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 2015 Top Plant.
The Product of the Year program recognizes products newly released in the manufacturing industries.
The Engineering Leaders Under 40 program identifies and gives recognition to young engineers who...
Hannover Messe 2016: Taking hold of the future - Partner Country status spotlights U.S. manufacturing; Honoring manufacturing excellence: The 2015 Product of the Year Winners
Inside IIoT: How technology, strategy can improve your operation; Dry media or web scrubber?; Six steps to design a PM program
World-class manufacturing: A recipe for success: Finding the right mix for a salad dressing line; 2015 Salary Survey: Manufacturing slump dims enthusiasm
Getting to the bottom of subsea repairs: Older pipelines need more attention, and operators need a repair strategy; OTC preview; Offshore production difficult - and crucial
Digital oilfields: Integrated HMI/SCADA systems enable smarter data acquisition; Real-world impact of simulation; Electric actuator technology prospers in production fields
Special report: U.S. natural gas; LNG transport technologies evolve to meet market demand; Understanding new methane regulations; Predictive maintenance for gas pipeline compressors
Warehouse winter comfort: The HTHV solution; Cooling with natural gas; Plastics industry booming
Managing automation upgrades, retrofits; Making technical, business sense; Ensuring network cyber security
Designing generator systems; Using online commissioning tools; Selective coordination best practices

Annual Salary Survey

Before the calendar turned, 2016 already had the makings of a pivotal year for manufacturing, and for the world.

There were the big events for the year, including the United States as Partner Country at Hannover Messe in April and the 2016 International Manufacturing Technology Show in Chicago in September. There's also the matter of the U.S. presidential elections in November, which promise to shape policy in manufacturing for years to come.

But the year started with global economic turmoil, as a slowdown in Chinese manufacturing triggered a worldwide stock hiccup that sent values plummeting. The continued plunge in world oil prices has resulted in a slowdown in exploration and, by extension, the manufacture of exploration equipment.

Read more: 2015 Salary Survey

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.
This article collection contains several articles on the vital role that compressed air plays in manufacturing plants.
This article collection contains several articles on the Industrial Internet of Things (IIoT) and how it is transforming manufacturing.
click me