Falling into Ambush
The domestic petrochemical industry, which have enjoyed a boom, hit a snag. This is because major petrochemical companies in the United States are planning to expand the annual ethylene production by 4.5 million tons, which is nearly half of the domestic production, by early next year. The fall in prices caused by oversupply and the increase in international oil prices are expected to be variables.
According to industry sources on August 28, Dow Chemical and Chevron Phillips Chemical of the United States will start operation of ethane cracking centers (ECCs) with an annual production capacity of 1.5 million tons in October. Exxon Mobil Corp., the largest oil producer in the U.S., also plans to start operation of ECC with an annual production capacity of 1.5 million tons in January next year. The combined 4.5 million tons of ethylene will be produced at the end of this year and early next year. The figure is 50 percent of 9.04 million tons of the annual ethylene production capacity of domestic companies such as LG Chem, Lotte Chemical and Hanwha Total.
The recent global economic recovery has boosted the demand of both oil products and ethylene. The domestic petrochemical industry is so booming that it is called “Super Cycle.”
There are conflicting forecasts in the industry. Some express concerns that U.S. companies’ increase in production will cause oversupply, and others say it will have a limited impact on the Asian market. Experts believe that the domestic market will not be hit hard because domestic companies have a higher profitability than U.S. companies and produce different products. Domestic firms produce ethylene by cracking naphtha, while U.S. firms produce ethylene by cracking from shale gas. The longer the industry suffer low oil prices, the more favorable to domestic companies which use naphtha as a raw material. With the fall in oil prices, the average price of naphtha this year stands at US$466 (522,386 won) per ton, down 49.4 percent from US$922 (1.03 million won) in 2013. The price of ethane gas, a raw material of ECC, dropped a mere 5.1 percent over the same period.
In 2012 when international oil prices exceeded US$100 (112,100 won) per barrel, the U.S. and North American region planned to expand the ECC production by 15 million tons. In 2016 when oil prices dropped below US$50 (56,050 won) per barrel, they decreased their expansion plans by half to 7.7 million tons. Domestic companies’ NCCs produce 30 to 40 percent of ethylene, 16 to 18 percent of propylene and 5 percent of butadiene. On the other hand, ethylene accounts for 80 percent of U.S. companies’ ECCs.
The price of oil is the variable. The industry expects that the shale gas-based ECC will have a higher price competitiveness than the NCC when oil prices surpass US$80 (89,680 won) per barrel. Some point out that companies at home and abroad are excessively expanding the production of ethylene. Until 2019, Hanwha Total will expand ethylene production by 310,000 tons, LG Chem by 230,000 tons and Lotte Chemical by 200,000 tons. New U.S. ECC facilities to be completed soon will produce 9.86 million tons of ethylene during the same period.