"A global "family" of ventures, partnerships and/or co-operations is a much more effective and efficient method to leverage local expertise."

Volker Trautz, President and CEO Basell Polyolefins, was one of the key speakers at the 5th Iran Petrochemical Forum, whose topic of discussion was "Responding to Changing Petrochemical Industry Dynamics". Many important points relating to the topic were touched on during the lecture some of which follow.

The Polyolefin industry must be recognized as a commodity industry even though players tend to position themselves with technologically advanced products and manufacturing platforms of ever-increasing scale to obtain the maximum market premium while benefiting from lowest unit manufacturing cost. The impact of change in such an industry is to keep supply and demand out of balance on a roller coaster ride that has wild swings in profitability and forces ever-increasing operating rates and efficiency to maintain the same return on capital.

Middle East ethylene based on gas crackers should have a significant benefit for polyethylene production cost especially under high oil scenarios but the produced polyethylene is not close to the market. Hence, to remedy the situation, Saudi Basic Industries Corporation (SABIC) recently made the strategic move of acquiring DSM. Drawing a preliminary conclusion at this stage suggests that future business models must have the proper diversity and regional balance between gas and oil based monomer portfolio and market access.

For manufacturing processes there is an increase in scales as seen in the development of world scale ethylene crackers (and correspondingly in polyolefin plants). Processes complexity has been reduced with a corresponding reduction of capital and operating costs taking advantage of new catalysts systems. But innovation at the process level only captures one element in the chain. The flow has been as follows: process improvements enable product improvements, and even totally new product attributes and these then create new polymer markets through inter-material competition.

Innovation and markets both form a strong force behind growth. Innovation thus becomes the glue between technology push and market pull. You will recognize the famous Innovation, Customer Intimacy, and Operational excellence triangular business model, where focus tended to be along one axis and a single element of the value chain. Early players were driven by a differentiating concept: a key raw material position, a core competency, unique product, technology or market positioning etc. Having strength in one area with sufficient skills in the other two was often sufficient to be profitable.

Polyolefin growth has been high and is expected to remain so. What has changed is strong regional growth has shifted to Asia, Middle East and Latin America. Optimized economics also confirm that polyolefin plants must be built at monomer sources in a fully integrated fashion. Consequently to participate in growth, the business models must incorporate, on a global basis, a local manufacturing base. This trend toward globalization, with a strong regional market presence, has already started with the top producers, including Basell, having a strong global manufacturing and marketing presence. This trend is expected to increase as producers follow the market.

It is important to note that not only have the top ten (less than 5% of the total producers) increased their capacity share to over 50%, but increasingly it is an integrated polyethylene and polypropylene petrochemical business with isolated players disappearing. All of the current leading players are the result of ventures and much of this change has taken place over the last five years reflecting a driver for change.

A global "family" of ventures, partnerships and/or co-operations is a much more effective and efficient method to leverage local expertise, market presence and access and innovation into a global network. Synergies and learning between family members is extensive and with benchmarked standardization customers have rapid access to the industry’s leading materials and services.

There are two important elements in such a venture network.

1. Each partner must be committed to the success of the venture and contribute significantly to one or more of: innovation, customer intimacy or operational excellence business elements necessary for success; and

2. The ventures must be set up on a balanced win- win basis where partners share risks and rewards.

There are many competing forces. Product and market innovation can, in the short-term, squeeze more money out of the market by setting new performance standards. However supply/demand forces in the bulk plastic industry drive results. As the balance becomes tight margins increase and new investment is attracted but over time as the balance softens the price will be continuously be squeezed down to the marginal cost level of the industry, which is the cost of the least efficient producer.

Consolidation (Family structures) and co-operative and/or co-producer agreements to help balance world scale capital investment risk with market demand offer a possibility to help dampen the supply side of the supply/demand cycle. Summarizing the key dynamics of change, it becomes clear that to enhance competitiveness it is mandatory to take action and treat the business as a whole with a business model that does not just treat symptoms but is robust and encompassing. The successful player will excel in each area.

A key challenge for the future will be to successfully develop an integrated business model with properly shared risks and rewards on a global basis recognizing that no one party can do it all and there is a need for strategic partnerships.

The optimized model must incorporate the key features:

1. Strong global market presence and access

2. Integrated gas/oil regional base; necessary to produce close to the market at the lowest costs

3. Monomer source security, diversity and cost leadership

4. Innovation excellence integrated with operations, products, and market

5. Shared risk/reward structure