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Petrochemicals, Front And Center

I took my usual seat at IHS’s World Petrochemical Conference at the Hilton Americas in downtown Houston today, front and center, as I have for 12 previous annual conferences run by CMAI. “The world is right when you’re sitting in the front row,” Mark Eramo, vice president of chemical industry research and analysis, said as he passed. He has given the big ethylene talk each year that I have attended the conference.

IHS purchased CMAI since the last conference. I was worried that IHS might mess with a good thing. The conferences have been a bigger and bigger draw year after year. IHS made some changes, but they were for the better. Instead of a keynote by an august petrochemical executive, there was a panel featuring five of them.

That forum gave me the impression that petrochemical executives may be exuberant about the prospects of feedstocks from shale, but they are also realistic. Since the last conference, five companies—ChevronPhillips Chemical, Dow Chemical, Shell Chemicals, Sasol, and Formosa have announced new U.S. ethylene crackers. “Not all crackers that have been announced may be built, certainly not in the announced timeframe,” noted Ben van Beurden of Shell Chemicals.

Jim Gallogly, CEO of LyondellBasell, made a similar point. “It’s likely you won’t see all the crackers advanced,” he said. Lyondell, for its part, is focused on expansions of existing U.S. facilities, to the tune of half a new cracker’s worth of output.

Also, Gallogly mentioned that his company would be interested in a “condo” cracker, perhaps at an existing facility. As I understand the concept, this would be a cracker that would have two or more partners, each with a defined offtake. I remember Dan Smith, a Gallogly predecessor, talking about this concept about a decade ago, just when the Middle East and Asia started getting all the petrochemical investment. If I had to guess how this might play out today, I would think it would be an project involving Lyondell, a partner with access to feedstocks, and maybe a partner trying to back-integrate an ethylene derivative such as ethylene oxide, alpha olefins, or vinyl chloride monomer.

Curiously, in the Q&A, van Beurden kept on getting asked why Shell announced a cracker and Gallogly kept on getting asked why LyondellBasell hasn’t announced a cracker. In fact, one attendee brought up the exact same two problems I noted with Shell project—that Shell no longer makes polyethylene and that Monaca, Pa., is relatively isolated from the rest of the petrochemical world. Van Beurden said there is as a big advantage being close to the converters—customers would enjoy quicker delivery and less working capital tied up in inventory. He also said there was an infrastructure solution to the isolation problem.

As far as Eramo’s talk goes, while here in the U.S. the profits have been enormous, the global industry is actually beginning to climb out of a cyclical supply-side trough. Demand for ethylene is 127 million metric tons globally, he noted, and growing at a 4.3% annual clip. It is forecast to reach 157 million tons by 2016, at which time the industry will likely see operating rates at around 90%, when the industry should see peak profitability.

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.)

Notes From A Latin American Meeting

Back on March 25, I attended the Petrochemical Networking Meeting in Houston, put on by the Latin American focused chemical consulting groups Intellichem and Maxiquim. It attracts many of the Latin American executives that are in the state for the CMAI conference and NPRA.

I picked up a few bits of information from the presentations:

1) Otávio Carvalho, managing director of MaxiQuim, gave a talk on the Brazilian economy. He pointed out that since 2004, Brazilian unemployment dropped from about 13% down to about 6%. “In the future, it will be difficult to find people to work in your companies,” he said. In addition, 30 million people exited poverty and entered the middle class over the last five years.

Who would have thought a decade ago that Brazil would have made such a transition by now?

2) Javier Constante, commercial director of performance plastics in Latin America for Dow Chemical, spoke at the gathering. For the first couple of slides, I was worried that I would suffer through a run of the mill marketing oriented talk. I was wrong. It turned out that Javier is a very bright thinker on the very nature of technology. “Do we ever ask ourselves what is wrong with the computer that is sitting in front of you or the packaging that you are using? When you ask yourself these kinds of questions, then you can begin innovating.”

So True. Remember how normal life seemed in the 80s?

3) Constante also noted in the Q&A session that Dow was going to move forward with its plan to build a polyethylene plant in Brazil using ethylene derived from ethanol. The plant, he said, would have 350,000 metric tons per year of LLDPE capacity based on Dow’s solution process. It would start up in 2014. “In the coming weeks, we’ll have some kind of announcement,” he said. He also noted that Dow is in discussions with a new feedstock partner for the plant. (This project languished because its first partner—Crystalsev—dropped out.)

This coming announcement, I would think, will be a new agreement with a new partner.

4) Rui Chammas, executive five president for Braskem’s polymers division, gave an update on Braskem’s project with Pequiven in Venezuela. He said the ethylene/polyethylene project is “on hold”, noting that Braskem is still in discussions with the Venezuelan government on raw materials. He said that the polypropylene project is “more advanced” though there are still talks around location, etc.

I think that Rui was just too diplomatic to pronounce the projects dead in front of a room full of people. Venezuela, as a country, is showing very little upside nowadays.

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.”

Musing On BASF’s Styrenics Following Nova’s Sale

Nova Chemicals revealed in its earnings announcement earlier this week that back on Halloween it had reached an agreement to divest its 50% stake of its Ineos Nova styrene and polystyrene joint venture to its partner.

The partners haven’t settled on a price, which is subject to final determinations on debt and other liabilities. Nova’s CEO, Randy Woelfel, did promise a modest amount of cash and reduced liabilities to come out of the deal.

Last month at the K show in Düsseldorf, people kept on speculating about the future of BASF styrenics business. That month, Styrolution was carved out of BASF into a €2.5 billion unit that makes styrene, polystyrene, ABS, and other styrenics. People supposed that Styron or Ineos might be interested in the business.

Chris Pappas, CEO of Styron since Bain Capital bought it from Dow, is keen on growing his company through acquisition. At the same time, he seemed miffed when I asked him at K about the styrene business cycle. He doesn’t want his company pigeonholed as a styrenics company. (I don’t know how I got that impression, considering that the company, along with ChevronPhillips, owns Americas Styrenics, one of the largest polystyrene makers in the world. Oh, and the name of the company is STYRon). Anyhow, he wouldn’t comment when asked about BASF and I doubt he’s inclined to order up a bigger helping of polystyrene and ABS. He would also need to get ChevronPhillips on board.

I wouldn’t quite say the same for Ineos and wouldn’t be surprised if it has kicked the tires of the BASF business. The company did, after all, buy BASF’s U.S. polystyrene business back in 2007. Ineos also recently acquired the old Lanxess/Bayer/Monsanto ABS business. Now it is in full possession of the Ineos Nova joint venture. Though, another big deal is a tall order.

I’m on the fence about whether either of these firms CAN buy the business for anti-trust reasons. Americas Styrenics and Ineos Nova have big market shares—first and third–in North America, respectively. Globally, the industry is still quite fragmented. It might be doable with divestitures.

That said, just because styrene has been down in the dumps for a decade doesn’t mean it can’t come back. Ineos Nova has turned a profit, albeit modest, in the first nine months of the year. Perhaps years of consolidation and plant shut downs are starting to catch up to the industry.

There is still a matter of the structural shift. Most of the growth is in consumer durable goods in Asia. The industry in the U.S. and Europe has been more anemic in recent years. BASF might be attractive on that front. It has operations in Korea, India, and Altamira, Mexico, which might make it attractive to acquire. But Its Mexican operations, in northern Mexico, no less, are oriented to the U.S. market. And the company is heavily concentrated in Belgium and Germany.

Another problem is that BASF has been on the market for three years and still hasn’t been sold. During that time, Dow unloaded Styron for a $1.6 billion, which was a good, full valuation for Dow. The BASF business is unloved for some reason.

Odds And Ends From Dow’s Dog And Pony Show

Dow’s investor day during the first week of November yielded a wealth of C&EN stories for me. I wrote a Latest News and News of the Week on the company possibly splitting up its polyolefins enterprise. I alluded to its timing on its Chinese coal to chemicals project in another News of the Week piece. And the next issue of C&EN will have a feature story on its Rohm and Haas progress.

Liveris talks to reporters at Dow's Investor Day event

Here are some impressions and tidbits that won’t make it into the magazine but I still think are worth noting.

1)     Dow CEO Andrew N. Liveris is not without his talents. CEOs of chemical companies often bring unique skills to their jobs. Jon M. Huntsman, for instance, is one of the industry’s best negotiators. Liveris is at his best when he is moving his lips. He is a salesman of first rank. When you ask him a tough question, he acts as if he woke up that morning hoping someone would ask him that.

2)     Even Andrew Liveris can be stumped. A reporter from Michigan Public Radio asked him about hypocrisy of investing in solar cells and lithium batteries in the U.S. while pursuing coal-to-chemicals in China. Liveris wobbled to his feet muttering things about best practices, Responsible Care, and planting lots of elm trees.

3)     Liveris isn’t excited about the pace of U.S. recovery. Coming as it did one the eve of election day, Liveris fielded questions about the economy and what he thought about policy. “I have done 22 overseas trips this year and I gotta tell you, including Europe, I’m excited when I go,” he said. “When I come back here, I feel depressed. The U.S. does feel very different. The U.S. is mired in uncertainty. The lack of clarity out of our political agenda is causing business to stay on the sideline.”

4)     Liveris has been right about the polyethylene market cycle. “Industry pundit forecasts for 2011 are too barish,” he said. Supposedly, an onslaught of capacity in the Middle East was to bring a blow from the supply side to the ethylene chain. As it turns out, a strong global rebound in demand and problems bringing on the new capacity for various reasons—inability to coordinate with feedstocks, high construction costs, renewed embargo emphasis on Iran—are dampening the impact. Not to mention that North America is one of the cheaper marginal producers because of shale-based gas.

5)     No word on costs for the Aramco project. I tried to get this out of him. Back when the massive complex was planned for Ras Tanura, pundit estimates were as high as $20 billion. The partners are moving the project to Al Jubail, where there is more existing infrastructure. At the conference, Liveris said the partners would wrap up engineering work next year. But while he would put the size of the project in the “double digit” billions, a more precise number will have to wait until the front end work is completed. Owing to the new venue and the mid-cycle nature of the project, I would expect the cost to be much less than the most grandiose estimates.

6)     Dow’s Powerhouse shingles get UL certification. OK, the Underwriters Laboratories signing off on Dow’s CIGS photovoltaic panels might not seem earth shattering. But in the construction world, anything that allows them to be specified into building codes and the like is important. I toured the pilot facility making the cells in Midland. They do seem durable and easy to install. I also saw the panels installed on a house. They really are harder to notice than conventional silicon photovoltaics.

7)     Less TiO2 in paints. Dow has new “polymer technology” that it says can reduce titanium dioxide in solvent-borne alkyd architectural paints by as much as 15%. The company already has opaque polymer technology in water-borne latex paints. The company says the technology results in lower volatile organic compounds and is cost effective. I suppose this is because fewer coats are needed due to the additional hiding power.

8)     Dow expanding trimethyl gallium. The company is opening a plant for the LED precursor in Korea, part of plan to expand capacity of the stuff by 60 metric tons per year in that country and in the U.S. I chatted with chief technology officer Bill Banholzer. He explained to me that the program is an example of synergy between Dow and Rohm and Haas. Basically, Dow was able to scale up production beyond the near lab-scale that was normal under Rohm and Haas, yielding a 65% decrease in capital intensity.

When Shareholders Attack!!!

These are usually the kinds of stories I don’t pay much attention to. Last week, I received a press release from Eastman announcing a few changes to its board.

CEO James P. Rogers is becoming chairman at the beginning of next year, replacing former CEO J. Brian Ferguson. No surprise there.

Independent director Gary E. Anderson is coming lead director of the company. Who would be better in such a position than the former CEO of Dow Corning?

And, Eastman plans to “declassify” its board. That doesn’t mean that some secret directors will now be known to the public. It means that Eastman’s eleven directors are divided into three classes. Each of the classes is elected to staggered, three-year terms. The class of three directors elected in 2010 is up for re-election in 2013; the class of four directors elected in 2011 will be up for re-election in 2014; and so on.

At its 2011 annual meeting, Eastman shareholders will decide whether they want to elect all of the directors each year. The move would ostensibly make the board more accountable to shareholders. It is sort of like the difference between the U.S. Senate and the U.S. House of Representatives.

“The board believes these latest actions are in the best interests of Eastman and its stockholders, and are further demonstration of the company’s ongoing commitment to strong corporate governance,” the company said in a statement.

The board hasn’t always thought that.

At the annual meeting back in May, Eastman was fighting a proposal to declassify its board. Gerald R. Armstrong submitted the proposal. He’s a Denver retiree who owns 98 Eastman shares. He has submitted shareholder rights proposals to a number of different companies in recent years. There are many people like him nowadays. I suppose you can call it a kind of hobby.

Back then, Eastman said “a classified board structure remains in the best interests of Eastman and its shareholders.” To Eastman, a classified board meant stability and a greater ability to maintain a long-term strategy in a cyclical environment. Eastman also argued that the classified board is a defense against hostile takeovers. That isn’t a silly argument. The biggest obstacle to Air Products’ bid for Airgas is Airgas’ staggered board.

But never underestimate a Denver retiree. Some 41,292,223 shares voted with Mr. Armstrong, 75.24% of Eastman’s total. He won big. The proposal was adopted.

So, is Eastman just doing what it is being forced to do anyway? Not quite. As Eastman spokeswoman Tracy Broadwater pointed out to me, the adopted proposal was non-binding.

I suppose Eastman was just nagged into doing it, really.

Industrial Gas Companies Face Brazilian Fine Muito Grande

The Brazilian antitrust authority, Conselho Administrativo de Defesa Econômica (CADE), is levying fines totaling about $1.7 billion against Air Liquide, Air Products, Linde, Praxair’s Brazilian subsidiary White Martins. It has also implicated seven managers of those companies.

CADE says it found evidence, through wire taps and searches, of an elaborate arrangement to divvy up the market by assigning customers to particular industrial gas companies.

“CADE understands the actions of those companies that were investigated resulted in grave damage to industry and the public health of Brazilians,” the regulator said in a statement. (Warning: I translated that myself.)

White Martins faces the largest fine, $1,273 million. Air Liquide is on the hook for $143 million. Air Products is looking at $130 million. And Linde may be responsible for $137 million.

The fines made Praxair mad. “Praxair strongly believes that the allegations of anticompetitive activity against our Brazilian subsidiary are not supported by valid and sufficient evidence,” the company said in a statement. “We further believe that the fine represents a gross and arbitrary disregard of Brazilian law.” The firm promises that it will “prevail on appeal.”

To Laurence Alexander, an equity analyst that covers Praxair for Jeffries & Co., the fine isn’t a shocker. “The threat of potential sanctions has been apparent since 2004, when CADE announced an investigation into alleged price fixing on public tenders as part of a broader government initiative to ‘help tame inflation’,” he wrote to clients. Alexander expects appeals to drag out five to ten years.