An end to Profitability in Aromatics?
As a period of strong profitability in Aromatics draws to a close, Nexant considers the implications of weakened demand and new capacity additions as the market approaches the start of a new decade.
The global financial crisis in 2008 ended the recent run of good trading conditions for aromatics producers. While most observers expected problems to arise as a result of impending new capacity developments, the severity of the downturn has been such that the market was weakened first by a sharp drop in consumption. Although the high oil price was among the main causes of the downturn, the precipitous drop in oil prices actually created additional problems. Such was the rate of decline in prices throughout the aromatics value chains that producers at various stages withdrew from the market. Holding inventory of raw materials or finished products during the price decline entailed a potentially catastrophic business risk. Inventories were thus reduced close to zero, and producers operated hand-to-mouth, purchasing only materials for the limited volumes that they were able to produce to order. Although the worst of the liquidity crisis and price volatility was over by the end of 2008, and operating rates in some areas were starting to increase, the industry remains in poor shape ahead of impending massive capacity additions.
The limited expansion of oil refining capacity after the previous downturn in 2001, and steady demand growth from derivatives brought aromatics operating rates to a peak in 2004, with operating rates on a plateau until 2007. Aromatics producers were then unable to pass through peak oil prices in mid 2008, and subsequent saw demand fall away as the oil price started to collapse. The loss of confidence that developed from the financial crisis undermined both the crude oil price and the manufacturing industry, leading to inventory reduction along the product value chains. Many operators moved from inventory positions of several weeks in early 2008, to almost zero by quarter four. The effect was compounded by the length and complexity of value chains, particularly for para‑xylene. As a result, lack of demand and de-stocking caused aromatics demand growth numbers, particularly for benzene and para-xylene, to decline and break historical correlations with GDP growth.
Styrene continued to be the dominant end-use of benzene, accounting for around half of global benzene consumption. The second largest application is for the production of cumene/phenol, followed by cyclohexane. During 2002-2007, global demand for benzene had grown steadily, driven mainly by styrene and cumene/phenol. Producers in Asia Pacific actively added new styrene and styrene derivative capacities, while export-oriented styrene facilities were also built in Iran and Saudi Arabia. Nitrobenzene/aniline showed the highest growth rate during that period as a result of booming electronics, construction and automotive industries in Asia Pacific.
Demand for para-xylene has become increasingly polarised, with the market maturing rapidly in developed regions, while Asia, and particularly China, continues to capture almost all growth in fibre production, and benefit from the large scale closures of fibre producing capacity in other regions. There are pockets of high growth into bottle resin production in regions such as Eastern Europe and the Middle East, although the volumes are minimal in comparison to the evolving Asian market. The dramatic increase in PET recycling has further impacted on demand for PET feedstocks over 2007-2008, driven partly by the record high prices.
Aromatic Demand
The correlation between benzene demand growth and economic performance broke in 2008, as the global financial crisis and collapsing housing and automotive markets impacted on demand in the United States and Europe. As a result, global benzene demand dropped by two percent in 2008. Nevertheless, assuming a more stable crude oil price, which at relatively lower levels should place benzene-derived polymers and fibres in a more competitive position, we foresee a situation which should allow inventory throughout the manufacturing chain to recover. We anticipate that benzene will grow at 3.5 percent over 2008-2015, driven by nitrobenzene with robust MDI demand expected once construction and automotive sectors recover. Cumene/phenol growth will be assisted by large capacity developments in Asia, and a push to lower prices and commoditize certain downstream applications. The dominant polystyrene sector will be supported by the growth of packaging applications in developing countries, and expandable polystyrene will see renewed growth in buildings insulation.
Global Benzene Demand, 2008
Para-xylene also experienced negative growth in 2008 with demand exposed to a double impact from the global financial crisis and de-stocking along the product value chains. Demand is expected to rebound to some extent in 2009, assuming a positive global GDP growth, supported by re-stocking as oil price trend is stabilized. PET, the key driver of para-xylene and PTA demand is projected to have robust growth during the forecast period. Demand into DMT however is expected to diminish due to the closure of uncompetitive plants.
Aromatics Supply
In the United States, companies including ConocoPhillips, Chevron, Valero and Marathon, have stated plans to boost refinery capacity, as a result of the significant deficit of gasoline and high-octane blendstocks in the region. However, the development of bio ethanol has also become an increasing part of the transportation fuels mix, reducing the need for additional gasoline from reformer sources. A number of refineries have meanwhile already met the new benzene limit imposed by MSAT II or can choose to trade benzene credits from other refineries, limiting some of the potential for new benzene supply caused by that legislation.
In Western Europe, supply developments are limited by the availability of reformer capacity. The trend towards diesel has also resulted in an imbalance between diesel and gasoline demand, and the development in new reformer capacity is considered unlikely.
Global Benzene Firm Capacity Additions
Almost all the projected increase in benzene supply is therefore projected to come from Asia Pacific and the Middle East. China, South Korea, Singapore, Thailand and India are currently building steam crackers and aromatic complexes which include an additional 6.5 million tons of benzene capacity by 2012. The second most active region is the Middle East where 1.6 million tons of benzene capacity is under construction for startup by 2012. Three quarters of total capacity addition in that region will be from refinery sources.
The current spate of para-xylene capacity building will peak in 2009, when over 3.5 million tons per year of new capacity will be added to the current total of 30 million tons per year, increasing global capacity by almost 12 percent. Most new para-xylene capacity additions are in Asia Pacific, and more specifically in China, although additions have also been seen in South Korea, Thailand, Singapore, India and the Middle East. The development of capacity in Asia Pacific exploits the low construction and labour costs and proximity to market available to producers in the region. Middle East investments meanwhile benefit from the new feedstocks available from refinery expansions and comparatively low utility costs.
Global para-Xylene Firm Capacity Additions
Report Availability
The report “Petroleum and Petrochemical Economics (PPE) – Aromatics Market Dynamics” is published by Nexant as part of its ChemSystems PPE program. Subscriptions or single copies of the report are available from www.chemsystems.com. For further details please email chemsystems@nexant.com. If you have any comments on the analysis, please contact Stewart Hardy ( shardy@nexant.com).
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©2009 Nexant, Inc.
