Petrochemical feedstock's unwelcome surprise

Price volatility surrounding petrochemical feedstock is a harsh reality that creates distress all along the supply chain. Feedstock is the process derivative—e.g., ethane, propane, and naphtha—that comes out of petroleum and natural gas and is subsequently converted for use in everything from shampoo and solvents to plastics, glue, drugs, pesticides, computers, and cars.

03/01/2008


Price volatility surrounding petrochemical feedstock is a harsh reality that creates distress all along the supply chain. Feedstock is the process derivative—e.g., ethane, propane, and naphtha—that comes out of petroleum and natural gas and is subsequently converted for use in everything from shampoo and solvents to plastics, glue, drugs, pesticides, computers, and cars.

Although they're true commodities, feedstock markets more closely resemble industrial rather commodity trading exchanges. This adds to the complexity of dealing effectively with sudden price swings that often result in earnings-report surprises.

“The further you go up the chain, the harder it is to control the price,” says Ben Morse, senior editor covering petrochemicals for New York-based Platt , which generates industry reports. “Feedstock producers may try to push price increases to converters, but converters can't pass the cost on because they're locked into long-term contracts with their customers. So it doesn't automatically mean that the price of a Coke bottle is going up.”

While price volatility has always been the case, “The issue is much more difficult with the trend upwards, causing significant impact on organizations,” says Sanjay Agarwal, principal with global consulting firm Deloitte . “It makes it very difficult for companies to accurately forecast earnings and profits, resulting in reporting surprises that are more negative than positive.”

The U.S. long held a cost advantage due to its abundance of natural gas, but “lost a good part of that in early 2000 when natural gas spiked,” says Mark Fisler, executive VP and CEO of Houston-based Chemical Market Associates Inc. (CMAI), a leading global research and consulting firm to the petrochemical industry. Even though natural gas has stabilized, its price has since been pegged to petroleum-based naphtha, which also affects market dynamics due to the sharp run-up of oil prices.



The U.S. long held a cost advantage based on its abundance of natural gas, but "lost a good part of that in early 2000 when natural gas spiked," says Mark Fisler, executive VP and CEO of Houston-based Chemical Market Associates Inc. (CMAI).

The big shift on the horizon is the massive processing capacity buildup going on in the Middle East, anticipated to come online in the next 12 to 36 months. In an April 2007 press release, Dow Chemical estimated the industry will add 35 million metric tons of capacity for ethylene—the global bellwether feedstock—with more than 50 percent of that under construction in the Middle East.

“The most significant thing happening now is the relationship between the Middle East and China, with the Middle East set to become the world's largest supplier, and China the sponge that drives global demand,” says Ihsan Rahim, managing editor for Platt. Though it's difficult to accurately predict when Middle East capacity will actually come online due to severe supply constraints of engineers and construction resources, the effect—coupled with the boom in development in India and China—will create what one industry minister in the Middle East deemed a “new silk road” at an industry gathering in Dubai in December.

Even though expanding capacity will ease supply constraints, expanding global demand—especially in emerging economies—will continue to make price volatility a reality for years to come.

Deloitte's Agarwal stresses that companies need to better accommodate the reality by adopting what Deloitte deems “integrated commodity strategies” based on clear, forward-view price forecasting models, with an arsenal of tactics to manage shifting supply-demand exposure tied tightly to a company's core business strategy.

“Companies that say they can't do anything but pass prices on to their customers—that's not an option anymore,” says Agarwal. “There are various strategies you can use to reduce your exposure, and those that do will gain significant competitive advantage.”





No comments
The Top Plant program honors outstanding manufacturing facilities in North America. View the 2013 Top Plant.
The Product of the Year program recognizes products newly released in the manufacturing industries.
The Leaders Under 40 program features outstanding young people who are making a difference in manufacturing. View the 2013 Leaders here.
The new control room: It's got all the bells and whistles - and alarms, too; Remote maintenance; Specifying VFDs
2014 forecast issue: To serve and to manufacture - Veterans will bring skill and discipline to the plant floor if we can find a way to get them there.
2013 Top Plant: Lincoln Electric Company, Cleveland, Ohio
Case Study Database

Case Study Database

Get more exposure for your case study by uploading it to the Plant Engineering case study database, where end-users can identify relevant solutions and explore what the experts are doing to effectively implement a variety of technology and productivity related projects.

These case studies provide examples of how knowledgeable solution providers have used technology, processes and people to create effective and successful implementations in real-world situations. Case studies can be completed by filling out a simple online form where you can outline the project title, abstract, and full story in 1500 words or less; upload photos, videos and a logo.

Click here to visit the Case Study Database and upload your case study.

Why manufacturers need to see energy in a different light: Current approaches to energy management yield quick savings, but leave plant managers searching for ways of improving on those early gains.
Electric motor power measurement and analysis: Understand the basics to drive greater efficiency; Selecting the right control chart; Linear position sensors gain acceptance
Protecting standby generators for mission critical facilities; Selecting energy-efficient transformers; Integrating power monitoring systems; Mitigating harmonics in electrical systems

Annual Salary Survey

Participate in the 2013 Salary Survey

In a year when manufacturing continued to lead the economic rebound, it makes sense that plant manager bonuses rebounded. Plant Engineering’s annual Salary Survey shows both wages and bonuses rose in 2012 after a retreat the year before.

Average salary across all job titles for plant floor management rose 3.5% to $95,446, and bonus compensation jumped to $15,162, a 4.2% increase from the 2010 level and double the 2011 total, which showed a sharp drop in bonus.

2012 Salary Survey Analysis

2012 Salary Survey Results

Maintenance and reliability tips and best practices from the maintenance and reliability coaches at Allied Reliability Group.
The One Voice for Manufacturing blog reports on federal public policy issues impacting the manufacturing sector. One Voice is a joint effort by the National Tooling and Machining...
The Society for Maintenance and Reliability Professionals an organization devoted...
Join this ongoing discussion of machine guarding topics, including solutions assessments, regulatory compliance, gap analysis...
IMS Research, recently acquired by IHS Inc., is a leading independent supplier of market research and consultancy to the global electronics industry.
Maintenance is not optional in manufacturing. It’s a profit center, driving productivity and uptime while reducing overall repair costs.
The Lachance on CMMS blog is about current maintenance topics. Blogger Paul Lachance is president and chief technology officer for Smartware Group.