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Strategyand Global Petrochemicals Disruptions
Strategyand Global Petrochemicals Disruptions
Strategyand Global Petrochemicals Disruptions
petrochemicals
disruptions
Business model
innovations for a
dynamic market
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Sonal Singh
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Strategy&
Executive summary
Over the last few years, the global chemicals industry has undergone a
series of large-scale disruptions. On the demand side, a shift to fastergrowing Asian markets and the increasing commoditization of specialty
chemicals continue to play out. On the supply side, factors such as shale
gas developments in the U.S. and coal in China have altered the feedstock
mix for petrochemicals producers. Together, these trends are challenging
the business models for five key building blocks in the industry: methanol,
ethylene, propylene, butadiene, and aromatics.
For the methanol value chain, the staggering demand growth is likely to
sustain current price levels. Methanol players in the U.S. and the Middle
East should consider converting methanol to olefins and/or propylene, and
consider building additional methanol capacity to take advantage of cheap
feedstock where available.
Ethylene will continue to be oversupplied from locations such as the U.S.,
driven by cheap gas. European crackers which still rely on more
expensive naphtha as feedstock and are far from the growing demand base
in Asia must streamline their operations to improve efficiency and
develop new higher-value derivatives.
The propylene market will continue to experience supply constraints in the
short term, leading to price imbalances for some derivatives. In response,
U.S. companies should consider integrating upstream into new on-purpose
routes. European producers need to rely on tight integration with refineries
and product and feedstock innovation to remain competitive.
The butadiene value chain remains largely driven by the tire industry, and
some manufacturers in Asia are now placing the complete value chain
(from butadiene through tires) in a single location. Rubber and tire
manufacturers need to consider a similar integration strategy to solidify
their butadiene sourcing and reduce costs.
Strategy&
A disrupted industry
Strategy&
Middle East
producers have
had to shift to
naphtha as a
feedstock.
Exhibit 1
Petrochemicals prices have become more volatile
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2001
2003
2005
2007
2009
2011
2013
Source: Strategy&
Strategy&
Excess methanol
capacity in
China is not
expected to
pose a threat to
methanol prices
in the short
term, due to
robust demand
growth.
Strategy&
Exhibit 2
China will dominate the methanol market
Methanol Supply
(capacity, million tons per annum)
+8%10%
160
140
Methanol Demand
(by end-use, million tons per annum)
+11%
Speculative
capacity1
105
1012%
96
45%
53%
China
63
6%
48%
15%
10%
27%
2012
14%
U.S.
8%
Europe
25%
Others
2017 forecast
11%
83%
2012
20%
22%
MTO/MTP
16%
Gasoline/Fuel blending
62%
Others
5%
2017 forecast
Speculative capacity is
capacity that has been
announced in investment
plans but is unlikely to
be built. Note: MTO =
Methanol-to-olefins, MTP
= Methanol-to-propylene.
Source: Strategy&
Strategy&
Exhibit 3
Margins for pure methanol and MTP plays are similar
Propylene versus Methanol Prices and Margins, 20002012
2,000
1,900
1,800
1,700
Last 2 years
1,600
1,500
1,400
1,300
1,200
1,100
1,000
900
800
700
600
500
400
300
0
50
100
150
200
250
300
350
400
450
500
550
600
650
Strategy&
Exhibit 4
North American methanol players will take advantage of low-cost gas to increase capacity
Implications for Methanol Players
Gas
Methanol
Coal
Derivatives
Increased
capacity
North
America
Integration into
olefins (MTO/MTP)
Middle
East
Asia
Pacific
Business Model
Considerations
Olefins /
Polyolefins
Coal-based
technology
Integration into
derivatives
MTO
technology
Gas-based players
Coal-based players
Capacity expansions
MTBE, formaldehyde,
acetic acid
Source: Strategy&
Strategy&
Exhibit 5
Ethylene will be oversupplied in 2025, with European and Asian crackers under cost pressure
Projected Ethylene Cost Curve in 2025 (assuming oil price of US$90/barrel)
1,800
Demand
1,600
1,400
1,200
1,000
Russian Gas
800
China
Shale Gas
Iraq Gas
400
200
0
0
20
40
60
80
100
120
140
160
180
200
220
240
North
America
10
Strategy&
Exhibit 6
European players will consider tighter integration with refineries and moving to highervalue-added products
Implications for Ethylene Value Chain Players
NGL
Ethylene
Naphtha
North
America
Ethylene
specialty
derivatives
Business Model
Considerations
Europe
Asia
Pacific
Middle
East
Ethylene
commodity
derivatives
Technology/Innovation in
intra-polymer substitution
Increased
capacity
Increased
liquid-based
Downstream derivatives
Naphtha players
NGL players
Capacity expansions
Strategy&
11
Similarly, shale gas will put pressure on margins for European companies,
which suffer from two disadvantages: older steam crackers based on
naphtha and a long distance from the industrys emerging centers of
demand. Given the market environment, efficiency is critical. European
producers of ethylene and its derivatives need to focus on streamlining
their operations and tightly integrating with refineries to reduce costs.
On the revenue side, these companies also need to drive top-line growth
by investing in product innovation and developing higher-value products
for their portfolio.
Middle East players, on the other hand, must also deal with local factors,
such as reduced access to natural gas and a need to strengthen local
industries and increase employment. The cumulative effect of these
forces is downstream expansion and a shift away from gas to heavier
feedstocks and liquids. In the right context, however, the shortage of gas
can represent an opportunity for Middle East producers. Now that these
resources are more constrained, Middle East companies will need to
improve yield, operate more efficiently, use technology more intelligently,
factor sustainability into their operations, and take active steps toward
manufacturing excellence. The Middle East petrochemicals industry will
likely undergo a wave of mergers and consolidation, especially among
smaller players as they strive to achieve scale.
Finally, Asian producers of ethylene and derivatives are also likely to
expand and acquire competitors in order to increase capacity and achieve
scale, which is even more attractive in a growing market. Some are
already using Verbund type plays, in which integrated petrochemicals
companies can rapidly switch from one feedstock and from one endproduct to another, adapting their processes in response to changing
market conditions.
European
producers of
ethylene and
its derivatives
need to focus
on streamlining
their operations
and tightly
integrating with
refineries to
reduce costs.
12
Strategy&
Exhibit 7
Propylene supply shortage compared to demand is expected to continue up to 2017
Propylene Supply/Demand and Impact on Derivative Margins
CAGR1 +6%
79
20%
12%
107
26%
17%
U.S.
18%
Europe
38%
35%
Others
2012
2017 forecast
21%
22%
1.0
0.5
2001 2003
Source: Strategy&
Strategy&
13
For European
companies,
which are still
cracking a lot of
naphtha, scale
and innovation
will be essential.
Strategy&
Exhibit 8
Asian players will seek to improve the economics of alternative feedstocks
Implications for Propylene Value Chain Players
NGL
Propylene
Naphtha
North
America
On-purpose production
Europe
Asia
Pacific
Middle
East
Propylene
commodity
derivatives
Propylene
specialty
derivatives
Business Model
Considerations
Innovation-driven
value-added derivatives
Bio-based derivatives
Technology/Innovation to
value-added derivatives
Alternative feedstocks
Increased
liquid-based
Downstream derivatives
Naphtha players
NGL players
Capacity expansions
Strategy&
15
In coming
years, the most
significant
factor affecting
the market is
the growing
tire industry
in Asia, whose
automotive
market is
booming. Large
sections of the
population are
entering the
middle class and
so buying cars.
16
Strategy&
Exhibit 9
Butadiene and SBR prices have boomed and crashed
Butadiene and Styrene Butadiene Rubber Prices (US$/ton)
Butadiene
4,000
4,000
3,500
3,500
3,000
3,000
2,500
2,500
2,000
2,000
1,500
1,500
1,000
1,000
500
500
2004
2006
2008
2010
2012
2014
2004
2006
U.S.
U.S.
2008
2010
2012
2014
Strategy&
17
Exhibit 10
The main supply sources of benzene are under pressure
Benzene Shortage from Crackers and Refineries
80%
22.0
18.1
17.6
1.3
19.3
3.1
5.4
Shortage
70%
60%
16.3
16.2
16.6
2015
2020
2025
Steam cracking
50%
40%
2010
18
Strategy&
Exhibit 11
Refiners and petrochemicals players will build commercial decision-making capabilities to
maximize the value of each molecule
Implications for Benzene Value Chain Players
Reformate
Pygas
Coal
1
Benzene,
Toluene,
Xylenes
Business Model
Considerations
End Products
Derivatives
Derivatives players
End-product
manufacturers
Note: C2 = Ethylene,
C3 = Propylene, MAN =
Methacrylonitrile, MMA =
methyl methacrylate.
Source: Strategy&
Strategy&
19
20
Strategy&
21
Conclusion
Although the current disruptions and their implications for the chemicals
industry seem significant, they underscore the need to address the problem
from a capability perspective. The petrochemicals industry has often seen
similar periods of profound change. Starting with the transition from
inorganics to organics, the introduction of plastics, and the launch of
material science, change is inevitable. Instead of trying to predict such
changes, which is almost impossible, producers can win by building the
capabilities needed to adapt to such changes, leaving them ready to
compete no matter what the future holds.
22
Strategy&
Endnotes
Strategy&
23
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