Tight times

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Andrew Liveris, chairman and CEO, of Dow Chemicals.

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Dow Chemicals has experienced significant increases in the cost of raw materials.

There's little relief in sight from feedstock pressure for the world's petrochemical industry.

The month of May saw US WTI oil futures hit new record highs, in fact at a level not seen since the contract was launched on Nymex in 1983. Prices have already climbed 98% in the past year.

Last month also saw a widely reported warning from analyst Goldman Sachs that crude may hit between US $150-$200 a barrel within two years, because growth in supply will fail to keep pace with increased demand from developing nations.

This analyst also said that OPEC's recent argument that much of the increase was due to "market speculation" was erroneous and that the price was being supported by a new era of fundamentals.

Even OPEC itself has admitted that there has been a shift in the dynamics of the market and its president, Saudi oil minister Ali Al-Naimi, recently went on the record as saying he doubted prices would ever again dip back below US $60 a barrel.

High oil prices are already having a serious impact on the petrochemical sector and could bring about a major change in the industry's structure and economics.

The most tangible impact at present is the sharp rise in feedstock prices, due to refiners having to pass on high crude costs to consumers. There is also tightened demand as refiners switch capacity to gasoline production, away from naphtha. Dow Chemical's first-quarter 2008 earnings amply illustrate the point.

In April it said its raw material costs during the first three months of this year had risen by 42% or US $2.2 billion year on year. This was the largest quarterly increase in the company's history, and nearly equal to the increase it experienced for all of 2007.

The pressure on petrochemical producers is less marked of course in major oil producing areas, where in fact high crude prices are enabling countries like Saudi Arabia to increase investment in new feedstock, as part of a general shift into petrochemicals and economic diversification away from oil and gas.

But for those countries that lack indigenous feedstock supplies or only have a limited amount, rising costs are forcing a change of strategy.

It is often said that the problem with feedstocks is that although they are true commodities, their markets are run on an industrial basis rather than via an exchange, meaning that rapid changes in prices are much less easy to absorb.

Feedstock producers will endeavour to pass on price increases to the converters, but they themselves cannot pass these costs on as they are more often than not tied into long-term contracts with their customers.

According to a recent report by Wood Mackenzie and International eChem, the future availability and cost of cracker and reformer feedstocks is about to become a critical success factor for olefin and aromatics producers, in particular in all major petrochemical producing regions.

Today's high-priced, and volatile, crude oil environment already presents the petrochemical industry with a huge challenge.

This is a global issue, where seemingly minor developments in one region can easily have a major ‘knock-on' impact around the world." In particular, aromatics producers are already finding themselves having to compete for feedstock supplies with growing global gasoline demand, the report said.

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