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North American Petrochemical Industry Warily Eyeing Potential Overcapacity, a Trump Pullback on Trade

The North American petrochemical complex is enjoying a stunning renaissance from flexible natural gas supply and low commodity prices, but uncertainty is looming from a surfeit of manufacturing capacity, strengthening overseas competition and a Trump presidency that has promised to revamp trade, executives said Thursday.

More than 450 people were in Houston on Thursday and Friday for Petrochemical Supply Chain & Export Logistics 2016 to hear insiders and industry analysts offer their views of the global industry. Times have never been better for U.S. and Canadian petrochemical producers as natural gas supplies flourish and prices remain low and stable.

However,  executives expressed a bit of uneasiness about the plethora of expansions and greenfield facilities, as overseas competitors begin to muscle in with expansion plans of their own. Experts also are warily eyeing President-elect Trump's campaign promises to revamp major trade agreements.

"We are entering into an area and a time, really, when the whole industry is on brink of breaking out into a dimension that hasn't been realized in years, if not decades," said conference Chairman David Bazetta of Resources Global Professionals. "It is a very interesting time," he said in kicking off the conference on Thursday.

Throughout the conference, the audience was polled in real-time about risks to the North American chemicals complex, which has recorded a massive building cycle along the Gulf Coast, where billions are earmarked in the Houston area, particularly Harris and Galveston counties. Too much? Or just right? Analysts and industry insiders appeared more optimistic than not.

Industry 'Dependent' on Trump Policy

"There are only two kinds of forecasts -- lucky or wrong," said panelist Ojas Wadivkar, a partner with A.T. Kearney's energy and process industries practice. "I think there are certain aspects active right now within the macro economics and the entire globe that will increase the need for petrochemicals. I'm optimistic on that." However, "North America is very dependent" on what the incoming Trump administration does in the next few years. The global consulting firm sees three potential scenarios playing out.

The No. 1 scenario, an "optimistic, Global 3.0," essentially is open trade and borders, with "free movement of product, which would lead to greater growth," Wadivkar said. The second, a "polarization" scenario, basically would see reduced trade between the western bloc of countries and the eastern bloc. The "most pessimistic" third scenario, "islandization," creates insular petrochemical economies, with North America essentially trading mostly within its borders.

As an optimist, Wadivkar said he's hoping the outcome will be between the first and second scenarios.

Wood Mackenzie Ltd. SVP Stephen Zinger, who oversees chemicals research, is "optimistic and pessimistic" about the volumes of chemicals coming on in North America. Product innovation across the industry, illustrated by improved, for example, by environmental stewardship practices and packaging, is cause for optimism, he said.

"This is a very innovative industry," Zinger said. "We have seen that over time...As trends emerge, I'm optimistic about the chemical industry in general..."

However, the industry tends to "build in waves," he said. "Where the margins are very good, as they have been in North America in the last four years...we invest in waves, and we overdo it and then markets change..."

The "big piece" of what has up to now driven chemical investment in North America are natural gas and crude oil prices, Zinger said. In 2014 when oil was $100/bbl-plus, "anything out of natural gas was very competitive versus oil...and we began seeing chemical investments." Generally, it takes three to five years before a greenfield project ramps up -- and there are "four world-scale crackers" set to begin operations in 2017. More facilities move online in 2018 and 2019, and Royal Dutch Shell plc's cracker in early 2020.

"That's a significant amount of ethylene capacity, 40-50% increase from 10 years ago coming in the next couple of years," Zinger said.

Expansions, Newbuilds Flourishing

As an example, ExxonMobil Corp. in November said a production unit would be added to its Beaumont polyethylene plant east of Houston, boosting capacity by 65%, or 650,000 metric tons/year. Underpinned by "advantaged feedstock," i.e. natural gas, ExxonMobil also is adding ethylene lines at its Baytown, TX, refinery and polyethylene lines at the Mont Belvieu, TX, complex.

"Another eight to 10 company evaluations haven't made final investment decisions, but we really are looking at changing dynamics in the next few years in the feedstock industry," Zinger said.

The project announcements are constant, heavily oriented to the Gulf Coast. In September LyondellBasell selected its La Porte, TX manufacturing complex southeast of Houston as the site for a high-density polyethylene plant with annual capacity of 1.1 billion pounds (500,000 metric tons). Construction is scheduled to begin in early 2017 with start-up planned for 2019.

More polypropylene supply also is being produced in North America, "rescued" by technology, Zinger said. Several operators are building and/or evaluating propane dehydrogenation (PDH) facilities in Canada and along the Gulf Coast. Among the tentative projects is one by Pembina Pipeline Corp. and a subsidiary of Kuwait Petroleum Corp. for a world-scale combined PDH, another for a polypropylene upgrading facility in Alberta, and a potential PDH facility by Sunoco Logistics in Pennsylvania.

Some polypropylene projects have been set aside as they are not as competitive as "ethylene value chains...but we will see some," Zinger said.

Regardless, billions already have been sanctioned for petrochemical growth in North America. However, "just like shale gas surprised us, there will be more surprises," from geopolitical upheaval, demand changes, etc., Zinger said. "This can't last forever...I'm optimistic about what this can be. But we have to be realistic" to consider the long-term viability for investments.

North America also is beginning to see much more competition from global chemical operators, the experts told the audience.

"We have to remember that North America is not the only one in the game," Wadivkar said. He pointed to Saudi Aramco, which "wants to be a chemical player in the next five or six years," initially through an initial public offering for its $2 trillion-valued company to raise funds for a petrochemical business. "There are huge players..." across the Middle East and in Asia, where China is planning a huge boost to its capacity.

North American petrochemical exports have surged in recent years -- but will they continue to be strong? It's questionable, analysts said.

Global Price War?

"I see a price war in North America between with the producers and the markets...they serve," Wadivkar said.

Zinger agreed. "North America is growing and already exports lots of commodity chemicals, but those volumes will be up significantly when capacity comes up...We estimate 50-70% of new capacity has to be exported to world markets...Latin America is growing and is a target, but that's a small amount of volumes." North American exports "have to go to international markets...the Middle East, targeting China. We will be testing those supply chains in a bigger way."

The North American petrochemical industry "is as good as we've ever had," Sinclair Group SVP Michael W. Mourot told the audience. But the flexibility of the supply chain "is the weak link to bring on all of this stuff." Companies may  continue to innovate and heed pricing, but they often are failing to consider the most "critical element," how to get product to the desired market.

The challenge is "how to bring plants online and move product around the world," Mourot said. "We have to change our thought processes about how we've done that in the past."

A lot of the new capacity "has got to leave North America...What we've found is that a lot of the technology is about 30 years old...I think we lack the most cost effective way to move product out of North America," depending on the container/shipment.

"We need to look at this from the manufacturing producing location chain to get to the best location" overseas, Mourot said. "There are elements across technology that we've got to take apart and look at. Some are regulatory, but the ability to handle chemicals safely...is an element many people miss. It's not just a logistics component."

For Nova Chemicals' Debra van Holst, who directs global logistics for the Canadian-based manufacturer, the "biggest risk" to the industry is a "fundamental slowdown in the global economy."

Nova has a plant in Joffre, AB, starting operations within a week's time, the PE1 Expansion that is a third natural gas phase reactor designed to produce 1 billion pounds of linear low density polyethylene a year, a 40% increase at the site. Annual nameplate capacity is expected to increase to about 3.5 billion pounds. Nova also is involved in several feedstock projects tied to the U.S. Northeast market for Marcellus/Utica gas takeaway.

Big Glut Equals Big Challenge

The chemicals market typically grows at a magnitude of gross domestic product, van Holst told the audience. There are big risks of a global market slowdown in the next few years, in part related to the U.S. presidential election. Trump made campaign promises to reconfigure global trade agreements, which may not be a positive for the petrochemicals industry.

If North America's market were to slow down as trade agreements changed, "what will happen is we'll start to see operating rates fall a little," with export volumes slowing as the global economy retreats, she said. "Then a big glut of volume would be a big challenge..."

Every project is undertaken with a worst-case scenario, she said. "Mitigation strategy is key. We also are working with partners to help understand what are the best supply chains...Really, the key for all of us is to be successful with all of this growth."

U.S. cracking capacity newly started up should boost U.S. ethylene supply by 2%, with domestic ethane demand up 3%, according to a note Friday by Tudor, Pickering, Holt & Co. (TPH). LyondellBasell has ramped up Corpus Christi, TX, olefins facility, which includes an 800 million pounds/year expansion. Dow Chemical also has restarted operations at its Plaquemine, LA plant, which features a 551 million pound/year expansion.

"Together, these projects will increase U.S. ethylene capacity by 2%, and they represent the initial batch of a wave of new projects set to raise U.S. ethylene capacity by a significant 20%-plus by the end of 2017," TPH said. "We believe this incremental ethylene supply will outpace demand next year, leading to a slight drop (about 3 ppt) in steam cracker utilization rates by 4Q2017." The LyondellBasell and Dow projects "also make up 34,000 b/d of new ethane demand, which represents a 3% increase compared to 3Q2016 U.S. ethane demand of 1,108,000 b/d."

Between new petrochemical facilities and new exports, TPH analysts pegged U.S. ethane demand rising 34% by the end of 2017, "which is one of the reasons our ethane forecast is 30 cents/gallon, about 5 cents above futures. This is a big jump compared to year-to-date ethane prices of 19 cents/gallon. With expected falling utilization and rising feedstock costs, we continue to expect small declines in U.S. steam cracker profitability in 2017."

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