The recovery will continue as trade volume increases in Canada. Prices which declined last year are projected to stabilize in 2003, boosting revenues. The other member of the NAFTA trio, Mexico, will also show growth this year. In other Latin American petrochemical-producing countries, Chile, Brazil, Argentina, and Venezuela are expected to show modest growth, despite political instability remaining the wild card in the region. In Europe, the chemical industry in European Union countries will grow at about the same 3.0% rate as witnessed in 2002, but growth in the so-called transition countries –consisting mainly of Southeast European and Commonwealth of Independent States (CIS) nations– will outperform that of the EU nations. Asia also has to be taken on a country-by-country basis, with petrochemical growth reflecting a range of performances, from a 7.2% increase in demand in China to continuing economic problems in Japan.

Most observers agree that the U.S. petrochemical business cannot get much worse than it was in 2001; a year that began with natural gas prices at record highs and ended with a severe recession much worse than most people had expected. Moreover, massive capacity expansions started up over the last 18 months in North America and the Middle East dug a pit too deep for U.S. producers to climb out of. The situation was so bad that roughly 6 billion pounds of U.S. ethylene capacity lay idle last year. In fact, three ethylene crackers –too old and unproductive for further investment– will soon be decommissioned. To many observers, 2001 was reminiscent of the early 1980s, the last time U.S. ethylene producers faced such severe capacity rationalization. The observers warn that more crackers will be closed like then.

In fact, many experts question the very future of the U.S. ethylene industry. They envisage the center of gravity shifting from the Gulf of Mexico to the Persian Gulf, where feedstock is cheaper. The U.S. has had a hard time stacking up against the prices put up by Middle Eastern-derived materials in Asian markets that constitute the biggest markets worldwide. This is not an absolute blockage like it was at the beginning of last year, but it is still a very difficult market to sell into. So some change in the U.S. will be inevitable.

The ethylene industry in Europe typically runs at higher operating rates than in the U.S. European producers, made the decision that they would adjust their supply after 1982 due to Middle Eastern production, and the fact that Europe would become a net importer of ethylene derivatives. Dow’s own 1.3 billion pound addition in Terneuzen, the Netherlands in February 2003, remains the only recent major European capacity increase.

Most producers expected some improvement in the U.S. ethylene industry sometime during the second quarter of 2002, depending on the timing and strength of a rebound in the U.S. economy. There will be a relatively steady recovery in 2003 and 2004, with the next peak in the profit cycle expected by the end of 2004 or beginning of 2005. Some producers say ethylene oxide and glycol will be the first ethylene derivatives to improve, because no new capacity is on the horizon. Ethylene operating rates have already climbed by as much as 83%. But a return to normalcy in ethylene markets depends on the economic recovery and how much additional capacity gets shut down.

Even though the worst is likely behind the U.S. petrochemical industry, fundamental shifts in the global market do not work to its favor, and its ability to export to Asia-Pacific is likely to fall. Gradually the portion coming from the U.S. manufacturing base will reduce as China will fill its needs both by indigenous construction and by increasing the diversity of its source of imports, with the new imports arriving from regional countries and to a greater extent from the Middle East.

The spending levels by some petrochemical industrialists reflect the change. For example, BP Chemicals reduced capital spending from $1.2 billion in 2001 to $800 million in 2002, with investment focused on completing Asian projects. This is not going to be a particularly big spending year in North America, but so far nothing has been canceled. In all, five European and U.S. chemical producers –BASF, BP, Shell, Dow, and ExxonMobil– have six ethylene joint ventures with Chinese companies planned over the decade. ExxonMobil is planning two ethylene ventures in China. It also started up an integrated cracker in Singapore last year. The first of these China projects will likely be BASF’s, which is already under construction. Observers have doubts about the rest. In fact, last year, Chevron Phillips canceled plans with PetroChina for a cracker in western China.

Western companies are also pouring capital into the Middle East. In late 2000 and early 2001, ExxonMobil started up two crackers in Saudi Arabia with partner Saudi Basic Industries Corp. (SABIC). Other start-ups include Borealis’ Borouge joint venture with Abu Dhabi National Oil Co. in the United Arab Emirates at the beginning of this year. The $1.2 billion complex has 1.3 billion pounds of ethylene and 1 billion pounds of polyethylene capacity. Chevron Phillips is opening a 1.1 billion pound ethylene joint venture later this year in Qatar, and it plans another cracker for 2006.

This trend will change the ethylene market in the U.S. to focus inward more in North America; a self-supply scenario rather than an export situation. It won’t make sense for a country like the U.S. to import raw materials to process and then export them to China, when China can import the same raw materials itself. It makes much more sense for the U.S. to consume its own goods. The trend will move gradually for the outcome to resemble a more European model.

Canada is an exception, which will continue in its ability to export to the Far East because of its new, large plants, an efficient supply chain for export, and cheap ethane. Some like ExxonMobil however, contend that the U.S. may continue to be an exporter in the long run. Because, Asia’s growing self-sufficiency will take a substantial amount of time to develop and besides there are closer South American markets for the U.S. to export to. So the U.S. and Middle East will continue to be significant exporters to those areas for the foreseeable future.

The North American market was built up on the assumption that natural gas would be readily available at low cost. Most experts agree the one lesson that the U.S. industry has learned from last year is to be less dependent on ethane feedstock. Many U.S. producers have similar projects under way. Dow is investing in its Gulf Coast operations to increase feedstock flexibility. In addition, its new cracker will be more flexible than the smaller units it is replacing. They will build ethane plus propane so they won’t have to use ethane.

Most experts agree that propylene production in the U.S. will remain competitive globally because unlike Europe and Asia, the U.S. has abundant refinery capacity that produces propylene as a by-product. Indeed, the U.S. propylene sector may be able to fill the gap caused by all the new plants in the Middle East, which are ethane-based and make little propylene, and the extent of ethane-based capacity may lead to a global propylene shortage. The U.S. will be called up to meet these shortages. Thus, the U.S. could likely turn toward heavier faced stocks.

The Middle Eastern industry has grown from being insignificant 20 years ago to being home to about 10% of global ethylene capacity today. For Europe and the U.S., the region is both threat and opportunity, gobbling up the export market on the one hand and presenting a profitable place to invest on the other. The Middle East is a threat for Asia but also an important emerging source of petrochemical products supply. But the Middle Eastern success isn’t unbridled; the war in Iraq, logistical and feedstock challenges could hem in regional growth.

For Makoto Takeda, head scientist at Tokyo-based Dia Research Martech, the reasons for Middle Eastern countries’ focus on petrochemicals are obvious. "The Middle Eastern oil-producing countries, led by Saudi Arabia, have in recent years promoted a policy of reducing their dependency on the oil economy and are actively tackling the petrochemical industry as a pillar for fostering domestic industry," he says. "With their background of superiority in feedstock, they are proceeding with expansion for their petrochemical industries at a pace which in some cases, are unrelated to the world’s supply-demand balance of petrochemicals."

Ethylene can be made in the Middle East for a fraction of the cost of manufacture in Asia –the destination for most Middle Eastern exports. The price of ethane in Saudi Arabia is set at $0.75 per million BTU, which translates to an ethylene production cost of $100 to $110 per metric ton. In Iran, ethane costs $1.25 per million BTU. In contrast, naphtha-based ethylene in Asia costs five to six times as much as ethane-based ethylene in Saudi Arabia.

Abdullah S. Nojaidi, company executive vice president for planning and investment, said "SABIC’s expansion is far from done, and our goal is 48 million metric tons of capacity by 2010". Saudi Arabia alone has over a quarter of the world’s proven oil reserves and enough natural gas to last well over a century. This means petrochemical producers in Saudi Arabia can depend on the continued availability of feedstock and energy resources for many years to come. Tapping these resources will be the Saudi Gas Initiative, which ExxonMobil and Shell are lining up to help develop. Sources have said the project could support three or more ethylene crackers. However, talks on the initiative stumbled last year.