INTERNATIONAL BUSINESS
European Executives Bullish Over Outlook for Petrochemical Industry Favorable factors cited include improving economic growth prospects, freer market in oil prices, benefits of restructuring moves Dermot A. O'Sullivan, C&EN London
William Shakespeare wrote, "What's past is prologue." It may have b e e n w i t h this premise in m i n d that the E u r o p e a n Petrochemical Association's 20th annual meeting in Monaco recently chose its t h e m e — t h e petrochemical industry over the past 20 years: have we learnt our lessons, a n d can w e apply t h e m in the future? Jacques P u e c h a l , p r e s i d e n t of Paris-based Atochem, one of France's leading petrochemical concerns, opened the session with a brief look back at h o w the French petrochemical industry has changed. In the mid-1960s, acetylene still was a basic material for making acrylonitrile, v i n y l c h l o r i d e , a n d t h e like, h e points out. French ethylene capacity stood at about 900,000 tons a year in contrast with today's 2.48 million tons. The rise in ethylene production stemmed from the rapid growth of fuel consumption, w h i c h in t u r n m a d e n a p h t h a available in large quantities a n d at a low price, he notes. "Furthermore, bulk plastics w e r e developing, w h i c h increased d e m a n d for ethylene. This helped newcomers enter the business a n d build production sites beside existing ones." The first attempts at restructuring the French petrochemical industry occurred in the 1970s w i t h t h e e m e r g e n c e of ATO C h i m i e , Produits C h i m i q u e s U g i n e Kuhl16
October 27, 1986 C&EN
m a n n (PCUK), and Rhone-Poulenc, Puechal recalls. Based on overoptimistic d e m a n d forecasts, decisions were taken to put u p n e w units. Although older ones were shut d o w n , overcapacity continued because t h e rate of market g r o w t h slowed at about the time the n e w plants came on stream. Moreover, n e w producers outside the European Economic Community were coming onto the scene. During the 1982 recession the situ a t i o n became " c a t a s t r o p h i c , " as Puechal puts it. This led to the second reshuffling of the French industry under a government-inspired plan (C&EN, April 2, 1984, page 22). PCUK ceased to exist, a n d Rhone-Poulenc essentially withdrew from the business. Basic petrochemicals output in France n o w is confined to Atochem and CdF Chimie, t o g e t h e r w i t h British P e t r o l e u m , Exxon, and Shell, he notes. "Capacity reductions were accomplished, a n d this process is not necessarily at an e n d , " Puechal notes. "What h a p p e n e d in France may be seen as a special case," he says. "I don't think so. Building up, t h e n restructuring the petrochemical industry has not been very different in other countries," he maintains. "What seems to me of the utmost importance is our concern to continue strategic moves in the European petrochemical business. This is needed to maintain our competitiveness, to keep on u p g r a d i n g our units, and to replace the aging ones. "Some moves have been achieved in this direction during the past few years. N o w we should not lose time, even if the present economic situation is more profitable to us. We have to improve our profitability so as to be able to [cope with] international c o m p e t i t i o n a n d an everpossible depression.
Puechal: con tin ue s tra tegic mo ves "A fundamental change has been the emergence of newcomers in lowcost raw material countries or in areas with developing markets. Capacity is growing, and these newcomers are disrupting 'traditional' European markets and our export markets. These n e w producers will not give u p , and we—Europe, Japan, and the U.S.—have to share the b u r d e n equally." T u r n i n g to pricing policies, Puechal r e m i n d e d his listeners t h a t w h e n there is an increase in raw material costs, it is difficult and takes time to transfer this to the price of the end products. On the other h a n d , w h e n feedstock prices decrease, t h e lower cost is r a p i d l y applied. 'Tricing stability can develop confidence of the downstream industry a n d increase the penetration of petrochemical products," h e maintains. " S a l e s m e n m u s t h a v e t h e nerve to resist buyers' arguments.
Trying to gain market share w h e n there is overcapacity can deeply alter profitability of operations a n d bring n e w fluctuations." N e v e r t h e less, Puechal professes confidence in the future of t h e petrochemical industry in Western Europe. Also expressing optimism is Tom O. Hutchison, Imperial Chemical Industries' director in charge of petrochemicals a n d plastics w i t h responsibility for continental Europe. "I associate myself with a moderate, yet rising, sense of optimism regarding the future of the industry in Europe," he says. "A n u m b e r of significant factors are in our favor. It is u p to us to take full advantage of them. If w e don't, someone else in the world will." The favorable factors h e cites are a greater sense of economic realism within the industry, improving economic g r o w t h prospects, the freer market in oil prices, changes in Middle East developments, and the benefits arising from r a t i o n a l i z a t i o n moves. T h r o u g h o u t the 1960s, a n d during m u c h of the 1970s, Hutchison recalls, a n u m b e r of West European chemical producers decided to enter sectors of t h e industry a n d invested large sums of cash on projects that had little foundation in economic reality. "Price was often the only means of gaining market share, and resulting market disruption was commonplace," h e notes. "I n o w see signs that attitudes are changing," he says. "Many companies have achieved a substantial market position in selected products, and n o w have a considerable vested interest in market stability. In addition, g o v e r n m e n t s , at one time guilty of profligate s p e n d i n g , are indicating a h a r d e n i n g attitude toward Tame duck' projects. This n e w s e n s e of r e a l i s m is v i t a l l y n e e d e d t h r o u g h o u t our industry, a n d must be maintained." The price of oil, a n d the prospect for i m p r o v e m e n t in economic g r o w t h are interlinked. Oil n o w is priced at about $ 1 2 t o $ 1 5 a barrel, roughly half w h a t it was at its peak. The consensus is that it will remain at around the current level for some time. " A l t h o u g h t h e Organization of Petroleum Exporting Countries is
European ethylene, plastics capacity changed since 1980 Billions of lb
Ethylene Polyethylene, low density Polyethylene, high density Polypropylene Polystyrene Polyvinyl chloride
Capacity, end of 1980
Capacity, phased out 1980-66
40.00 14.76 6.07 5.54 5.20 13.10
12.72 3.60 1.01 0.73 0.68 1.87
Capacity Current Capacity added capacity change, %
2.76
-— «— 1.32 0.33 0.33
30.04 11.16 5.06 6.13 4.85 11.56
-25% -24 -17 11 -7 -12
Source: EniChem
likely to re-establish greater influence in the 1990s, I believe its members have learned from the past, a n d that future oil price increases will be progressive rather t h a n disc o n t i n u o u s , " H u t c h i s o n predicts. "The prospects, at least for t h e next few years, are for oil to be influenced principally by a freer market. As a result, w e will have to live w i t h continuing oscillations in oil a n d gas prices. Those petrochemical producers w h o can accommodate greater flexibility in their feedstock use will see a h a n d s o m e competitive d i v i d e n d . " H e acknowledges that the d r o p in crude oil prices late last year has not yet fed t h r o u g h to improved economic g r o w t h for the industrialized world. A n d a l t h o u g h that g r o w t h unlikely will match " t h e heady levels" of the 1960s, he expects it to return to the rates of the 1970s, namely, annual growth of bet w e e n 2.5 a n d 3% in gross national product. "That w o u l d be a notable i m p r o v e m e n t on the recent past," he points out. Petrochemical producers will benefit in a n u m b e r of ways, Hutchison says. For instance, energy costs n o w are back to the levels prevailing before the 1973 Arab oil embargo, and raw material costs have fallen substantially. Although the subsequent rise in profit margins is unlikely to be fully sustained, a significant imp r o v e m e n t probably will be realized. Increasing d e m a n d probably will lead to h i g h e r levels of plant capacity use. In contrast to t h e c o n c e r n expressed a few years ago about threats from the b u i l d u p of petrochemical production in Saudi Arabia, Hutchison n o w feels more secure about the future. It is true, of course, that
large t o n n a g e s of p r o d u c t s from Saudi plants have found their way into Western Europe a n d that additional quantities have cut into markets long served by West European makers. " M u c h of this product n o w has been accommodated," h e says, " a n d I foresee less of a threat arising from the plants u n d e r construction a n d yet to be started u p t h e r e . " Substantial moves have been made in the past few years to bring production capacities of plants making ethylene a n d the bulk t h e r m o plastics made from it more into line with anticipated demand and growth rates. These, together w i t h restructuring steps, were h i g h l i g h t e d by Charles M. Doscher, chief operating officer of Milan-based EniChem, the chemicals arm of Italy's Ente Nazionale Idrocarburi, w h e n h e addressed the European Chemical Market Research Association meeting in A n t w e r p recently. D u r i n g t h e
Hutchison:
attitudes
are
changing
October 27, 1986 C&EN
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I I I I I I I I I I I I I I I
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CIRCLE 33 ON READER SERVICE CARD October 27, 1986 C&EN
I I I I I I I I I I I I I I I
International Business past six years, for instance, ethylene capacity was p r u n e d 25%, that of low-density polyethylene 24%. The reductions have had a positive impact on capacity utilization. According to Doscher's figures, the average n o w stands close to 96% for polypropylene, 89% for LDPE/linear LDPE, 84% for both ethylene a n d high-density polyethylene, 83% for polystyrene, and 82% for polyvinyl chloride, based on nameplate capacities, w h i c h usually are 5 to 10% greater t h a n the available capacities. The 1981 use rates, by comparison, were 75% for polypropylene, 62% for LDPE/LLDPE, 71% for ethylene, 64% for HDPE, 60% for polystyrene, and 64% for PVC. "By a combination of attrition in capacity, buoyancy in the market, and an oil glut, the picture today looks less critical, a n d the industry less in need of major surgery. But before w e all start congratulating ourselves a n d p r o n o u n c e the crisis over, the margin i m p r o v e m e n t achieved has not left the bulk plastics' producers in a position w h e r e their returns on investment are sufficient to pay for rebuilding of aging p l a n t s / ' Doscher hastens to add. "Since updating productive assets is an acid test of the health of any business, the point needs to be emphasized. I am not talking here of capacity additions, but the need for a 'scrap and build' policy that is just as m u c h part of restructuring as plant closures." ICI's H u t c h i s o n c o n c u r s , a n d voices concern about " t h e advancing age of t h e [European p e t r o chemical] industry's assets. Many old plants have been closed. But there has been little opportunity to build n e w plants in the past five years, and the 'average plant' n o w is about mid-1970s vintage. There will in time be a growing a n d eventually urgent need for the replacement of existing assets. "Few responsible [management] boards will be reaching for their checkbooks to replace bulk chemical plants even at today's somewhat improved level of return on investment. In the long term, this presents a problem for w h i c h I see n o immediate solution other t h a n t h e creation of a driving force for yet further concentration."
Doscher: need scrap and build policy In t h i s c o n n e c t i o n , H u t c h i s o n points out, "there still are far too many producers of several important products." In the case of ethylene, for instance, the n u m b e r has moved d o w n only marginally to 28, from 31 in 1975. Likewise for HDPE, there are 16 n o w against 18 in 1975, 17 in polystyrene against 20. Indeed, the n u m b e r making polypropylene has moved u p to 16 from 11 over the same timespan. " O u r colleagues in synthetic fibers have substantially changed the shape of their industry [in Europe]. We w o u l d do well to emulate t h e m , " he suggests. "This brings u p the sensitive issue of competition," Hutchison continues. "In Western Europe, there are many factors and attitudes in each country that make it difficult to achieve the restructuring w h i c h is necessary. While most of these can be overcome, more difficult are those aspects of competition policy w i t h i n the EEC Commission that inhibit restructuring. "There already have been some mergers and joint ventures w i t h i n EEC," he admits, " w h i c h leads me to believe that neither national gove r n m e n t s nor the commission are wholly opposed to the concept. But the process of receiving clearance or exemption from the commission is painfully slow." H e cites the case of his compan y ' s a g r e e m e n t to take over BP Chemicals' PVC operations in ex-
React to this... change for ICI's LDPE business in the U.K. "It took 18 m o n t h s after the notification before exemption was a n n o u n c e d / ' h e recalls. EniChem's Doscher maintains that "if m a n a g e m e n t adopts a flexible a n d o p e n - m i n d e d approach to the problems, w e are going to be closer to a solution." H e illustrates his p o i n t w i t h t w o examples d r a w n from his o w n experience. O n e involved EniChem's leasing for 10 years the LDPE plant of Hoechst's R u h r c h e m i e s u b s i d i a r y in O b e r hausen, West Germany. At the same time E n i C h e m p h a s e d out some LDPE capacity in Italy. "The result has been quite positive," he points out. "Hoechst, which was seeking a way of getting out of LDPE w i t h o u t writing off expensive plant, has achieved its goal. EniChem w a n t e d a N o r t h e r n European production facility for strategic commercial reasons, but did not w a n t to build additional capacity." Doscher's other example centers on a joint venture between EniChem a n d ICI in PVC, called European Vinyls Corp. "Both companies were integrated producers. By leaving the assets with the parents, the two comp a n i e s w e r e able to c o n s t r u c t a mechanism that allowed the right degree of flexibility at plant level w h i l e ensuring that the n e w venture had the necessary resources to fulfill its mission." Looking to t h e future, Doscher maintains that " w h a t needs to be d o n e most is to examine carefully the way w e approach innovation and specialized product segments. Today's commodities w e r e specialties once, and those w h o ignore history are in great danger of repeating it. European companies need to be acutely aware of w h o is doing w h a t in terms of innovation so that w e d o n ' t d u p l i c a t e each o t h e r ' s work. "It is entirely possible that collaborative research a n d innovation approaches are the only way w e can ever expect to create a healthy chemical industry over the next two decades. Only t h e n can w e have reasonable h o p e that managers of the 21st century will not need to undertake the painful rationalization that today's m a n a g e r s h a v e come to regard as part of the job." •
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