Leaders of the petrochemical industry got down to brass tacks in a recent discussion about advantages and investment opportunities that lend themselves to building a foundation for profitable growth despite the unpredictability of an uncertain market.
Bob Patel, CEO and management board chairman at LyondellBasell, said ethylene is “foundational” in terms of thinking about investment.
“The wave of crackers that are about to start up here in the United States were envisioned when shale gas was really coming to life and ethane was very advantaged,” he said, addressing delegates to the recent World Petrochemical Conference in Houston.
Patel characterized the change in peak shale between 2014 and 2016 as “remarkable,” considering the curve has gotten a bit flatter.
“Now, the United States still enjoys advantage, but if you think about the amount of uncertainty that this range of outcomes presents, then I think scenario planning is really important,” he said. “In fact, if we look at very recent history, meaning the middle of the first quarter, naphtha actually has been equal to or even favored to ethane in the United States, because co-product prices have gone up so much.”
Patel believes this necessitates thinking about a range of outcomes.
“Capital costs are really important,” he added. “And they’ve gone up here in the United States as a result of all the construction that has happened.”
Patel pointed to recent steady organic growth, including eight major expansion projects completed since 2012. The projects represent a 20-percent increase in U.S. capacity, with a potential EBITDA (earnings before interest, tax, depreciation and amortization) of $500 million-$700 million per year.
Although the business environment drives investment decisions, Patel noted other considerations include oil-to-gas ratio, ethane relative to naphtha, co-product prices, capital costs, export capacity and supply chain feasibility.
“When we think about returns, we have to put capital costs against the variety of scenarios surrounding the cost curve itself to see to what degree there will be an advantage. ‘Can I earn a return?’” Patel said. “So scenario planning is very important, at least in our minds, when we think about investment in future organic growth.”
Control issues
According to Patel, building a healthy and successful foundation for the future also requires “controlling the controllables” by relentlessly focusing on a number of factors, including health, safety and environmental performance; cost management; and operational excellence.
“We compete in a commodity-cyclical business, so watching our costs at every part of the cycle is very important,” he said. “Good cost discipline affords you the opportunity, I think, to invest through cycles and to gain momentum as these cycles come and go. But things like oil price, ethane price, general global supply and demand — those are things that we don’t control day-to-day.”
The things that can be controlled very directly, he said, are directly related to a company’s own performance.
Actively concentrating on customer orientation and satisfaction is another essential “controllable,” Patel said, citing LyondellBasell’s new polyethylene plant as a prime example of that controllable.
“This technology will be able to deliver more innovative polyethylenes, which will quite possibly allow our customers to ‘lightweight’ their products and consume less polyethylene per unit of output,” he said. “Things have changed in a year. Perhaps the outcome is not as dire as we thought a year ago.”
On the demand side, polyolefin demand continues to grow at 4-5 percent per year, led by the emerging middle class in places like China, India and other parts of the world, Patel said.
“And because of polyethylene and, to an extent, polypropylene’s non-durable nature — meaning more everyday use applications — we think these growth rates are incredibly resilient in a variety of economic scenarios,” he said.
In the last quarter-century, 2008 was the only year in which demand actually declined, Patel noted. Most would agree, he added, the anomaly of 2008 brought “an unusual and a very deep” economic downturn.
“This pattern of stability and increase inspires conviction on the demand side. As the middle class emerges and when growing economies and mature economies grow at slower rates, the demand will be there,” Patel said optimistically. “The question is, where do we put the supply? And what is the best place to earn acceptable returns?”
Thinking outside the planetary box
BASF Corp. Chairman and CEO Wayne Smith observed an increasing population expected to reach 10 billion people in 2050 brings with it “an increasing demand for clean water, more energy, better nutrition, more food and the continuing drive for urbanization.”
Smith is confident chemistry will continue to be the “key enabler” in responding to these global challenges by providing specialty chemicals and functional solutions for current and future needs.
“And in the background, there’s this societal expectation that the general standard of living of people around the world will continue to increase,” he added. “With this, we are challenged to find sustainable solutions and innovative new materials.
“If you look at many of the solutions and many of the potential ideas that are being worked on to attack these areas, there’s almost always some component of chemistry involved. It’s a tremendous opportunity for specialty chemicals, new advanced materials and functional solutions to provide sustainable ideas for the future.”
In terms of mobility alone, Smith highlighted the contribution of chemistry and how the automobile industry depends on the petrochemical industry. Steel, glass, plastics, elastomers, rubber, adhesives, sealants, engine coolants, lubricants, and oils, brake fluid, battery materials, coatings, fibers and textiles are just a few of the chemical components essential to the manufacturing of vehicles.
Smith referred to projects currently underway on the U.S. Space Station, including plant-based agricultural experiments accepted by NASA’s educational program that was conceived and designed by three high school students in Germany.
“They’re specifically looking for plant cuttings and how they can reproduce in a microgravity environment,” he explained. “BASF has a large specialty chemical focus on the agricultural markets in crop protection, so we sponsored these students to help us understand how we can protect crops against bacterial and fungal disease.”
Admitting this “space story” is not directly connected to traditional investment projects like steam crackers or ethanol plants, Smith said it is undeniable chemistry plays a key role in the inspiration and eventual investment outcomes of these students’ galactic farming experiments. “Farming is the biggest job on earth,” he added ironically.
Innovations in chemistry and global research and development enable innovative solutions to help tackle the needs of the farming industry by developing modern crop protection and plant health solutions, Smith explained. Specifically, agricultural IT platforms support farmers in managing their crops, and biodegradable mulch films increase crop yields per hectare without causing soil pollution.
Investing in sustainability
Regarding the industry’s level of focus on sustainability, Patel said BASF is increasing its focus there as the population and its ensuing urbanization grow.
“And that’s going to bring its own problems with it,” he said. “It’s an important focus area and one that we must not lose sight of. We’ve got to be very responsible from the time that we bring the resource out of the ground until it’s finally used. And in some cases, through the recycle process, it’s reused three and four times.”
Patel said sustainability makes good business sense, though he admitted the concept of sustainability means “a lot of different things to a lot of different people.”
“It’s important for the industry to get our heads around what that means, and then each company will interpret what that definition is to them,” he said.
Smith agrees with Patel that focusing on sustainability is just good business.
“But in many cases, the alternatives that we have to come up with can’t be more expensive because the consumer is not yet willing to pay more for a sustainable solution,” he said. “But you can see it coming.
The demand is growing, and the attitudes o the general public are changing.”
The American Chemistry Council, on which Patel serves as a board officer, has commissioned a task force to define what sustainability means.
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