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Notes On Dow’s Brazilian Biopolymers Project

As you may have heard, Mitsui and Co. has signed on to an integrated joint venture with Dow to make biopolymers in Brazil. Here are a few observations:

1) What Dow is talking about here is the project it has been planning since 2007 to build a 350,000-metric-ton-per-year linear low-density polyethylene plant that is integrated all the way back to the sugarcane field. Dow originally partnered with Brazilian sugar cane processor Crystalsev, but that company pulled out when its parent, Santelisa was purchased by Louis Dreyfus around the end of 2009. However, this remained an active project within Dow, which proceeded for a couple of years on its own.

2) Dow isn’t coming out and saying it is building a 350,000 MTPY LLDPE plant. The exact size depends on engineering, though Luis Cirihal, Dow’s director of renewable alternatives and business development for Latin America (Dow likes long titles), assures me that it would be “world-scale”, which means about 350,000 metric tons.

3) Dow really won’t come out and say it is an LLDPE plant, exactly, either. The company rather euphemistically is referring to it as a “differentiated polymers” or a “performance polymers” plant. This is a new habit for the company. What I think the company means is that the plant uses its solution process, which is a platform for not only LLDPE, but also for plastomers and elastomers and the like. Dow’s terminology is meant to exclude the old Union Carbide gas-phase Unipol process.

4) A little more on this. Dow has indicated in the past that it is seeking to divest polypropylene and high-density polyethylene. Obviously a HDPE plant can swing to LLDPE. So what I think that Dow means is that it intends to keep the solution process and divest the Unipol process assets. This might not be an absolute. In any case, I have heard from a couple of people who would know about such things that Dow has only been actively marketing the polypropylene business anyway. This would make sense because shale is likely making HDPE a profitable business at the moment.

5) Dow is growing 17,000 hectares of sugarcane in Minas Gerais, Brazil. (This marks the first time a company from Michigan has EVER established a plantation in Brazil to find an alternative source of raw materials for a polymer. Maybe it doesn’t.)

6) Back to the Brazilian project. Later this year, the JV will begin construction of a 240-million-liter-per-year ethanol plant that will be finished in Q2 2013.

7) Financial details are sketchy. Mitsui says it invested $200 million in the JV thus far. I take it Dow has invested that much, too. And I suppose that amount would include the sugarcane growing and processing as well as the ethanol plant. I would think that it doesn’t include the ethanol dehydration plant (to make the ethylene), cogeneration, and the polymer plant. I reckon this total investment, which Dow is calling its largest ever in Brazil, could reach about $1 billion at the end of the day.

Eight) According to my calculations, the amount of ethanol planned would only yield about 150,000 metric tons of ethylene. And thus it will only integrate about half of the plant.

9) Braskem already makes about 200,000 metric tons of HDPE per year based on ethanol. Dow says its plant will have cost advantages because it will be integrated. It is true that Dow’s plant will be the only integrated plant when it is completed, but it might not be true for long. Braskem is studying a 400,000-metric-ton grassroots plant that would be integrated.

10) Braskem has a monopoly on ethylene production in Brazil. I asked Cirihal if getting around that monopoly was a rationale for the plant. “Absolutely,” he said. “It will serve as a mechanism of enabling the participation in an attracting, growing market in Brazil.”

Dow Promoting Incineration

Dow Chemical is recycling plastic the old fashioned way, they are burning it.

The company wrapped up a trial at its Midland, Michigan, headquarters facility where it incinerated 578 lbs of linear low-density polyethylene film waste from its nearby extrusion laboratories. The company was able to recover 96% of the energy from the plastic, an equivalent, it says, of about 11.1 million Btu of natural gas.

Dow is suggesting that incinerating plastic is a viable alternative to the landfill for those plastics that aren’t commercially recycled. It also asserts that waste-to-energy technology is an underused scheme in the U.S. compared to Europe, where the practice is fairly common.

I couldn’t agree more. I grew up in Staten Island where hostility to landfills is pretty well entrenched. For decades, half the borough smelled like sour milk. We are letting a lot of good energy and land go to waste by burying trash.

You may be wondering about greenhouse gas emissions. I asked Dow about that. “Polyethylene and natural gas have similar fuel values and emit a similar amount of CO2 when burned,” I was told.

True? Well, fair enough. I did my own calculations. I came up with 75 kg of carbon dioxide per kilogram of polyethylene burned. The value for natural gas is about 54 kg. That’s a 39% difference. However, the value for polyethylene matches crude oil and middle distillates almost exactly and is less than petroleum coke.

(Granted, this isn’t something I do every day. So my calculation for polyethylene might have erred somewhere.)

The Middle East Revolts And Chemicals

Here’s an interesting question: How might the political turmoil in the Middle East affect the global petrochemical industry?

Let’s look at the potential areas of impact:

Directly, the countries that have seen the most serious challenges to their ruling regimes—Egypt, Libya, Algeria, Tunisia, Yemen, And Bahrain—don’t have very large petrochemical industries, at least not in the sense that they are major producers of olefins and derivatives. However, they do have significant production of methane derivatives like nitrogen fertilizers and methanol. (Dow did once sign a preliminary agreement to modernize and expand a small Libyan petrochemical complex in 2007. But I haven’t heard company officials mention that project in a couple of years.)

The countries that do have large petrochemical industries—Saudi Arabia, Kuwait, the UAE, and Qatar—haven’t seen as much unrest, though they haven’t been completely immune to political protests. If these countries do see serious challenges to the regimes, then there could be a disruption in chemical operations.

Iran, which has had significant protests, is a separate question. Politics have already impacted its petrochemical industry in the form of sanctions over its nuclear program. This has been making it harder for Iranian firms to export chemicals.

Geographically, the countries that are major petrochemical producers sit on the Persian Gulf. In addition, Saudi Arabia has the major Red Sea port of Yanbu, which is also a major petrochemical center. The countries with the turmoil are mostly in North Africa. Most petrochemical exports are headed in the opposite direction, towards Asia. However, Oman, which sets right near the Strait of Hormuz, is experiencing major protests. Moreover, any disruption to the Suez Canal would also disrupt petrochemical exports to Europe. But if there was such a disruption, the world would have more important fish to fry than a few containers of polyethylene.

Oil prices always have the ability to disrupt the chemical industry. Brent crude prices have climbed since the turmoil began and have since hit $100 per barrel. That said, prices began the year in the mid 90s. The turmoil seems to be exacerbating an existing run up in prices. This will tend to make the natural gas based North American industry even more competitive versus the naphtha cracking rest of the world.

(It should be noted that Algeria is also a major player in the international natural gas market, and has pipelines that connect it directly with Europe.)

Finanlly, never underestimate the power of high oil prices to sabotage the economy. The last time oil prices climbed into the 90s was in the fourth quarter of 2007, when the recession began.

Celanese Moves Forward Somewhat On Ethanol

Celanese and the White House have made announcements regarding ethanol capacity Celanese is planning to build in China using its new technology. I’ve written about this on the blog before. The latest news on the topic is a little baffling, hopefully I’m sorting all that out in this post.

Here’s an excerpt from Celanese’s announcement:

DALLAS, Texas; NANJING and ZHUHAI, China (January 19, 2011) – Celanese Corporation (NYSE: CE), a global technology and specialty materials company, today announced that its wholly owned subsidiary, Celanese Far East Limited, has signed letters of intent to construct and operate industrial ethanol production facilities in Nanjing, China, at the Nanjing Chemical Industrial Park and in Zhuhai, China, at the Gaolan Port Economic Zone.

Pending project approvals, Celanese could begin industrial ethanol production within the next 30 months with an initial nameplate capacity of 400,000 tons per year per plant with an initial investment of approximately USD$300 million per plant. The company is pursuing approval at two locations to ensure its ability to effectively grow with future demand.

Earlier, Celanese had been saying that it was planning to build one or two 400,000 plants for $300 million apiece. It then would then have the choice of doubling capacity at one plant at a cost of less than the original investment. Or, it could build both plants and then expand both of them.

It would seem from this release that it was moving forward with both of them. Not so. As the last sentence above alludes, with the interpretational help of a Celanese spokesman, one or two plants is still the plan. The MOU’s with the industrial parks still leaves open that possibility. In other words, Celanese can move forward at either Nanjing or Zhuhai or at both locations.

It turns out the Chinese projects are among those deals being highlighted to coincide with Chinese president Hu Jintao’s visit. Here’s an excerpt from the White House press release:

Celanese — Wison Group Memorandum of Understanding for Ethanol Production: Celanese Far East Co., a subsidiary of Celanese Corporation headquartered in Dallas, Texas (Celanese), and Wison Group Holding Limited (Wison), will conclude a Memorandum of Understanding for the construction and operation of an industrial ethanol production facility in China.  Wison plans to invest in a coal gasification unit based on clean coal technology to produce synthesis gas per Celanese specs, and Celanese plans to invest approximately $650 million in an Ethanol Complex using the output from Wison as feed stock, and Celanese proprietary technology, to produce ethanol for industrial use, and potentially for fuel ethanol. This transaction is valued at approximately $815 million, with $50-80 million in U.S. export content.  Celanese estimates project implementation will support an estimated 200-250 U.S. jobs.

Huh? This doesn’t seem to square with the Celanese release. That is due to errors and omitted information. The Celanese spokesman cleared these up. He told me investors have also been confused.

Let’s start from the top and work our way down:

1)     This is a memorandum of understanding with Wison. It is different than the letters of intent with the industrial park authorities. Incidentally, Wison supplies carbon monoxide to Celanese’s new acetic acid facility in Nanjing.

2)     Wasn’t each plant supposed to be $300 million? Is this $650 million figure a number for both plants combined? No. According to the Celanese spokesman, the $650 million figure is the combined investment of BOTH Wison and Celanese. The White House misattributed the figures to Celanese.

3)     Now where does $815 million come from if THAT number isn’t the combined Celanese/Wison investment? That number comes, in part, from something that isn’t directly connected to the Chinese deal at all. Celanese is building a smaller, 40,000-metric-ton ethanol plant in Clear Lake Texas. This $815 million encompasses is that plant plus the $650 million for the Wison/Celanese contributions to the Chinese facility.

This morning, Celanese put out another press release about the project. It talks about the MOU with Wison, but it doesn’t correct the White House’s numbers. The Celanese release even links to the still erroneous White House release.

Celanese Says It Is The Amazon Of Ethanol

Yesterday, Celanese hosted a conference call with analysts about its new ethanol technology. On the call were CEO Dave Weidman, CFO Steven Sterin, and senior operations VP Jim Alder.

About a month ago, the company unveiled plans to build one, and possibly two, 400,000-ton-per-year ethanol plants in China based on coal and using its new conversion technology. It is also planning a smaller, 40,000-ton plant in Clear Lake, Texas, based on natural gas.

The conference call didn’t shed a whole lot of light on what the technology is all about. It is pretty obvious that the process is based on gasification. Officials said that the plant can use any hydrocarbon feedstock, including biomass.

Another clue is that Alder said that the technology “integrates elements of Celanese acetyls technology.” What could this mean? Well, acetic acid, also known as ethanoic acid, has two carbons like ethanol. In other words, it is ethanol plus a carbonyl group. Celanese and other companies make it via the carbonylation of methanol using carbon monoxide.

Alder also mentioned that by the time the Clear Lake plant comes onstream in 2012, the company will have some 3,000 patents worldwide covering the technology, many of which are patents covering its existing acetyl chemistry.

Company officials also stressed that the technology is highly selective for ethanol, a point of contrast, they said, between Celanese’s technology and existing processes to get to alcohols via gasification, such as Sasol’s.

The economics, Weidman said, were “very favorable compared to fermentation.” Another advantage is that the technology is very scalable, officials stressed. Celanese can expand a 400,000 plant to 1 million tons at a fraction of the initial cost of building the plant. This seems to explain why Celanese said might build one–or two–plants in China. The options the company is looking at are either building a second plant, presumably at a different location, or expanding its first unit. Either way, Celanese wants to quickly ramp up the technology to about a million tons.

To say that Celanese is excited about the technology is an understatement. I have never once heard a chemical company gloat about a technology more than Celanese has about this ethanol process. “This technology breakthrough is a new platform for earnings growth with the potential to reshape Celanese,” Weidman said.

Weidman said that if Celanese had an operational million ton plant today, it would generate nearly a billion dollars in revenue and ethanol would be the Celanese business with the greatest profit margins. A cash cow is born, lay down some straw and gather the children.

Weidman: Our Ethanol Technology Will Rock Your World

Officials did get a little carried away. One of the principals, I lost track of who, said Celanese entering the ethanol business was “kind of like Amazon entering the book selling business.”

Braskem To Make Propylene From Ethanol

Brazil’s Braskem is taking another step in its efforts to derive chemicals from sugar cane. In September, it started up production of a 200,000-metric-ton plant in Brazil to make ethylene for subsequent conversion into  “green“ polyethene.

Now the company plans to invest $100 million to make 30,000 metric tons per year of propylene from ethanol by the end of 2013. The company will use the propylene to make polypropylene that will have same properties as conventional hydrocarbon-derived propylene.

Late last year, Braskem signed a deal with Novozymes to develop a biotech route to propylene. However, the 30,000-metric-ton plant will not be based on this technology. At a press conference at the K 2010 plastics fair, the company called the plant‘s technology “proprietary“ and would give few details. However, a possible route that company officials have alluded to in the past is to use ethanol derived ethylene to make butylene, and then through metathesis, convert ethylene and butylene into propylene.

The cost of the plant is staggering for a what amounts to semi-works scale production of polypropylene. However, Rui Chammas, executive vice president for polymers at Braskem, says that bio-based polymers have a completely different value proposition than regular polymers. “We are not in competition with fossil polymers,“ he says. He is also quick to add that 70% of the output from the polyethylene is already under contract.

Manoel Carnauba Cortez, vice president of Braskem’s based chemical unit, says the company also has its its sights set on another ethanol derivative, ethylene glycol. “We may be an ethylene supplier for EO production in the near future,“ he said.

There is strong interest in bio-based ethylene glycol. Coca Cola is beginning to use ethylene glycol as a co-monomer in its PET bottles, likely sourced from Asia. Japanese trading firm Toyota Tsusho, which incidentally is a green polyethylene distributor for Braskem, recently formed a Taiwanese joint venture to make ethanol-based ethylene glycol.

BASF: The Chemical Company?

I’m working on C&EN’s annual survey of the Global Top 50 Chemical Companies. Perusing BASF’s annual report reminded me of one of my favorite observations about that company. BASF calls itself “The Chemical Company”–and it most certainly is, by any measure, the largest chemical company in the world— but the company’s Wintershall oil and gas business rakes in most of BASF’s earnings.

While oil and gas made up 22% of BASF’s €50.7 billion in sales in 2010, it generated 62% of its €3.7 in operating profits in 2009. In 2008, it was the same story: 59% of its profits on 23% of its sales.

One might wonder if this is a recessionary anomaly. Indeed, BASF’s chemical operations slumped in the economic downturn while Wintershall remained strong. This is a factor, but not an enormous one. Oil and gas comprised 18% of BASF’s sales in the pre-downturn year of 2007 and racked in 41% of its profits. After that time, the company’s chemical profits headed downward. However, Wintershall was still BASF’s most profitable unit by a mile. Its profit margin was 28%, versus 20% for its next most profitable reporting segment, chemicals.

What is the point of this observation? Oil and gas is a classic cash cow, a large earner that helps the company make big acquisitions like Cognis, Engelhard, Degussa’s construction chemicals unit, and Ciba. The cigarette tow business serves a similar function for Eastman.

One can image what would happen if BASF decided to suddenly divest its oil and gas business. (I never heard of BASF considering such a thing.) The unit’s book value is roughly €5 billion. Its earnings suggest it would be worth way more than that. Moreover, the company’s business is a nice strategic asset, with North Sea operations in Germany and Norway and strong positions in Russia and Libya. A fairly conservative estimate would put the business in the neighborhood of $15 billion. That’s enough cash to buy nearly every other chemical company outright and probably adequate to buy ANY of its peers with financing.

Equity Analyst Sweet On Dow

Goldman Sachs analyst Robert Koort headed to Dow Chemical’s headquarters in Midland, Michigan, to talk to top execs. He came back smitten, reiterating his buy rating on Dow’s stock.

Dow has been transforming itself from a commodity chemical to a specialty chemical company. The keystone was its purchase of Rohm and Haas last year. CEO Andrew Liveris has been hammering the transformation message to shareholders. He wants his company to be a high-growth, long-term investment, not a fast-money, cyclical play for speculators once or twice a decade.

He must have been pleased when he read this in Koort’s report to clients:

“We believe Dow shares remain somewhat stigmatized by its commodity chemical past as many investors fail to appreciate the transformation that has occurred, resulting in a much heavier weighting towards intermediate and specialty chemicals.”

Aw! It is the sort of thing that I would say to my wife over a flickering candle on a night out without the kids.

Koort theorizes that Dow’s transformation will be soon be vindicated by the much anticipated downturn in the ethylene chain caused by the deluge of new Middle Eastern capacity. When that happens, Koort says, Dow’s earnings from specialties will carry the day and investors will finally get the point.

Perhaps, but only if the downturn is very dramatic. It might not be. Koort said that executives hinted as much when they “laid out a case for better than expected results in the ethylene chain.”

Such a case can surely be made, at least from a Dow perspective. There is a slow, albeit timid, economic recovery underway that will absorb some new capacity. This recovery might be given plenty of time. All this capacity was originally supposed to start up years ago, but regional players have had difficulty ramping up the latest generation of plants. Who’s to say all this gets straightened out in the next couple of months?

As for Dow, it has a strong position in North America. There, shale gas has helped make regional industry more competitive globally. The Middle Eastern capacity will have a bigger impact on higher-cost naphtha based producers in Europe in Asia. (Dow does, however, have three ethylene crackers in Europe and a JV in Thailand).

Dow also makes ethylene and polyethylene in Bahia Blanca, Argentina. The country doesn’t offer the most secure natural gas feedstock supply in the world. But with Braskem soon to command a monopoly in Brazil, South American plastics converters will cherish Dow more than ever before.

Now I’m sounding romantic.

But indeed, there might be silver linings for Dow either way the downturn plays out.

Eastman Not Closing Ethylene After All

Here’s a sign that the U.S. petrochemical industry is becoming more competitive: Eastman Chemical has reversed a decision to close ethylene capacity at its Longview, Texas, complex.

Eastman had been running four ethylene units at its Longview complex: one with about a billion lb of annual capacity of olefins; another two with a half million lb of capacity apiece; and another cracker, older and smaller than the others.

In 2007, following the sale of its polyethylene business to Westlake Chemical, which remains a customer of Eastman’s Longview ethylene, Eastman decided to shut down the three smaller units at the site. It closed the smallest unit in 2007 and one of the half-million-lb units in 2008.

However, it never closed the other half million lb unit and it now plans to bring the cracker that it closed in 2008 back in service by the first quarter of 2011.

Earlier this month at the JP Morgan Diversified Industries Conference, CFO Curt Espeland said that fortunes have turned around for the Longview units. These plants use mostly propane as a feedstock and turn out a lot of coproduct propylene. The plants have benefitted from the abundance of shale gas in North America, which has kept prices for light, natural gas feedstocks low. “Propane in North America is expected to be pretty available and advantaged on a cost basis compared to the naphtha crackers,” he said.

Also, Espeland expects the propylene market to remain tight. North American crackers are favoring lighter feedstocks, namely ethane, and are thus producing less propylene. Refineries, which have been running at low rates because of a cruddy gasoline market, have also been putting out less propylene.

Now, I am not 100% certain about whether Espeland means that propane is available because of abundant supply as a natural gas liquid or because other ethylene crackers are opting to go as light as they can, using ethane instead of propane as a feedstock.

In either case, other companies are going after propane/propylene arbitrage as well. For example, pipeline firm PetroLogistics is repurposing an ExxonMobil ethylene cracker it purchased a couple of years back into a propane dehydrogenation plant. It plans to start up this summer.