By Collin Eaton and Saabira Chaudhuri
Petrochemical makers are pausing multibillion-dollar U.S.
expansions as the coronavirus pandemic subdues what had been rapid
growth in demand for plastics.
Companies such as Dow Inc. and Chevron Phillips Chemical Co.
collectively poured tens of billions of dollars into Gulf Coast
petrochemical facilities over the past decade, eager to take
advantage of the gusher in raw materials being unlocked by the
American shale-drilling boom.
They bet that turning the cheap byproducts into ethylene and
other plastic-making ingredients would boost earnings.
Surging investments in the hot area overshot demand, as
sometimes happens in business. Capacity to produce ethylene rose
41% on the Gulf Coast over the past five years, according to
research firm S&P Global Platts, while margins dropped more
than three-quarters over that period. Executives remain optimistic
that profits will return after the pandemic, but companies are
reassessing future projects.
Oil giant Saudi Aramco, chemical maker LyondellBasell Industries
NV and Chevron Phillips, a joint venture between Chevron Corp. and
Phillips 66 Co., have delayed plans for three Gulf Coast
petrochemical investments totaling $17 billion. Taiwan's Formosa
Plastics Group and Thailand's PTT Global Chemical also have pushed
back plans for large U.S. plants.
Chemical companies since 2010 have spent $96 billion to complete
more than 200 projects linked to the U.S. shale industry, with a
further $99 billion in projects under construction or in planning
stages, according to the American Chemistry Council.
Dow led the recent American petrochemical boom with the
construction of the Gulf Coast's largest ethylene plant, which
opened in 2017. But last year, as Dow swung to a $1.4 billion
annual loss, the company vowed to cut spending, move away from
building large new facilities and focus on lower-risk, incremental
investments that generate quicker returns. Covid-19, the illness
caused by the new virus, has only accelerated the company's shift,
Chief Executive Jim Fitterling said in an interview.
"You've just come off a big industry growth phase," Mr.
Fitterling said. "When you go through a situation like you've got
with Covid-19, and dramatic changes with oil price, focus on cash
and liquidity becomes king."
Mr. Fitterling remains optimistic that the company's existing
investments will perform well over time, saying delays in new
projects because of the pandemic should lift margins next year as
demand for plastics in the industrial, auto and construction
sectors rebounds.
Analysts are less bullish. Ashish Chitalia of consulting firm
Wood Mackenzie said petrochemical margins are projected to remain
well below 2015 levels until around 2028. The industry has expanded
faster than global demand for plastics, with U.S. polyethylene
capacity and production growing about 39% from 2015 to 2020. That
is compared with a 2% increase in domestic demand and a 17% rise in
global demand over the same period, according to Wood
Mackenzie.
At the peak in late 2014 and early 2015, Gulf Coast margins for
ethylene, a bellwether chemical in U.S. plastics manufacturing,
averaged $558 a metric ton, and companies were racing to build
petrochemical facilities known as crackers that take the gas
byproduct ethane and turn it into ethylene.
"Anyone who had access to capital was going to build a cracker
because it literally printed money," said Carlo Barrasa, an analyst
at IHS Markit.
That Gulf Coast ethylene margin dropped to $127 a metric ton
this year and is projected to fall to $50 in 2022, according to
S&P Global Platts. The squeeze has caused companies to lose
their appetite for growth. New ethylene projects after 2020 are now
forecast to add 4.5 million metric tons a year of North American
capacity, down from the original expectation of 11.3 million,
according to consulting firm Chemical Data LLC.
In July, Chevron Phillips decided to delay final approval of an
$8 billion Gulf Coast project it had expected to sanction next year
with Qatar Petroleum. Chief Executive Mark Lashier said in an
interview that while some companies have paused projects to wait
for the economics to improve, the long-term value of plants remains
strong.
"Capacity is going to come on in lumps and outstrip demand
temporarily, but the beauty of a market that's growing 4% to 5% a
year is that [demand] will catch up," he said.
LyondellBasell, which expanded a Corpus Christi, Texas, ethylene
facility in 2017, isn't planning to embark on any new U.S. ethylene
projects over the next few years. It slashed chemical production,
cut spending by one-third and delayed the late 2021 startup of a
$2.4 billion Texas plant by a year to conserve cash. Its net income
last year fell 28% from 2018.
Bob Patel, the company's CEO, said in an interview that
petrochemical companies had decided to pursue major U.S. expansion
plans as profits had peaked for the decade. But he said he believes
the worst of the pressure on profits is over, because fewer plants
are coming online next year and demand will eventually bounce back
to pre-pandemic levels.
"We're coming into a period where we harvest the value of the
investments we've been making," Mr. Patel said. "When the recovery
really takes hold, we could see a very strong business environment,
with pent-up demand in the back half of 2021 and 2022."
Though overcapacity has weighed on petrochemical margins, the
pandemic drove demand for products such as gloves, masks, gowns and
cleaning wipes, all made from plastic. Supermarkets are packaging
groceries for home delivery in single-use plastic bags rather than
reusable crates because of virus concerns. A jump in e-commerce
also added to the consumption of plastic bags.
But the change in consumer behavior isn't likely to last
forever, and heightened awareness about plastic waste is already
returning even as the pandemic continues. Governments have been
moving to penalize the use of virgin plastic and incentivize
recycling, which could further hit the prospects of petrochemical
plants.
Packaging accounts for about one-quarter of all plastic
production globally, according to the Ellen McArthur Foundation, a
nonprofit. Growth in demand for that type of packaging in North
America is forecast to drop to 2% in 2021, from 5% this year,
before ticking back up to 3% in 2025, according to Wood
Mackenzie.
Some companies including Dow and LyondellBasell have invested
millions in tests of chemical recycling, a process of turning
plastic waste into feedstock to make new plastic.
Chevron Phillips last week announced a successful test of
chemical-recycling technology and plans to increase output of
plastic derived from plastic-waste feedstock to some 450,000 metric
tons a year by 2030. That is still tiny, however, compared with the
nearly 5.4 million metric tons a year of ethylene it makes from
ethane on the Gulf Coast.
"We believe there's a great market out there for that," Mr.
Lashier of Chevron Phillips said of recycled plastic.
Write to Collin Eaton at collin.eaton@wsj.com and Saabira
Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
October 15, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
Chevron (NYSE:CVX)
Historical Stock Chart
From Mar 2024 to Apr 2024
Chevron (NYSE:CVX)
Historical Stock Chart
From Apr 2023 to Apr 2024