WORLD CHEMICAL OUTLOOK AT THIS TIME LAST YEAR, C&EN predicted that 2006 would be a year of growth around the world—and that is essentially what it proved to be. In the U.S., the volatility of raw material and energy costs proved challenging for companies, especially those in the basic chemical sectors. Still, chemical industry fundamentals improved: Production grew and selling prices increased rapidly. The Canadian chemical industry followed a pattern similar to that of the U.S., but plant closures lowered performance from what it could have been. There are few actual data for Latin America, but anecdotally, the chemical industry there seems to be doing well, as evidenced by a flurry of new projects and only a few cancellations. Outside the Americas, the chemical industry in Europe finally escaped the malaise that has weighed it down in recent years and enjoyed above-average growth. In the Asia-Pacific region, China maintained its high-flying status and even Japan managed to show relatively good profit
growth, despite declines, sometimes substantial, in the output of many chemicals. For this year, companies in most regions are predicting continued growth, but it is generally a cautious prediction. The caution comes from the belief among producers that even though oil and natural gas prices have come off their peaks, these costs will continue to be volatile. Plus, demand may slow in some regions. In Europe, for instance, 2006 chemical production grew about 2.5%, above the average for the past few years, but producers are expecting a slower 2.2% expansion in 2007. The same holds true for most chemicals in the U.S. For the entire industry, production is expected to grow 3.2% this year after a 2.1% rise in 2006. But the 2007 figure includes a 5.0% projection for pharmaceutical industry growth after an estimated 1.1% decline last year. Excluding pharmaceuticals, the estimate for the rest of the U.S. chemical industry is 1.9% growth in 2007, down from 4.5% last year. As for the Asian chemical industry, which WWW.CEN-0NLINE.ORG
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has enjoyed several years of rapid expansion, worries are emerging that the prosperity will not last. Although no concrete problems loom, companies have the nagging fear that the region is due for one of the crises that seem to hit it every few years. Only China sailed unscathed through the several crises that affected other Asian countries between 1997 and 2003. World Chemical Outlook was compiled by William J. Storck, senior correspondent, and Alexander H. Tullo, senior editor, in New Jersey; Patricia L. Short, senior correspondent, in London, and Jean-Francois Tremblay, senior correspondent, in Hong Kong.
CONTENTS UNITED STATES CANADA LATIN AMERICA EUROPE ASIA-PACIFIC
-g 14 17 19 21 24
COVER STORY
UNITED STATES Analysts view 2007 with GUARDED OPTIMISM as some industry fundamentals weakened at year-end 2006 WILLIAM J. STORCK, C&EN NORTHEAST NEWS BUREAU
IF THERE IS AGREEMENT among chemi cal industry observers in the U.S., it is that the economic cycle is aging and that the highly cyclical chemical industry is in for slower growth in 2007. There are a number of reasons for this tempered optimism. The U.S. chemical industry has suffered through hurricanes, a shaky geopolitical climate, and increasing feedstock and energy costs. It is now looking warily at the less-than-stellar performance in the housing and automotive sectors, both big users of chemicals. Chemical results in 2006 show just how vulnerable and volatile the industry can be. In the first quarter, when companies were still feeling the effects of rising feedstock and energy costs and the 2005 Gulf Coast hurricanes, C8cEN's survey of major chemical producers showed an aggregate earn-
ings decline of 2.7% from the same period a year earlier; sales rose just 5.1%. In the second quarter, earnings were up just 0.4% on a 6.6% increase in sales. And in the third quarter, when natural gas price hikes began to moderate, earnings jumped 23.0%, and sales increased 11.4%. In all three quarters, however, most companies scored earnings increases, often in the double-digit range, and any bad news tended to come from just a few major companies. Despite overall low earnings growth in the first half of the year, industry fundamentals performed fairly well in all of 2006. Using data from the Federal Reserve Board through November, C8cEN estimates that the 2006 production index for chemicals increased 2.4% over 2005, led by a 3.0% increase in the basic chemical segment. Drilling down further shows that ba-
sic organic chemical output rose 2.3%, and basic inorganic chemicals increased 4.2%. The producer price index for all chemicals also performed well in 2006, improving 7.4% as producers successfully covered increases in their raw material and energy costs with price increases of their own. Again, the basic chemical sector was the growth leader, with its index appreciating 12.9%. Basic organic chemical prices rose 10.3%, less than half the 22.5% rise in inorganic chemical prices. The value of U.S. chemical shipments for the full year was about $580 billion, a 5.3% increase over the prior year. Excluding the 11.8% increase in pharmaceutical shipments of about $155 billion, demand for the remainder of the U.S. chemical industry was up just over 3% to about $425 billion, C8cEN estimates. The increase in chemical shipments was helped by higher export values. C8cEN projects that the value of all chemical exports in 2006 was about $134 billion, an increase of almost 12% over 2005. Chemical imports for all of 2006 totaled about $143 billion, an 11% gain. The chemical trade deficit was about $8.4 billion; it was $8.1 billion a year earlier.
TRADE Chemical trade deficit increased slightly in 2006 $ MILLIONS
Organic chemicals Inorganic chemicals Plastics Fertilizers Pharmaceuticals Cosmetics Dyes & colorants Other TOTAL
2003
EXPORTS 2004 2005
2006 a
IMPORTS 2004 2005
2003
2006 a
2003
$20,103 $25,852 $26,765 $29,470 $32,887 $35,447 $38,009 $42,676 5,576 6,196 10,960 7.698 8,980 8,276 10,165 7,420 25,202 21,069 28,861 32,482 14,222 19,183 17,385 12,161 2.342 2,595 2,990 3,000 3,460 2,636 3,701 2.129 23,433 17,776 28,092 45,550 25,012 34,937 31.517 39,176 7.441 6,558 8,300 8,059 9,120 7,922 6,948 5,611 4,138 4,569 4,901 5,367 2,667 2,971 3,100 2,481 12,987 14,563 15,846 9,546 17,865 7,982 6,858 8,939 $91,549 $109,851 $120,132 $134,376 $101,054 $113,115 $128,268 $142,775
-$12,784 -1,844 8,908 213 -13,741 947 1,657 6,129 -$9,505
TRADE BALANCE 2004 2005
a C&EN estimates. SOURCE: Bureau of the Census
DEMAND Inventories-to-shipments ratio began to rise in August as shipments slipped lnventories-to-shipments ratio
SOURCE: Department of Commerce
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2006 a
-$9,595 -$11,244 -$13,206 -1,980 -2,467 -2,080 10,980 13,299 11,476 -41 -460 -711 -11,504 -17,458 -14,164 493 137 820 1,902 2,267 1,930 6,907 6,581 8,319 -$3,264 -$8,136 -$8,399
OUTPUT All sectors, save pharmaceuticals, showed good production gains PRODUCTION INDEX, 2002 = 100 Manufacturing Chemicals Basic chemicals Basic organics Basic inorganics Resins, synthetic rubber & fibers Agricultural chemicals Pharmaceuticals & medicines Paints, coatings & adhesives Soaps, cleaning compounds & toilet preparations
2003 101.3 101.4 102.8 105.1 99.8 98.4
2004 104.4 105.7 111.7 121.0 99.7 103.1
2005 108.6 108.0 111.8 120.5 98.7 107.0
2006a 114.8 110.6 115.1 123.2 102.9 108.9
CHANGE 2005-06 5.0% 2.4 3.0 2.3 4.2 1.8
104.5 103.4 100.5
109.7 104.0 105.0
115.0 106.0 106.3
118.6 105.3 109.5
2.6 -0.6 3.0
96.2
107.8
116.7
125.5
9.1
a C&EN estimates. SOURCE: Federal Reserve Board
So, it looks like 2006 turned out to be a fairly good year, considering the problems that the chemical industry faced, primarily in the first six months. This year, however, maybe more of a challenge, according to economists, consultants, and analysts. In the last few months of 2006, economists lowered their forecasts for the economy in 2007. The National Association for Business Economics (NABE) surveyed 50 professional forecasters between late October and early November and found a consensus forecast for real gross domestic product (GDP) growth of 2.5% this year. This prediction is down from 2.7% in a survey taken just two months earlier. "Despite the hindrance of the housing correction, the economy is expected to gain ground in 2007," says Carl R. Tannenbaum, president of NABE and chief economist at LaSalle Bank/ABN AMRO in Chicago. He adds, though, that the forecast panel suggests that "we'll need to pay close attention to energy prices, home sales, and inflation, which could threaten the expansion's durability." The Livingston Survey, compiled by the Federal Reserve Bank of Philadelphia, predicts that real GDP will grow at an annual rate of 2.8% in the first half of 2007 and 3.1% in the second half. Although this is a more optimistic prediction than the NABE consensus, the Livingston forecasts are lower than they were six months earlier. Still, the chemical industry in the U.S. is expected to perform well, and perhaps even better than in 2006. In its annual forecast, the American Chemistry Council predicts that overall, U.S. chemical industry growth in 2007 will improve to 3.2% after an estimated 2.1% increase last year. The growth leader this year, according to
ACC's chief economist, T. Kevin Swift, will be pharmaceuticals, with a 5.0% increase in output. This follows a 0.6% decrease for the segment in 2006. Excluding drugs, though, the remainder of the U.S. chemical industry will grow at just 1.9% this year, well down from the 4.5% growth estimated for 2006. Swift warns that the industry faces some economic headwinds. A major risk continues to be volatile natural gas costs, although these costs are off from their posthurricane peaks and down relative to oil as a result of mild weather during the past year.
ACC projects that, in 2008, GDP will rise 3.3%, up from an estimated 2.6% growth in 2007; however, growth in chemical production will decline to 2.5% in 2008 from 3.2% in 2007. This apparent disconnect between overall GDP growth and chemical growth comes because the chemical industry is nearing the end of the commodity cycle. ACC expects the chemical economy to start declining before any overall decline sets in, as it has in the country's past two economic expansions. During 2006, the ACC survey says, high feedstock and energy costs and improving plant operating rates resulted in higher chemical product prices and contributed to higher shipment values. ACC forecasts shipments valued at $618 billion in 2007 and $636 billion in 2008 as a result of continued expansion in output. TRADE WILL HELP increase demand for U.S. chemicals in 2007. ACC says there will be an improvement in the trade balance for agricultural chemicals, polymers, surfactants, and specialty chemicals including adhesives, catalysts, coatings, and plastic additives. Exports may provide "a pleasant surprise for U.S. producers," Swift says, if the dollar continues to weaken against foreign currencies. Analysts at Fitch Ratings are also san-
EFFICIENCY Slightly improved chemical productivity caused decline in unit labor costs
a C&EN estimates. SOURCES: Bureau of Labor Statistics, Federal Reserve Board
MARKET CONDITIONS Production growth will slow in basic chemicals in 2007, while price increases will moderate
a C&EN estimates. SOURCES: Federal Reserve Board, Bureau of Labor Statistics
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guine about 2007. "Fitch believes fundamental market and economic conditions for the chemical industry continue to be good, despite the instability caused by energy markets," says Randy Biang, senior director at the ratings service. The sharp drop in crude oil prices in third-quarter 2006 helped boost chemical operating margins, but it also quickly slowed demand as many purchasers stopped buying in anticipation of lower prices, Biang says. "Demand growth should return as end-users work off excess inventories and need to start buying product again." On the other hand, Biang says, the recent slowdown in U.S. economic activity, falling real estate sales, inflation, and rising interest rates all put pressure on consumption and, consequently, on demand. All in all, 2007 may have lower prices and margins but will still be a profitable year for suppliers, he says. In terms of individual products, Joy Guttschow, an associate director at Fitch, says 2007 may be the last good year of earnings for polyvinyl chloride producers before a slug of new capacity forces
PRICES Basic chemical prices rose at double-digit rates again in 2006 PRODUCER PRICE INDEX, 1982 = 100
2003
2004
2005
2006 a
CHANGE 2005-06
All commodities Chemicals Basic chemicals Basic inorganics Basic organics Paints Pharmaceuticals Fats & oils, inedible Agricultural chemicals Plastic resins Other chemicals
138.1 161.8 141.7 121.1 146.7 172.6 274.7 123.6 135.2 146.1 141.2
146.7 174.4 162.8 125.5 173.9 178.7 284.5 153.6 143.9 163.1 143.8
157.3 192.0 188.5 141.4 203.1 190.7 298.2 146.9 153.0 193.0 159.3
164.6 206.2 212.9 173.2 224.0 203.9 312.0 148.8 158.0 199.4 157.9
4.6% 7.4 12.9 22.5 10.3 6.9 4.6 1.3 3.3 3.3 -0.9
a C&EN estimates. SOURCE: Bureau of Labor Statistics
the market into a cyclical downturn. She says Fitch expects the U.S. PVC market to remain tight in 2007, most significantly through the seasonally strong second and third quarters, so long as the U.S. economy remains fairly robust. North American fertilizer producers, she says, should show stronger profitability, earnings, and cash flow in 2007 because of market conditions that may encourage increased planted corn acreage in the U.S. Luknova Flash Columns and strong fertilizer demand abroad. And Guttschow notes that specialty chemical producers will likely see improving operating margins as raw material costs come down. Fitch expects specialty producers to continue to raise prices to mitigate the impact of the higher raw material, energy, and transportation costs they incurred in 2006. She notes, however, Prepacked Columns Solid Load Columns that most specialty • Leak-free, pressure up to 90 psi • No plunger producers don't • Quicker and more efficient separations • No O-rings • Tight and uniform packing, no channeling • No spills and splashes price their products • Sample recovery and reusable • No clumsy external spring on the basis of avail• Easy disassembly and reassembly • No maintenance ability, as commod• Reliable and reproducible performance • Easy and effective ity producers do, and Excellent Quality • Low Price • Reusable therefore have less Compatible with all purification systems. pricing flexibility. The ethylene Luknova Inc., 20 Cabot Blvd, Suite 300, Mansfield, MA 02048 chain is receiving a Phone (508) 618-1257 Fax (508) 618-1334 good deal of
[email protected] www.luknova.com tion from analysts.
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JANUARY 8, 2007
Fitch expects ethylene and polyethylene operating rates to remain high, but not at peak levels, in the first half of this year. Buyers are likely to replenish inventories in early 2007, improving operating rates from the drop seen in fourth-quarter 2006. Most petrochemical producers will see some degree of relief on the raw material side of the equation in 2007; however, Fitch expects natural gas and crude oil costs to continue to be volatile. At Merrill Lynch, research analyst Don Carson says margins for U.S. producers of ethylene and its derivatives eroded sharply in the fourth quarter of 2006. Softening demand led to price declines that sharply outpaced falling raw material costs, he says. Effective ethylene operating rates, Carson estimates, likely averaged only 91% in the fourth quarter after hovering around a more robust 95% in the first three quarters of 2006. Merrill Lynch also takes note of the housing slowdown. "PVC has the most housing-related exposure of any of the ethylene derivatives, with 20% of PVC demand represented by construction applications," Carson says. The North American PVC industry reduced production by 12% in October, following a 5% decrease in September. Producers trimmed output even further in November and December, he notes, weakening demand for ethylene and chlorine. Thus, the U.S. chemical industry starts 2007 with its traditional concerns about volatile costs, foreign competition, and adverse geopolitical events. But it is adding some new worries: lower selling prices, slowing downstream markets such as housing and automobiles, and a concern that the end of the business cycle, at least for commodities, is approaching. •
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CANADA
Mirosh expects Nova to have a year similar to 2006. "We don't see anything that wouldn't mirror 2006 in terms of our economics and maintaining our costs," he Industry mulls OPPORTUNITY for new feedstock sources says. ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU J. S. (Steve) Griffiths, vice president and general manager of petrochemicals at Imperial Oil's products and chemical diviTHE CANADIAN chemical industry had prices. Moreover, the "Alberta advantage," sion, agrees. "We're looking for a strong another good year in 2006. But with high the cost benefit that ethane-based ethylene year again in 2007," he says. "There should energy prices cutting into industry profitcrackers in Alberta enjoy versus similar be a couple more years of strength for the ability and a couple of prominent plant plants on the Gulf Coast, almost tripled chemical business." closures, the year wasn't as good as it could from its usual 6-7 cents per lb to a record But Griffiths warns of changes for the have been. 17 cents. Mirosh credits a wide natural gas North American petrochemical industry by Industry observers expect another price differential between the Gulf and about 2011 as plants start up in the Middle profitable year in 2007. Longer term, the Alberta. East and Asia. These facilities will gradually Canadian petrochemical industry will need Observers expect undermine the ability access to additional feedstocks if it is to 20071° be another of the North AmeriTRADE expand. good year for chemican industry to export Chemical trade deficit grew once According to C&EN projections based overseas and could cals. On the basis of again in 2006 on figures culled from Statistics Canada, also generate imports surveys of its memCanadian chemical shipments increased by bers, CCPA forecasts of downstream chem$ Billions (U.S.) 3.6% in 2006, hitting $45.9 billion. Certain chemical sales to inical products such as individual sectors, however, beat that pace: crease by 1% this year polyethylene film. Basic chemicals grew at a robust 11.6% rate, on flat volumes and a "Every year, there will and resins and synthetic fibers increased moderate increase in be a little more of a at a 9.7% clip. Chemical prices, meanwhile, margin squeeze as a selling prices. Operinched up by only 1.4% during the year. result of imports," he ating profits are exProjections by the Canadian Chemical says. pected to surge by 18% Producers Association shed more light to $1.8 billion. Capital Plant closures put on last year in Canada's chemical sector. expenditures are forea damper on CanaNOTE: All data were converted at the exchange CCPA projects that Canadian sales of basic rate of $1.00 U.S. = $1,133 Canadian. cast to rise by 17% to dian chemicals in a C&EN estimates. chemicals and resins grew by 10% in 2006, $1.2 billion, their high2006. In particular, SOURCES: Statistics Canada, Industry Canada hitting $25.9 billion. Volumes, meanwhile, est level since 2000. a seemingly obscure increased by 6.0%, and prices increased by 4.0%. PRODUCTION According to CCPA, before-tax operatCanadian chemical output largely declined in 2006 ing profits for Canadian chemical manufacturers declined by 7.0% in 2006 to $1.5 billion. David Shearing, the association's 2004 2005 2006 a 2005-06 THOUSANDS OF METRIC TONS 2002 2003 4,607 4,444 -3.5% Ammonia 4,996 4,501 4,455 senior manager of business and economics, 1,096 1,206 1,120 -7.2 Ammonium nitrate 1,152 1,031 explains that the industry didn't keep up 724 -9.3 Benzene 915 798 843 849 with rising energy prices. "Prices went up 2.6 245 251 Butadiene 276 289 276 to cover a lot of the cost, but they couldn't recover all of it," he says. 1,057 1,004 -1.6 994 Chlorine 988 1,095 A couple of Canadian industry bellwethna na Ethylene 4,734 4,729 na 5,095 141 162 14.6 ers, however, posted large profit gains 153 149 Hydrochloric acid (100%) 151 1,147 1,121 -2.2 Nitric acid 1,219 1,143 1,105 for the first three quarters of 2006. Nova Chemicals' olefins segment, which oper6 3,587 3,366 7.3 3,083 3,613 Polyethylene 3,330 ates solely in Ontario and Alberta, reported 207 198 194 -2.0 183 Polystyrene0 195 a 35% gain in before-tax profits to $633 mil737 2.5 939 755 Propylene 938 956 lion for the first nine months of 2006 ver1,169 -3.8 Sodium chlorate 1,029 1,183 1,125 1,055 sus the year-earlier period. Sales increased 1,117 1,071 -4.2 1,146 Sodium hydroxide 1,059 1,111 20% to $3.2 billion. Nine-month chemical 1.9 3,755 3,828 3,887 3,465 3,933 Sulfuric acid profits at Imperial Oil, ExxonMobil's Canana na na Toluene 289 na 256 dian affiliate, jumped 21% to $95 million. 3,654 3,549 na na Urea 3,311 3,436 Val Mirosh, Nova's president of olefins na na Xylenes 294 336 351 na and feedstocks, attributes the strength, a a C&EN estimates, b Includes low-, linear low-, and high-density resins, c Includes acrylonitrile-butadiene-styrene record for the olefins segment in the third resins, na = not available. SOURCE: Statistics Canada quarter, to strong ethylene demand and WWW.CEN-0NLINE.ORG
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as an industry, we have to understand what event early in 2006 had drastic effects on to work around the Cochin outage with we want to do with that position." the industry by year's end. ethylene purchases. In the short term, Nova's Mirosh says, In March, BP's Cochin Pipeline System, When it announced the Sarnia closures, there is more ethane available in Alberta a 1,800-mile natural gas liquids pipeline Dow said it would also close its Fort Sasbecause Dow isn't converting as much into connecting Fort Saskatchewan, Alberta, to katchewan chlor-alkali facility and a downethylene as it had been. During this time Sarnia, Ontario, suspended shipments of stream ethylene dichloride (EDC) plant by of the year, he adds, Nova typically suppleethylene "at least" until fall 2007. BP said the end of October. Last year, the company ments its ethane feedstock with propane. it needed to lower the pressure in the pipeclosed a vinyl chloride plant downstream "We have had to do less propane line "to ensure a proper safety cracking than we otherwise margin for operations." Ethylene, PRICES would have been doing in this the company explained, has a Canadian chemical prices increased only slightly in 2006 situation," he says. higher vapor pressure than other products in the pipeline such as Longer term, the chemical ethane, propane, and butane. Chemicals & industry in Alberta, which today chemical products runs mostly on ethane extracted Cochin supplied ethylene to from local natural gas, has pinned Dow Chemical's 220 millionits hopes on extracting ethane lb low-density polyethylene Organic chemicals from natural gas pipelines that (LDPE) plant in Sarnia. Citing would come down from the North All manufacturing the lengthy ethylene outage, Dow Slope of Alaska or the Northwest announced in late August that it Territories' Mackenzie Delta would permanently shutter the Inorganic chemicals sometime in the next decade. It is unit over the following weeks. also looking increasingly at northJeff Johnston, president of ern Alberta's burgeoning tar sands a C&EN estimates. SOURCE: Statistics Canada Dow Chemical Canada, says industry, which may yield enough the company exhausted all of by-product ethane, propane, ethits options in securing a supply SHIPMENTS ylene, and propylene to support of ethylene to keep the LDPE Canadian firms' sales increased despite soft volumes petrochemical production. plant running, including buying ethylene from competitors in the In the meantime, the indusSarnia area. "We were never able try is eyeing extracting ethane to come up with other sources of from natural gas liquids that are Chemical manufacturing ethylene that made any economic already leaving the province and sense," Johnston says. being burned as fuel in the U.S. The government of Alberta has With the LDPE closure also Resin, synthetic proposed offering incentives of came news that the company was rubber and fibers Basic chemicals up to $31 million in royalty credclosing all its other units at the its on new ethane supplies. site, including a polystyrene unit, Fertilizers slated to close in September, and According to Mirosh, the proacrylic latex and propylene oxide posed policy is a step in the right derivatives units, set to close in direction. "Those types of dollars NOTE: All data were converted at the exchange rate of $1.00 U.S. = $1,133 Canadian, a C&EN estimates. SOURCE: Statistics Canada 2008. In addition, the company is are fairly significant and would planning to sell its hydrocarbon encourage the extractors of storage caverns and permanently shut ethane to look at projects that to date they from the EDC unit. Johnston says the down its Sarnia product development haven't looked at," he says. The proposals, chloro-vinyls production at the site was plant. All told, some 340 Dow employees he adds, could unlock another 50,000 barno longer globally competitive. "That was and 40 contractors in the Sarnia area are rels of ethane a day, enough to support an a decision that started with vinyl chloride affected. ethylene cracker expansion in Alberta. and worked its way up," he says. Although a blow to the Alberta industry, Chemical expansions may get underway JOHNSTON EXPLAINS that losing the the closure of the EDC and LDPE units in the Sarnia area as well. Shell Canada is LDPE plant, Dow's most profitable unit in may create other opportunities by freeing spending about $43 million on a study for Sarnia, caused a "domino effect" and made up more than 600 million lb of annual etha heavy-oil refinery based on tar-sands-dethe entire complex uncompetitive. "We ylene capacity. Johnston hasn't ruled out rived feedstocks. A Shell spokesman says determined that without that major particiDow or another company building a polyit is too soon to tell if the project will yield pant at the site, it became very hard to mainethylene plant or other derivatives unit to chemicals. The final decision for the plant is tain long-term competitiveness," he says. soak up that excess capacity. "If you look expected within the next two to three years. For Imperial, the Cochin pipeline at the overall balances in the market that But such a plan, if it moves forward, bridged the supply gap between the comwere brought on by the Cochin shutdown would mark a new era for the Canadian pany's 1 billion-lb polyethylene plant and and our EDC facility shutdown, the provchemical industry, one in which it grows 600 million-lb ethylene cracker in Sarnia. ince of Alberta is long on the ethylene side beyond dependence on conventional oil Griffiths says Imperial has so far been able right now," he says. "As we move forward and natural gas as feedstocks. • WWW.CEN-0NLINE.ORG
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COVER STORY
which can be acquired more cheaply than natural gas in the U.S. "The key driver for a lot of these new projects is advantaged ethane and other feedstocks," Bauman says. Ample resources and STRONG DEMAND spur construction projects One of the region's biggest undertakings ALEXANDER H. TULLO, C&EN NORTHEAST NEWS BUREAU would have been the Phoenix Project, a $1.9 billion ethylene cracker, aromatics, and derivatives complex led by Mexico's state oil company, Pemex, with the partners Nova FOR CHEMICAL COMPANIES aiming to company, Braskem, posted a 3% decrease in build petrochemical plants close to raw Chemicals and Mexico's Grupo Idesa and sales to $4.1 billion for the first nine months materials, the Middle East is the destinaIndelpro. The project was canceled in 2005 of 2006, while its before-tax earnings detion of choice. For chemical companies because of the Mexican government's uncreased by one-third to $530 million. that want capacity near the fastest growing willingness to agree to favorable terms for In Mexico, state oil company Pemex remarkets in the world, Asia is the place to the natural gas condensate feedstock. ported that petrochemical sales for the first be. But not to be overlooked is Latin But Arturo Garcia, a Pemex exAmerica, where both good growth ecutive who oversees new chemical GDP and pockets of hydrocarbon availprojects, says his company is close Growth in Latin America is expected to cool somewhat ability are spurring ambitious chemito firming up plans for a series of cal plant construction plans. petrochemical expansions in the ill ilW II 1 Argentina mmmmmmm&mm» Strong, sustained economic perwake of the Phoenix cancellation. formance has been one of the key Slated to come onstream in Brazil drivers of the region's burgeoning 2009, the new projects will be m OC\(\A chemical sector. Gross domestic based on a petroleum-derived 2005 a Chile *mooAia 2006 product (GDP) growth in Latin stream of pentane and hexane America's largest economy, Brazil, instead of natural gas condensate. Mexico was 3.6% in 2006 and is forecast as The pentane will be used for 50% 4.0% in 2007, according to the Interexpansions at Pemex' crackers Venezuela mm national Monetary Fund. Argentina in Morelos and Cangrejera to grew 8.0% in 2006 and is expected to 900,000 metric tons per year () 5 10 15 20 % change in gross domestic product from increase 6.0% in 2007. Chile continapiece. The hexane feedstock the previous year ues to post strong results, with 5.2% stream would support a $350 miland 5.5% growth projected for 2006 lion, 700,000-metric-ton aromatand 2007, respectively, IMF says. ics plant near the other projects. The additional ethylene capacity in MoVenezuela, which is enjoying high prices 11 months of 2006 increased 5% versus the relos will feed a recently completed linear for its oil exports, is also posting strong same period in 2005, hitting $2.04 billion. low-density polyethylene plant, and thus economic results. After GDP growth of Alpek, a Mexican producer of polyester is very likely to proceed. The Cangrejera 17.9% in 2004 and of 9.3% in 2005, Venezuand polypropylene, reported a 6% increase project depends on the formation of a joint ela is expected to post a 7.5% GDP growth in sales for the first nine months of 2006 to venture among Pemex, Nova, and Grupo in 2006, tapering off to 3.7% in 2007, ac$2.6 billion. Earnings over the same period Idesa for a downstream polyethylene plant. cording to IMF. declined by 17%, to $187 million. The com"We will need to reach an agreement with Mexico has been seeing moderate ecopany, it should be noted, derives about half the partners to build the new polyethylene nomic growth, according to IMF. Its output its sales outside of Mexico. facility," Garcia says. "The projects are derose 4.0% in 2006 and is poised for 3.5% Latin America has even more projects in pendent on each other." growth in 2007. the works, or at least under study, than Asia, Pemex is sweeping away the obstacles for Financial results for the region's compoints out Robert J. Bauman, a consultant that project as well, Garcia says. "We already panies remained strong in 2006, though with Nexant Ghem Systems. The projects have a price arrangement for the contract they weren't as stellar as they were in 2005. are predicated on healthy demand and to supply ethylene to the new venture with Brazil's largest private-sector chemical abundant feedstocks, particularly ethane,
LATIN AMERICA
w]
PRODUCTION Results for basic petrochemicals were mixed again in 2 0 0 6 THOUSANDS OF METRIC TONS
ARGENTINA
VENEZUELA
MEXICO
BRAZIL
2006 a
2004
2005
2006 a
2004
2005
2006 a
2004
2005
2006 a
2004
2005
145 749
158 774
152
na
na
na
na
112
102
78
120 1,135 337 343 130
379 7 164
112
161 1,085 321 385 142
3
na
106 1,007 300 427 162
341
na
919 3,005 289 1,843 395
13
Propylene
947 2,700 297 1,745 326
28 272
Ethylene oxide
958 2,702 297 1,347 445
na
na
na
Benzene Ethylene
Styrene
774
a C&EN estimates, na == not available. SOURCES Country chemical trade groups
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4
7 144
project would have 1.3 million metric tons of ethylene capacity and make the derivatives polypropylene, polyethylene, styrene, ethylene glycol, and polyethylene terephthalate. Among its smaller undertakings, Petrobras is planning a 160,000-metric-ton acrylic acid complex with specialty chemical company Elekeiroz in Minas Gérais. And it is working on a joint venture with
Nova and Idesa," he says. Nova says it is still awaiting word from Pemex and the Mexican government on several outstanding issues. In Brazil, meanwhile, state oil company Petrobras is trying to spur petrochemical growth through joint ventures. Most ambitious among these is a plan with Grupo Ultra, the parent of ethylene oxide maker Oxiteno. Planned for 2012, the $8.3 billion
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Braskem to make 300,000 metric tons of polypropylene in Sâo Paulo. That complex, to be 60% owned by Braskem, is slated to start up in 2009. One project that Petrobras isn't likely to build is an ethylene/polyethylene complex based on Bolivian ethane. The project, also involving Braskem, is all but dead because of the nationalization of Bolivia's gas industry by Bolivia's newly elected president, Evo Morales. Petrobras isn't the only chemical company investing in Brazil. Petroquimica Uniâo, the chemical arm of Brazilian industrial conglomerate Unipar, plans to increase capacity of its ethylene cracker in Sâo Paulo by 40% and build a 200,000-metric-ton polyethylene unit by the second quarter of 2008. Venezuela is looking to model itself on Middle Eastern states like Saudi Arabia and Iran that are building large petrochemical complexes based on abundant hydrocarbon resources. The efforts have hit some bumps. Last year, state petrochemical company Pequiven ousted ExxonMobil Chemical from plans to build an ethylene and polyethylene complex in Jose. Pequiven soon signed on Brazil's Braskem to study a similar project, a 1 million-metric-ton ethylene cracker and derivatives complex. Braskem expects to create the joint venture and carry out engineering studies later this year. The project is expected to open in 2011. Braskem is also studying a 400,000metric-ton polypropylene joint venture with Pequiven in El Tablazo, Venezuela, slated to open in 2009. POTENTIALLY, there are two more ethylene projects that could be built in Venezuela, Bauman points out. One from Pequiven affiliate Polinter would make ethylene and derivatives from ethane. The other would make petrochemicals from feedstocks provided by a refinery in Paraguana. "They will all go ahead; it is just a question of timing," he contends. In Peru, according to Bauman, the Argentine oil company Pluspetrol is looking for partners for an ethylene complex based on ethane from the Camisea gas fields. Bauman says this project is more likely to be completed than a project being studied by Chile's state oil company, ENAP. He says there isn't enough demand for the two plants, which would both be situated on the Pacific Ocean, to go ahead. "The project that has the best economic position will most likely proceed," he says. •
EUROPE
consumer confidence has led to higher consumption, in turn boosting demand for chemicals used in consumer products by nearly 4% in 2006. So how does all this shape the outlook for 2007? Hadhri and his fellow CEFIC economists agree the European business climate deteriorated slightly during the last quarter of 2006. That cooling has tempered their forecast: Current chemical confi dence is still good, but optimism is gradu ally falling, they say.
Industry is set for MODEST SLOWDOWN
after good year in 2006 PATRICIA L. SHORT, C&EN LONDON
LAST YEAR WAS A GOOD ONE for the
ly, according to the December statistics reported by CEFIC, for two major reasons. First, domestic sales have been propelled by the generally favorable business climate in most of the chemical PRODUCTION BY SECTOR industry's customer industries. Ac Drugs and petrochemicals will cording to CEFIC, chemical sales have improved continuously since lead growth in 2007 the beginning of 2006 and are fore ANNUAL CHAtsIGE cast to be up 4.6% over 2005. 2005 2006a 2007a The other major reason is the 6.5% 5.0% Pharmaceuticals 3.5% 3.6 Petrochemicals 2.3 1.4 dynamic growth in trade with major 1.1 1.5 3.0 Polymers European Union trading partners. 2.7 Consumer chemicals 3.0 3.8 In particular, Hadhri says, EU 2.8 Specialty & fine chemicals 1.7 -1.2 chemical exports to Canada, the 1.8 3.1 3.5 Basic inorganics U.S., and Mexico are outpacing im ports by 1%. Chemicals excluding 2.2% pharmaceuticals 1.5% 2.5% Most chemical sectors have ben Chemicals including efited from the improved business 2.2% 3.6% 3.0% pharmaceuticals conditions, CEFIC says. Basic inor a Estimates. SOURCE: European Chemical Industry Council ganics, polymers, and petrochemi cals showed continued growth The declining confidence is partly ex in 2006. Fine and specialty chemicals plained, the economists say, by a widely rebounded sharply, up 2.8% year-to-year expected slowdown in the global economy, after a drop of 1.2% in 2005, as stronger in especially in the U.S., that reflects uncer dustrial demand materialized. And healthy tainty about global oil prices and the weak U.S. dollar. BASICS Economists at Zurich-based bankers European Union economy overall is set to cool slightly. Credit Suisse point out, for example, that the dollar "has substantially depreciated %annual change for European Union 4 recently." What's more, they see little _ Real gross Consumer prices domestic product likelihood that the dollar will strengthen during the first few months of this year. It could weaken even further, they warn. Η in ^ ι "Only when there are increasing signs that the U.S. economy is regaining its foot 0 ing," and the central banks in a few Euro 1997 98 99 00 01 02 03 04 05 06 a 073 1997 98 99 00 01 02 03 04 05 06 a 07a pean countries pause in raising interest ... with moderate slowing in most major countries rates, Credit Suisse economists say, will the % annual change dollar regain strength. They don't expect M Real gross domestic prod LICt that to happen at least until the second half 1 Consumer prices 3 of 2007. «s m Β Β S œs CEFIC economists, though, pick up positive signs that will keep any slowdown for the European chemical industry to a modest level. They would concur with a a a a a a a a a a a a 2005 06 07 2005 06 07 2005 06 07 2005 06 07 2005 06 07 2005 06 07 Jean-Philippe Cotis, chief economist at the Belgium France U.K. Netherlands Germany Italy Organization for Economic Cooperation 8c NOTE: Data for 2000 and years after are for 25-member EU; data prior to 2000 are for 15-member EU. a Estimates. Development, who suggests that the world SOURCE: European Union economy maybe facing "a rebalancing of
European chemical industry, according to economists at the European Chemical In dustry Council (CEFIC). The 2.5% growth in chemical production was above the average for the past five years, and it was strong enough that even the prospect of a modest slowdown in 2007 leaves CEFIC members reasonably pleased. In fact, the economists say, chemical industry pro duction will remain robust this year, with growth of 2.2% over 2006. And that is not including the European industry's star sector, pharmaceuticals. If pharma is factored into the industry's growth, performance looks better. In 2006, CEFIC says, production, including drugs, grew by 3.6% over 2005 levels. And in 2007, CEFIC economists predict, the level will be up 3.0%—a slight cooling, but still a pleas ing prospect for the industry. Moreover, according to CEFIC Chief Economist Moncef Hadhri, chemical sales are doing even better than production, re flecting a rise in chemical selling prices. Chemical business has improved strong
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COVER STORY
growth across OECD regions." The slow down in the U.S. and Japan, he says, should remain well-contained. Meanwhile, growth should remain buoyant in China, India, Russia, and other emerging economies. And in the EU countries that have ad opted the euro as the single currency, Cotis adds, recent hard data, as well as business and consumer confidence, even suggest that a solid upswing may be under way.
region of the global economy, the Credit Suisse analysts point out, and it is benefit ing from solid economic expansion. That, in turn, should help maintain European consumer demand in what Credit Suisse analysts see as a world economy that will begin reaccelerating this summer.
Werner Wenning, who is also chairman of Bayer, at VCI's annual end-of-year press conference in Frankfurt in early December. As VCI economists point out, the chemi cal industry is regarded as an early indica tor of general economic trends because it produces many intermediate goods and supplies its products to many down stream industries. The chemical industry's upswing began in 2003, VCI says, driven primarily by the rapid economic boom in China, culminating in an "excellent" year in 2006. VCI calculates that production in creased by 3.5% in 2006 and that sales rose by 6.0% to more than $200 billion. These results would mean that production has risen more strongly than the association was expecting as recently as last summer, its economists say. The German group and Bayer are work ing on the general assumption that the dollar will continue to be weak, at a level of $1.30 to the euro, the currency in most of the EU. The costs of raw materials and energy will continue to increase, Wenning said. Moreover, "we assume that overall world economic growth will slow down, but even then there will still be good de velopments. All in all, we are satisfied with the economic developments" in 2006, he concluded. Similarly, "the Dutch chemical industry can look back on an extremely good year," in which sales were "well above the EU average," said Rein Willems, chairman of the Association of the Dutch Chemical In dustry (VNCI).
THE STRENGTHENING worldwide economy, Credit Suisse analysts add, should mean good investment opportunities in areas such as the PETROCHEMICALS alternative-energy sector. Global Ethylene production slipped slightly population growth and the in Millions of metric tons creasing economic participation of zb \ • Ethylene Propylene Butadiene countries such as China and India ι m 1 should boost demand for energy, 20 keeping the price of oil relatively 1 15 high. A sustained high oil price, I 1 P i they point out, "enhances the at 10 tractiveness of alternative sources 5 of energy such as solar and wind oi J power." ] 996 97 98 99 00 01 02 03 04 05 () 6 Such innovative technology a Estimates based on nine months' data. SOURCE: Association of Petrochemicals Producers in Eu rope areas are in their developmental infancy, though, compared with longer established chemical industry What's more, the strong demand following such an upswing is expected to be profit sectors. It is in these sectors, even those able demand, predicts an industry report thought "mature" by many observers, published in December by Standard & where growth continues to be strong. Poor's Ratings Services. That is particularly true in Germany, European chemical companies are which in 2005 and 2006 finally shook off expected to continue to generate healthy the languor that had affected the entire EU. cash flows in 2007, the report says. "The This year, German results are expected to generally good business conditions, with slow slightly after a strong 2006 but will solid demand growth and high capacity uti grow nonetheless. lization, are expected to continue through As the German Chemical Industry As out 2007," says Standard & Poor's (S&P's) sociation (VCI) observed in its end-of-year credit analyst Tobias Mock. "Although demand growth could soften somewhat CURRENCY compared with 2006, credit quality is ex Although strengthened in 2005, dollar turned down again in 2006 pected to be supported by good operational performance." Relative value of the U.S. dollar versus European currencies, January 2003 = 1.00 The 20% decline in the oil price in 2006 M British pound Swiss franc Euro had not filtered through the value chain by the end of the year, the report says. Even through the third quarter, petrochemical companies managed to keep prices up, pocketing a large part of the savings gener ated by reduced raw material costs. Con sequently they were able to post excellent SOURCE: U.S. Federal Reserve results, S&P's report says. However, the drop in oil prices inevi tably cascades down the value chain, S&P In 2006, he reported in December, the report on the chemical industry's perfor notes. This began happening in fourthDutch chemical industry's sales soared by mance, production is expected to increase quarter 2006, which indicates that spe 15.0% in comparison with 2005, to reach by 2.0% this year over last, while the indus nearly $60 billion. "This growth," Willems try's sales should be up by 2.5%. cialty chemical producers will soon start to said, "is the result of a 6.5% increase in "That's not a recession scenario, but one benefit from reduced costs for the petro production output and an 8.5% increase in for growth rates that are below those of the chemicals that are their raw materials. selling prices." past two years," conceded VCI President Europe has developed into a growth
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He attributed the Netherlands' excellent he added, does not take into account any production performance to the upturn in adjustment costs and loss in sales of the the economy, a low number of mainteindustry's customers along the value chain. nance outages, and the commissioning of Innovation is already a problem for the new plants. And the good performance was chemical industry, worry consultants at racked up, he added, despite energy costs Boston-based AMR Research. Technolthat were significantly higher than in 2005. ogy investments in the European industry Willems made one cautionary point. this year will be designed to improve and With a slight softening of oil prices, "the enhance manufacturing operations, they chemical industry is encountering increassay, rather than support the kind of proding difficulty in passing on the higher enuct innovation that fueled growth 20 or 30 ergy costs in selling prices, and this could years ago. impose pressure on margins." The industry maybe forced, however, In Finland, chemical industry economists to redirect its investment planning by the face the problem of reconciling the picture need to focus and increase R8cD spending that industry managers report with the ecoon innovative products that will substitute nomic forecasts published by ETL A, a Finnfor less desirable ones under the REACH ish economic research institute. regime. That, at least, is the expectation ETL A has discontinued its quarterly forecasting reports and publishes PRODUCTION BY COUNTRY forecasts only twice a year, most Production in France, Spain will buck downward recently in September 2006. In that trend in major European countries report, it forecast Finnish chemical industry growth of 8.3% in 2006 and of 3.7% in 2007. Those figures are too high, fret economists at Finland's Chemical Industry Association. During the first 10 months of 2006, the industry's production was only 4.8% higher than during the comparable period of 2005, one economist points out, making it virtually impossible to show growth for the entire year of more than 5.0%. The industry association also considers ETLA's forecasts for 2007 to be on the high side, based on what the % change in chemical output from association considers to be ETLA's previous year overly positive view on "the developa Estimates. EU 25 = 25-member European Union. ment of the most important customer SOURCES: National chemical associations, European Chemical Industry Council, C&EN estimates sectors of the Finnish chemical industry." With the international economic condition slowing, a growth forecast of of the European Commission, which last 2-3% might be more realistic, the associayear guided the controversial legislation tion suggests. through to completion. It remains to be seen how the European chemical industry will be affected by the FOLLOWING A VOTE by the European advent this June of REACH, the EU's proParliament on Dec. 13,2006, to accept a gram to register, evaluate, and authorize hard-fought compromise on REACH, and chemicals. a vote by the EU Council of Ministers on Dec. 18,2006, the regime will enter into As Wenning noted at the VCI conference force on June 1, points out Stavros Dimas, in December, European chemical company EU environment commissioner. managers estimate that REACH will cost their industry more than $5 billion over "REACH is currently the most ambitious the next 11 years. Half of that, he explained, chemicals legislation in the world, and a will be spent on testing and registration. marked improvement over the current The other half will cover substitution.of situation," Dimas says. "More information what he described as long-established and will be available about substances in everywell-tested materials. And the $5 billion, day products, and it is expected that most WWW.CEN-0NLINE.ORG
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dangerous substances will be progressively substituted with safer alternatives. This will help improve citizens' health and avoid environmental damages. REACH will also encourage innovation in the chemical industry and increase consumer confidence in their products." Over the 11 years, the regulation will require the registration of some 30,000 chemicals currently in use. It is expected that the most dangerous among them— probably about 10%—will be progressively phased out and replaced by safer substances, Dimas says. REACH will be administered by the European Chemicals Agency in Helsinki, Finland. Some 100 people are expected to be on staff when the agency begins operations this spring, and that number will grow to about 400 in 2010. At the French Union of Chemical Industry, officials acknowledge the competitive and regulatory challenges faced by French chemical companies. Nonetheless, they report, the industry appears to be experiencing a healthy influx of both public and private initiatives aimed at boosting research and innovation. For example, the Council for the Strategic Development of the French Chemical Industry (COSIC) is leading the way to create various projects, including financing for R8cD arising from a French government scheme to cultivate competitiveness in industry. Moreover, COSIC is helping create networks for advanced research programs and is pushing politicians to favor environmentally friendly operations. With REACH in mind, VNCI's Willems, for one, has called on the government in the Netherlands to establish "a number of preconditions that need to be met" if the chemical industry is to maintain its position as a major driving force behind the Dutch economy in the future. Two of his clutch of requests involve support of innovation in the chemical industry. For example, he called for the government and the chemical industry to invest a combined $1.3 billion during the coming five years on innovation initiatives. He also urged the new Dutch government to reduce the administrative and compliance burdens imposed on entrepreneurs by a streamlining of site and project inspections and a drastic simplification of the permits needed for plants to operate. •
COVER STORY
ASIA-PACIFIC Economic BOOM CONTINUES, but forecasts reflect concern JEAN-FRANÇOIS TREMBLAY, C&EN HONG KONG
IN 2006, the once-sleepy port of Macau lier period and its net profit increased 10%. became the world's gambling capital when For its chemical business, which accounts gaming revenues in this southern China for about a third of sales, Reliance reported port exceeded those of the Las Vegas strip. a 32% improvement in margins despite Last month, residential land sold at auchaving to close its large Hazira complex for tion by the Hong Kong government fetched several weeks because of a flood. Reliance $5,400 per sq ft, the highest price ever paid attributed its performance to the high level in the city. In India's major cities, meanof integration at its large facilities in India. while, luxurious restaurants are opening that serve U.S. steaks for more GDP than $100 a plate and bottles of fine Rapid growth will moderate slightly this year French wine for several times more. As wealth spreads across Asia, so 1 m 1 • ii Β ' China do worries that the prosperity will M mmmmsLmm 1 ^ Ί ^ not last. In the past 10 years, the reHong Kong gion has experienced four major ecoTHIMIMOTIIIILIM——Lwww nomic setbacks: the Asian financial India crisis of 1997-98, the bursting of the Internet bubble in 2000, the shock Indonesia •~>~~L~,. waves from the attacks on the World Japan . . ............ Trade Center and Pentagon in 2001, I and the SARS health crisis in 2003. Malaysia Most Asian countries were affected; the major exception was China, Pakistan which mostly sailed through it all unscathed. That the region has enjoyed Philippines four uninterrupted years of strong wmmmàmm\ Singapore and synchronized economic growth seems almost unnatural. South Korea ^ ^ ^ ^ ^ ^ j g | S ^ 1 2 003 BASF provides an example of care2 004 ful optimism about Asia in 2007. The Taiwan 2 005 a giant company, with businesses span« 2 006a ] am ** B 2 007 Thailand ning almost all sectors of the chemical industry, tells C&EN that "Asia will be JêmmmmàmmÊmmàKÊiÊemm Vietnam the growth driver, especially China, where we are well-positioned." But C) 8 10 2 4
