels, from direct operating and con struction costs, to research and de velopment, to indirect high labor costs in the many purchases chemical com panies make outside the industry. Causes of trade patterns in chemi cals are particularly difficult to assess because most trade between devel oped countries results from incremen tal pricing rather than from move ment from a surplus to a shortage. This occasionally leads to the remark able phenomenon of the identi cal product moving both ways be tween the same two countries at the same time. Obviously then, incre mental pricing is involved, an account ing method or an attitude of manage ment can easily wash out other ad vantages or disadvantages involved in trade. No other edge Back a few years the disadvantages of the U.S. were more than countered by much larger plants, more advanced technology, and other factors. The domestic industry no longer has this edge, however. Plants and compa nies are fully as big abroad, technol ogy has been thoroughly disseminated, and so it goes, with perhaps the only remaining real advantage of the U.S. JULY 28, 1969 C&EN 19
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CfiEN BUSINESS FEATURE
First derivative capacities, as ethylene equivalents Year
U.S. EEC
Ethylene available for trade in terms of capacity and domestic consumption equivalent vs. net exports
Japan
U.K.
U.S.
10,000
Thousands of metric tons
4000 Domestic consumption equivalent
2000
1961
1961
I iJ%%%Tll,i""i»**tf 1963 1965 1967 1969 1971
1963 1965 1967 1969
1971
Japan 5000
4000
First derivative capacity equivalent Percentage of Amount* ethylene
1966 1969 1971 1966 1969 1971 1966 1969 1971
5492 8235 9777 1717 5022 6457
5550 7970 9290
101% 97 95
2290 4770 5390
134 95 84
1224 2385 3822
1040 2550 3060
85 107 80
1966 1969 1971
793 1562 1806
740 1145 1203
93 73 67
* Thousands of metric tons.
6000
0
Ethylene capacity*
being its somewhat better and more flexible management. Whether we like to believe it or not, we do not have the edge we used to have, and the figures here show that we are reaping the results of the disadvantages we face. Certainly domestic chemical operations will be hurt by what is happening; however, for many companies this will be at least partly countered by increased operations abroad. U.S. government restrictions on foreign investment, however, definitely limit the degree to which companies can move production abroad. In time, such restrictions will likely become much more important to the U.S. industry because it is hard to be very optimistic about progress on other trade disadvantages. Much more significant to the U.S. economy as a whole is the effect on balance of payments and loss of domestic employment. Although many people outside the chemical industry don't realize it, the U.S. chemical industry as a whole has one of the most favorable balances of trade of U.S. industry. Losing this could spell disaster in the already critical U.S. balance of payments problem. The problem of employment requires no comment; obviously, loss of business to foreign sources means loss of domestic employment.
of years to use capacity domestically. This approach has the advantage of tying available capacity to rate of growth of consumption. Thus, this figure recognizes that a given amount of excess capacity is much more burdensome where consumption is growing slowly than if it is rapid, while an absolute tonnage figure does not. If anything, looking at the number of years to use capacity domestically shows the problem even more dramatically than absolute volumes. It also tends to put the U.S. "capacity available for trade" in better perspective. Also notable is the rather smooth growth curves for domestic consumption equivalent. Because of the way this figure is defined, it is primarily dependent on the growth of industries
Hi
Years to use capaci domestic Years
Capacity
Same answer
u n i Foreign trade equivalent, net exports
24 C&EN JULY 28, 1969
When the same data already shown are presented in their basic form, that is, as ethylene capacity, domestic consumption equivalent, and foreign trade equivalent, the same conclusions can, of course, be gleaned, though not as easily or as dramatically as by looking at capacity available for trade. These basic charts also suggest another way of expressing capacity available for trade, namely, in terms
1961
1963 1965 1967 1969
1971
C&EN B U S I N E S S FEATURE
First derivative capacity equiva lents Capacity equivalents,** as ethylene
Sample calculation, U.S. 1966
EB* EDC PE, low density PE, high density Ethylene oxide Sum Five derivatives, % of consumptionf Estimated total first derivative capacity (4338-r78%)
529 505 1530
536 1238 4338
78% 5550
"'Includes only that made from ethylene. * * All in thousands of metric tons. t Estimated.
that consume chemical products, which in turn probably also closely approximates growth of the economy as a whole. In addition, growth rate is a function of type of raw material, and such changes as switching from acetylene to ethylene for vinyl chloride increase growth rate of ethylene domestic consumption equivalent, while the switch is occurring. The U.K., the only other major developed country in the Free World not included in the previous discussion, shows a pattern not unlike that of the U.S. In spite of substantial capacity available for trade, the trend in trade is stagnant. In the total trade picture, the U.K. is not of particularly great concern, mainly because overall economic growth is being held back by extremely severe economic problems quite unrelated to chemicals. Weakest
link
The weakest link in the approach developed here is probably the fact that name plate capacities can often be misleading. Problems in achieving design capacity such as have occurred recently in both Europe and the U.S., varying ways of expressing capacities, and sometimes even intentionally misleading capacity announcement all contribute to this weakness. To check whether name plate figures are a serious problem, I compared ethylene capacities to first derivative capacities, expressed, of course, as ethylene equivalent. For the U.S. the check was good and for EEC and Japan it was reasonable. One would usually expect that for 1971, ethylene capacity would somewhat exceed first derivative capacity because ethylene capacity usually becomes firm more than two years ahead, whereas derivative capacity may not. That is, new derivatives capacity not yet announced could well
be in place by 1971. As an example, a sample calculation of first derivative capacity for the U.S. in 1966 is given above. In addition to possible name plate capacity difficulties, there are some other potentially troublesome areas that require mention. Inventory changes, accounted for as much as possible but not completely here, can affect results. Ethylene trade, which is not significant across oceans now, can and does affect the U.K. and EEC, and could become significant in intercontinental trade in the future. Refinery use of ethylene, for alkylation to gasoline blending stocks, is not very large now, but could become much more important. I didn't consider that here. Still another caution in interpreting results is that trade of the rest of the Outer Seven (except the U.K.) is not separately considered here. One also has to be cautious not to automatically assume that an overall ethylene surplus in, say EEC, necessarily means that a surplus exists in the entire area. So far, ethylene pipeline facilities are quite limited and ethylene is costly to move by other means. Thus, localized shortages with an overall surplus are not uncommon.
Dr. James G. Tewks· bury is president of Chemarkets, Inc., Old Greenwich, Conn., a consulting firm he started in 1965. His principal activities are analysis and forecasting of markets, marketing, and profits in the chemical area. International trade has been of particular interest to him since 1967, when he did a study on the effect of the Kennedy round on the chemical industry. His clients include Equity Research and a number of major chemical and oil companies. Dr. Tewksbury received a B.S. in chemical engineering in 1949 from Case Institute of Technology and a Ph.D. in physical chemistry in 1952 from Massachusetts Institute of Technology. He then was with Standard Oil Co. of California for 13 years in refining, refinery process planning, petroleum economics and, finally, chemical marketing research.
You can purchase reprints of this C&EN business feature, Ethylene Derivatives 1 to 49 copies—50 cents each 50 to 299 copies—40 cents each Prices for larger quantities on request To:
Data sources The basic source of the data I've used here is a study by Pace Co., Consultants and Engineers, entitled, "Free World Ethylene and Its Derivatives," April 1968. I believe this is by far the most accurate and comprehensive data available. However, even this does not have complete data on some minor ethylene derivatives and is more than a year old. I supplemented and updated the Pace study as needed with data from other published sources.
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J U L Y 28, 1969 C & E N 25
