Orders have been slow to materialize. Customers are hesitant to project sales. It’s tough to run a business.
As president of the Greater Baton Rouge Industry Alliance, Marcus Lewis says this is what he’s hearing from chemical companies in the Capital Region, and he doesn’t expect the market to improve until 2010.
“A lot of our plants are not running at capacity for sure, and it’s uncertain as to how long that could last,” he says. “In the financial world, people are not really forecasting. There’s hesitancy on the recession, about how long it will last and when it will bottom out.”
At Rhodia, where Lewis also is general manager, the French specialty chemical producer has challenged them to evaluate every cost at its Baton Rouge plant. No one’s been laid off, but there is a hiring freeze and attrition.
Nationally, a 3% job loss is anticipated in the industry this year, but the impact could be more severe in Louisiana and the Gulf Coast, says Kevin Swift, chief economist with the American Chemistry Council. As of December, chemical production was down 18.9% in the Gulf Coast region compared to the same time last year. Production has fallen 10.4% nationally.
Globally, the outlook is even more grim.
According to Platts, an energy analysis company, the petrochemical industry needs to prepare “for a long, cold winter … that could last well into 2012.”
An entrenching global recession, volatile raw materials costs, worsening auto and housing markets [both major chemical users] and the credit crunch are stressing the industry this year. Product demand continues falling while global competition is increasing, particularly with the Middle East emerging as a major player that is pushing considerable cheap products. This competitor’s arrival is so significant, with its huge investment in considerable larger petrochemical facilities, that it’s changing the market worldwide.
With a global recession already causing a staggering market contraction and the Middle East muscling in with major petrochem capacity by 2009-10, those factors will compound an already challenging year for the U.S. industry.
“The more of this stuff that comes online competes with American petrochem products, and the global economy is tough everywhere,” says Dan Borné, president of the Louisiana Chemical Association. “More and more of what we make goes into stuff that isn’t being bought, so I’ve got a very cautious outlook for 2009.”
The industry’s export advantage of a weak U.S. dollar making products more attractive overseas is also waning in the recession.
Despite challenging conditions, the Middle East, including an aggressive Saudi Arabia, still is on track this year to flood the market with bulk, cheap petrochemical products, says Mark Eramo, executive vice president of marketing advisory services with Houston-based Chemical Market Analysis.
Middle East supplies glutted the market in late 2008, which helped end a four-year upswing in the industry. While the oversupply was anticipated, he says a severe global recession was unexpected.
“They will force the idling of assets in the U.S. and other parts of the world, depending on the company’s position in the competitive chain,” Eramo says. “Polyethylene is particularly being hit by Middle East suppliers.”
The region is firing up world-class facilities with considerably larger capacity than U.S. plants and delivering much cheaper materials. Saudi Arabia calls its emerging petrochem industry the “new gulf,” referencing the U.S. industry along the Gulf of Mexico.
“They’re trying to build what we’ve got,” Eramo says. “In Baton Rouge, think about the number of businesses related to the chemical base there. That is exactly what Saudi Arabia is trying to do—to copy what we have in Baton Rouge.”
While it sounds like the Middle East is simply taking a major market sector of the Capital Region, GBRIA Director Connie Fabre says the industry has been bracing for the blow.
Some companies have been aligning themselves with the Middle East, which Dow Chemical recently attempted with its K-Dow partnership until Kuwait pulled out because of the recession. Others have invested billions of dollars to realign plants for greater efficiency and capacity. Fabre says the hope is the market will improve and the Gulf Coast will remain the primary supplier.
David Dismukes, executive director of the LSU Center for Energy Studies, also foresees plants getting smaller and more efficient to survive.
While Dismukes doesn’t anticipate wholesale plant closures in the Capital Region, he says more layoffs are possible if the recession worsens.
The industry was in reaction mode late last year. It’s in survival mode this year.
“The Middle Eastern products will flood the global market and more likely our own markets if the recession continues,” he says. “Our production is higher cost so with lower demand we have a harder time competing price wise. Although prices are falling in petrochem, cost hasn’t kept pace, especially in Louisiana.”
Much of the new investment has been in “boutique” and specialized areas of petrochem, such as ExxonMobil’s $554 million low-sulfur diesel upgrade under way at its Baton Rouge facility. Dismukes says domestic producers will focus on unique product mixes and custom chemicals while the bulk chemicals will be done cheaper by countries like Saudi Arabia.
In the meantime, he says the industry “is hunkering down, cutting costs and trying to stay alive to resume growth in 2010.”