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Video: Maintaining focus amidst uncertainty in the petrochemicals sector

27 April 2015 Dewey Johnson

Interview of Dewey Johnson on maintaining focus amidst uncertainty.

Video of Dewey Johnson on maintaining focus amidst uncertainty

Interview Transcript

How does the uncertainty of energy and feedstock price affect petrochemicals?

Energy and feedstock prices are integral to petrochemical behavior. And the key reason for that is feedstocks typically are 60% to 70% of the cost structure to produce petrochemicals. And so, we are a critical item for successful companies. Today, in moving forward, it's certainly to have feedstock diversity and flexibility as they look at the production of the petchems.

So, just a quick look at history and what's happened. Of course, oil was at very high levels in 2013 and 2014, and then we've seen the sudden collapse of oil down to $40 to $50 per barrel. Natural gas, likewise, had a significant drop in the US-for example, going from nearly $4-per-million BTU to less than $3-per-million BTU today.

And a critical item we really look at is the oil-to-natural gas, or oil-to-gas, or oil-to-ethane differentials. And the reason that's so important is many of the basic petrochemicals pricing is set by the marginal-producing unit, usually who is consuming a liquid oil-based feedstock.

And so in 2013 time frame, when oil was $100 per barrel, we saw oil-to-price differentials of $12-per-million BTU. We have now seen that collapse to nearly $5-per-million BTU. And certainly, that has flattened the cost curve in allowing those marginal units in Asia and Europe, for example, to have a gasp of air and to be more competitive. It has also taken some of the cash margin away from the highly advantaged units.

We do see that differential improving and increasing, as oil overtime does go back to its trend line. But we see a period of continued-as it has been for much of history-high volatility. And as a result of that, we are launching a study to look at whether the recovery in energy is on a V-shaped pattern-where energy prices rise suddenly; or whether that's a U-shaped gradual return to previous prices on energy; or even an L-shaped with sustained low cost of energy.

So, the key element there is to look at what the cost crunches of different kinds of feedstock are to petrochemicals in different value chains. And look at the break-even values at different end uses. And in doing so, then we can look at when those underlying cost crunches are engaged, and cause a different pricing mechanism to affect the behavior of different products and different value chains.

And so, that's the value-actually, of really understanding this volatility-is looking at the signpost and knowing what behavior will occur as a result of passing that signpost.

What are the implications of lower prices for investment in the global chemical market?

This era is actually a period of significant opportunities for petrochemicals, and it's resulting because chemical growth is 3% to 5% per year, while energy is growing at a little over 1%; the economy is growing at 2% to 3%. So, petrochemicals is actually becoming a larger and larger percentage of the energy pool. It's also representing one of the most significant opportunities for investment.

At the same time, the cost of money is at the lowest it's been in years, with debt after taxes in the range of 3% to 4%. Many chemical companies are sitting on large cash reserves. And because of this demand growth-especially in areas such as North America and the Middle East that have low-cost feedstocks-we're seeing if we just pick three value chains-C1, which is methanol and ammonia, C2 or ethylene, and C3 propylene-each of those product areas need four to five world-scale plants per year to meet demand. And that's an investment requirement of $30 billion per year. So, significant opportunity exists, and the market needs that investment.

What is the outlook for future chemical demand?

Demand for petrochemicals still looks very positive. We're still seeing-while developing regions, for example, countries such as China and India-while they have slowed down significantly-for example, China, from double-digit growth to mid-single-digit growth-we're still seeing good growth pattern.

But one of the critical issues for petrochemical companies is how to invest in the West, for example, where there's advantaged feedstock to meet the demand in the East. And the companies are putting emphasis on supply chain innovation to meet the customer's needs.

One area that is certainly an area of deep study is, what are the manufacturing options? Do you manufacture an intermediate or the final product to ship to the customer? And then secondly, there's a significant amount of optimization in the logistic systems that are occurring.

In fact, as an example, deep-sea shippers of container and product have significantly concentrated. And a few years ago, 40 to 50 shippers moved 3/4 of the global petrochemical product around the world. Today, that has collapsed to six major players. And those six major players are working in alliance agreements, and they're integrating themselves not only to participate in the shipping side of logistics, but also in terminaling and distribution into the home countries, into the destination countries.

So again, companies are looking at how to innovate and really squeeze the most out of the supply systems to their customers.

Dewey Johnson is vice president, base chemicals, IHS Chemical

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