Summary
This plant closure will have no immediate impact on the ethylene market. There may be additional rationalization coming in petrochemicals. What may close in the future is a big gamble.
Analysis
Dow will close one ethylene cracker and an ethylene oxide/glycol facility, and an EDC/VCM unit in Louisiana. The ethylene cracker to be closed is one of two at the site. It has actually been down since December; therefore, there will be no immediate impact on ethylene markets. The closed unit was rated at 800 million pounds per year. The cracker that will continue to operate can producer 1.3 billion pounds per year of ethylene.
Ethylene operating rates in the US are still around or below 80%. Margins are so thin throughout the value chain that these kinds of operating rates are not sustainable. Included in this poor current position are relatively strong exports of derivative products like polyethylene. In the long term, by the end of 2009, new Middle Eastern capacity that has been delayed or experiencing trouble in starting up will be in operation and likely to capture the current export market being supplied from the US.
Digging a bit deeper into global supply/demand, there is new capacity due and planned in Asia, especially China. Asian producers are considering cutting back operations, again, because their naphtha-based crackers cannot compete, even with US producers, due to the run up in oil prices. So, the US opportunity to supply Asian markets may be extended if oil prices remain high. However, the new capacity in China, while not entirely cost competitive, has government support, will be protected, and will operate.
The derivative units that Dow is closing supply markets that will be very long in recovering, or are simply going away domestically. EO/EG supplies PET, polyester fiber, and antifreeze markets. The first two have moved to Asia. The last is being made antiquated by technology. Modern cars no longer change their antifreeze every year, but come with sealed cooling systems that use about one-quarter of the antifreeze radiators contained ten years ago.
EDC/VCM is used to produce PVC. Dow does not make PVC but supplies Shintech, the largest PVC producer in the world, and exports EDC and VCM. Shintech has developed their own capabilities, to an extent, and the export market is shrinking, again based on China moving from a net importer of PVC to a net exporter, with low cost acetylene technology. In addition, many smaller, burgeoning economies like Pakistan, Viet Nam, and Bangladesh, are developing their own PVC capabilities, see this plastic as critical to their infrastructure development. The PVC industry will not improve in the US until housing starts fire up to pre-recession levels. No prognosticators seem to have this vision on their horizon.
Based on prices and margins last week, my estimates are that some 40% of US ethylene capacity is still operating in the red. On an annualized basis, these units will lose $750 million dollars. And this is with the Dow cracker in question already closed.
There may still be some adjustments coming in the domestic petrochemical industry. Decisions will be a big gamble, however. Once the recovery is engaged, just how much polyethylene, polypropylene and PVC will we need for the long term? It is very unlikely that, ten years down the road, a new ethylene unit would be built to supply creeping demand. Maybe changes in technology, making smaller ethylene units viable would be an answer. Which ethylene facilities would you close? Right now, ethane is a preferred feedstock due to the disparity between oil and gas prices. How long will this last? What about the coproducts of oil-based ethylene production, like butadiene, propylene, and benzene? Would their future prices make naphtha cracking economical?
More rationalization in the US petrochemical industry may be on the way. For sure, more critical decisions are ahead. Through this last down cycle, the industry has demonstrated uncharacteristic decisiveness and resolve. I expect that the next round of decisions will demonstrate creativity and innovation.
