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What is the Future of the Gulf Coast Petrochemical Industry?

What is the Future of the Gulf Coast Petrochemical Industry?. Presentation at a Conference Sponsored by Global Energy Management Institute, University of Houston April 29, 2005 Avi Nash.

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What is the Future of the Gulf Coast Petrochemical Industry?

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  1. What is the Future of the Gulf Coast Petrochemical Industry? Presentation at a Conference Sponsored by Global Energy Management Institute, University of Houston April 29, 2005 Avi Nash Avi Nash LLC

  2. This information is proprietary and not to be copied, or redistributed in any form, without the permission of Avi Nash LLC Avi Nash LLC

  3. Future of the Gulf Petrochemical Industry • Yes, There IS a Future! • It Will be Different…but for Reasons Different From Just the “Feedstock Issue” • Key Differences Beyond Feedstock Mix. • Product Mix • Players • Profitability Avi Nash LLC

  4. Setting the Stage • The Issues • Feedstock Shifts • Product Mix Shifts • Ownership Shifts • Putting it All Together Avi Nash LLC

  5. Geo-Political Factors • Government Policy: US; Foreign ENERGY REGULATIONS Product Mix Innovation Future of the Gulf Coast Petrochemical Industry Profitability, Ownership Competitive Dynamics “Center of Gravity” Of Supply DEMAND Avi Nash LLC

  6. Setting the Stage • The Issues • Feed-stock Shifts • Product Mix Shifts • Ownership Shifts • Putting it All Together Avi Nash LLC

  7. Conventional Wisdom: Since 2000, the Cost of Energy, Particularly Gas, Has Crippled USGC Competitiveness Reality: (1) The Trend is Not New Source: Avi nash LLC Avi Nash LLC

  8. Conventional Wisdom: Since 2000, the cost of Energy, particularly Gas, Has Crippled USGC Competitiveness (cont..) Reality: (2)Decline in Competitiveness is Far from Across-The-Board Avi Nash LLC

  9. Reality: 3) Recent Energy Prices Mask Deeper Issues Facing US Gulf Coast Producers: Others are Catching up! Mid-1980s 5 = Favorable; 1= Unfavorable Avi Nash LLC

  10. Reality:3) Recent Energy Prices Mask Deeper Issues Facing US Gulf Coast Producers: Others are Catching up! (Cont’d) 2005 5 = Favorable; 1= Unfavorable Avi Nash LLC

  11. Reality: 3) Recent Energy Prices Mask Deeper Issues Facing US Gulf Coast Producers: Others are Catching up! (Cont’d) 2015E 5 = Favorable; 1= Unfavorable Avi Nash LLC

  12. We’ve used up Most of Stranded Gas (Others Haven’t). Globalization (via Capitalism!!) Has Shifted the Playing Field for Demand..and Supply. Periodic Cyclical Peaks Encourage Complacency Commoditization, With Increasing Maturity Why the Marginalization of US Competitiveness?Reasons are Partly Structural; Partly Self-Inflicted Structural • Have we Done The Best We Can …to Replace More of What We Use? • …To Cut Costs More Aggressively?...More Proactively? • …And Consistently, Instead of Periodically? • Innovation Has Lagged: “The R&D Productivity Issue” • What you Spend vs. What you Get For It. Self-Inflicted Avi Nash LLC

  13. Setting the Stage • The Issues • Feedstock Shifts • Product Mix Shifts • Ownership Shifts • Putting it All Together Avi Nash LLC

  14. Of Course, The Gas Hit is Real…With the Most Direct Hit Being to Methanol and Ammonia (No Surprise !) • Regulation shrinks Demand (MTBE) • Gas Hit Shuts Celanese Methanol (Acetic Acid) Chemdata Inc. Avi Nash LLC

  15. The “Oil & Gas Story” is more Complex for Other Products. In case of Ethylene, consider 3 Scenarios for Oil and Gas Note: WSJ (4/28): WTI $51.62/bbl; Henry Hub $7.09/mmbtu Avi Nash LLC

  16. Reality: The North American “Hit” is Real…But varies by Producer, Oil/Gas Prices and position in the Cycle. Delivered Cash Cost Comparison For HDPE, cents/lb Avi Nash LLC

  17. This is Borne Out by Recent Profitability & Share Prices Naphtha Margins less Ethane Margins Uniform Stock Performance Needed to Justify the Higher Cost of Capital of Naphtha Crackers Nova Chem. (Alberta+flexi) Westlake (Ethane) ¢/Lb Lyondell (Flexi) CMAI Global Inc; Compustat Inc. Avi Nash LLC

  18. Perception of the Hit May Exceed Reality in Some Cases • Oil-to-Gas Ratio Has Limited Room to Fall Further. • Self-Correcting Actions Get Triggered • Debottlenecking of Liquid Crackers; Shutdown of Old Gas Crackers • Increase in Capacity in Canada (Ethylene), Trinidad (Methanol, Ammonia) • LNG Importation Projects Avi Nash LLC

  19. Need: Practical Ways of Reducing “Gas-Feed” Cost and its VolatilityUS Challenge( For Industry and Regulators):“Why Should a 6.0x Oil-to-Gas Ratio be the New Level? Why Not Higher?” • Creative Ways to Accelerate Regional Production? …Alaska; Canada; Mexico; Trinidad. • Facilitating Infrastructure For Getting the Gas Where it is Needed. • Addressing and Resolving Objections to LNG Terminals? Avi Nash LLC

  20. Perception of the Hit May Exceed Reality in Some Cases • Oil-to-Gas Ratio Has Limited Room to Fall Further • Self-Correcting Actions Get Triggered • Product Mix Shifts • Bottom Line: Gas Hit is Real but, • No Longer Asymmetric with Oil (as it was from ’50-’00)… and so unlikely to further worsen Competitive Position • Disproportionately Relevant for Products Such as PE and EG. Avi Nash LLC

  21. Setting the Stage • The Issues • Feedstock Action…and the Reaction • Product Mix Shifts • Ownership Shifts • Putting it All Together Avi Nash LLC

  22. “What Will the Gulf Coast (Be Allowed to) Make?”This Has Been Changing Meaningfully…and Will Continue To do so ...Partly From Less Gas Cracking Gas-Based Crackers Flexi-Based Crackers Avi Nash LLC

  23. End-Markets still driven by higher per-capita GDP Exterior Paint Disposable Hygiene Products Furniture, Housing, Appliances Engineered Plastics U.S. Growth Will Trail Overseas… But Imports Unlikely in the Intermediate Term BOTTOM LINE: Competitive Advantage on the Gulf Coast for BASF, ROH, Lyondell (PO) etc. Competitive Advantage is Still Decent in Some Areas. Relative to, Say, Polyethylene Propylene Chain (Acrylic Acid, Propylene Oxide, Oxo-Alcohols, Phenol-Acetone) Vinyl-Chain: VCM, PVC, Rigid PVC Fabrication • End Markets Driven by US Housing Market and Substitution. • Structural Issues Discourage Mid-East Investment • China’s PVC Advantage Limits Export Opportunity. • Freight Cost for Caustic. • U.S. Sheltered from Imports in Rigid Applications, eg: Pipe, for Freight Cost Reasons. • BOTTOM LINE: Shin-etsu Investing Heavily in N.Am. Gulf Coast. Avi Nash LLC

  24. Competitive Advantage Varies by Product…and Affects Product Mix U.S. Share of Global VCM, Ethylene(C2) & Polyethylene Market Ethylene & PE share declines have accelerated; VCM Decline stays steady Polyethylene C2 VCM Avi Nash LLC

  25. One Likely Result: Integration Importance Should Rise • Attempt by Many to Emulate Best Practices in Refinery-Cracker Integration. - “How Much of the 5¢/Lb Potential Are WE Capturing?” • Greater Upgrading of By-Product Streams • Reinvestment in Mega Sites (Similar to Ludwigshafen) • Disproportionately Higher vs. Industry and Company averages • Enough to Maintain al least Acceptable Competitiveness Avi Nash LLC

  26. US Challenge (Industry and Regulators): How Best Can the Gulf Coast Improve Competitiveness.. …. in Chains Where it has Advantage, …. Such that the Competitiveness Can be Defended? Example: Propylene • How much more Propylene can be squeezed out? • At What Cost… Under Different Scenarios? • Directed into Which Products and Markets? • “Captively”, or Left to Others to Upgrade? Example: Refinery-Cracker Integration • How Best to Leverage Scale & Infrastructure on Gulf Coast? • How to Accelerate Incorporation of Best Practices Involving Process Technology, Process Control, ERP, Software, Logistics, Outsourcing? • What Limiting Steps need to be overcome for the next level of Benefits? Avi Nash LLC

  27. Mix Shift: End Markets • Stating the Obvious: • Fewer Exports of Certain Commodities, eg ethylene-chain derivatives • More Volatile Exports of these as US increasingly becomes the swing producer • Greater Exports of specialized Derivatives, Materials Avi Nash LLC

  28. Secular Product Mix Shift: Less Material- Intensive, More Knowledge-Intensive • European Case History Ciba-Geigy, Sandoz, Rhone-Poulenc, Hoechst, ICI, and, to a lesser extent, Bayer, Akzo, Solvay • US Transformations: Pharma or Ag Biotech Monsanto, American Cyanamid, and, to a lesser extent, Du Pont • US Transformations: More Downstream Rohm and Haas, 3M • Bottom-Line: Disproportionate Growth in Value of “Users” Formulators: eg Sherwin-Williams Distributors/Service Providers: eg Gases, Sigma-Aldrich, Ecolab Materials: eg 3M,ITW(Adhesives), Toray, Fiberite Avi Nash LLC

  29. Industry Challenge: How to Increase the Productivity of R&D? • What to Spend on? • How Much to Spend? • Equally Importantly, Reducing “False Positives”, and Reducing “False Negatives” in the R&D Process. • The Role of Fresh Approaches High Thru-Put Experimentation Informatics Avi Nash LLC

  30. Setting the Stage • The Issues • Feedstock Action…and the Reaction • Product Mix Shifts • Ownership Shifts • Putting it All Together Avi Nash LLC

  31. Division of Companies. PTA, EG (Dow Chemical) Polyester, Spandex (Dupont) Polyethylene, Olefins (BP) Small, or Mid-Sized Players Millenium Celanese Semi-Commodity Companies eg: Great Lakes, Noveon. Drivers: Move Down Stream Cash Out Ownership Changes Sellers Buyers • “Private Equity” Firms. • Not Strategic Owners. • Focused Industry Players. • Relatively New Entrants, e.g: Koch, Sun • Consolidators, e.g: Lyondell. • Foreign Competitors. • Drivers: • Size, Share • Market Access • “Synergy” • “Make a Quick Buck” Avi Nash LLC

  32. Ownership Changes: Changes Little in Most Cases. Most Products Continue to Have too Many Players to Allow Pricing Power.Acquisitions Driven by Size or Share Alone Fail to Deliver US Ethylene Industry Structure is Way Too Fragmented • Question: • What is the Franchise Quality of the Purchased Assets? • What is the Acquirer's confidence in Adding Value to Acquired Assets? • What is the price paid relative to “Cycle-Average” Earnings? Avi Nash LLC

  33. Setting the Stage • The Issues • Feedstock Action…and the Reaction • Product Mix Shifts • Ownership Shifts • Putting it All Together Avi Nash LLC

  34. Putting it all Together • Why the Gulf Coast Industry Won’t Go Away . Infrastructure, Integration, Logistics Advantages . People & Productivity Advantages + Proximity to the #1 Market . “Delivered-Cost” Advantage in Local market for Many Products Avi Nash LLC

  35. Putting it all Together • Why the Gulf Coast Industry Won’t Go Away • Why the Gulf Coast Industry Will Slow/Shrink . Local market Growth Slowing . “Delivered-Cost” Advantage into Export Markets Disappearing in some cases . “Delivered-Cost” Advantage in Local Markets shrinking . Demise of Old Non-integrated Assets (slowed by Exit Costs), often without reinvestment in new ones Avi Nash LLC

  36. Putting it all Together • Why the Gulf Coast Industry Won’t Go Away • Why the Gulf Coast Industry Will Slow/Shrink • Why Disparities will Increase Between Players . Big Differences in Execution, Focus . Big Differences in Innovation: R&D, Production, Marketing . Big Differences in Re-investment: Cap-Ex, R&D . Big Differences in Profitability Avi Nash LLC

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