The petrochemical industry’s costs are skyrocketing as raw materials grow dearer
`We’re keeping our fingers crossed,’ one executive tells reporter John Spears
What do you do as a business when the price of a basic raw material goes through the roof?
As Canada’s petrochemical industry watches the price of crude oil shoot to record levels, the answer is to breathe deeply, reach for a computer program and remember that worse has already happened.
And, oh yes, says Graeme Flint, vice-president of Nova Chemicals Corp.: “We’re keeping our fingers crossed.”
Consumers tend to think of oil largely as a fuel that powers cars and airplanes, fuels industry or heats homes. But roughly 5 per cent of Canada’s oil output (and 18 per cent of natural gas) is used as a raw material for manufactured goods.
The oil-price increase could add pressure for higher prices on a wide range of products including foam cups and nylon, which are largely made from oil-based chemicals; and other products such as carpets, automotive bumpers, dashboards, tires, CD cases and plastic boxes that use a blend of chemicals from oil and natural gas.
The effects aren’t immediately visible to consumers because of the industrial nature of chemical products. For example, Delaware-based Hercules Inc., which makes chemicals for the pulp and paper industry, cited big jumps in petrochemical costs as reasons for a price increase announced yesterday.
Steep increases in the price of benzene, propylene and ethylene — all petrochemicals — “leave us virtually no alternative” but to boost prices, company vice-president Steve Braley told Bloomberg News.
But the oil-price spike isn’t the industry’s first shock: It has already been through one crunch.
“For us, this latest run-up on the price of oil is really the second wave,” says Michael Bourque, vice-president of the Canadian Chemical Producers’ Association. “The first wave was the run-up in the price of natural gas, which has increased, especially over the last five years.”
Analysts bravely maintain that the new shock from $50-plus (U.S.) oil is sustainable — in large measure because it’s not likely to endure. Economist Monique Brugger of the Conference Board of Canada is in the mainstream of forecasters calling for the price of crude to be in the mid-$30s or a little lower by next year. That would ease pressure on prices and reduce risk of a broad economic slowdown.
But in the meantime, chemical producers are nervously watching markets and customers.
Petrochemicals can come from either oil or natural gas. And in Canada, the chemical industry invested heavily in new, modern chemical plants in Alberta using western natural gas.
Those plants now are competing for more expensive natural gas as North Americans continue to heat their homes and run industries on the fuel, and also turn increasingly to natural gas to power electricity generators.
That trend has worried the chemical industry for some time. Not only is gas getting scarcer — some geologists have warned of declining production in western Canada starting within seven or eight years, though others disagree — it has become more expensive.
That’s not the case in other parts of the world. While North American gas prices have run up to the range of $6 (U.S.) or more per million British Thermal Units (BTU), gas in Saudi Arabia is 75 cents or less per million BTU, Flint notes. As a result, not surprisingly, chemical makers have been expanding their plants in the Middle East.
That’s tough competition for the Canadian chemical industry, which argues that Canada should pay more attention to the jobs and export revenues generated by its members.
“We want less pressure on natural gas,” says Bourque. “We don’t think it’s smart to use it as a feedstock for electricity.”
Against that background, a sharp increase in the price of oil would seem to be similar bad news. But Flint says it’s not quite that simple.
For one thing, oil prices don’t vary much worldwide. So if oil is your feedstock, there’s not much raw material price advantage setting up shop in Saudi Arabia or Kuwait rather than Sarnia or Houston.
“Feedstock costs average on the order of 50 to 70 per cent of the cost of producing the products that we produce,” Flint says. “We can’t avoid the fact that we’re paying more and more for the barrel of crude that we use.”
The one consolation is that every chemical plant in the world that uses oil as a feedstock is in exactly the same boat. And from a Canadian perspective, high oil prices may even carry a benefit to the chemical industry because they encourage more investment in Canada’s biggest oil reserve, the tar sands in Alberta.
“There will be a lot of raw materials coming out of the oil sands that we’ll be able to use as feedstock,” says Bourque.
Shell Chemicals Canada Ltd. already has a petrochemical facility in Scottford, Alta., that’s fed by synthetic crude from the tar sands.
The other piece of good news, from Nova’s perspective, is that the company and the rest of the industry is selling into a reasonably buoyant marketplace.
“At the moment the economic recovery worldwide is resulting in a significant ability for us and our competitors in North America and Europe to pass through these additional costs,” says Flint.
Markets weren’t so kind for most of the previous four years, says Bourque at the chemical producers association. While natural gas prices climbed, chemical prices remained flat. “It really impacted profitability.”
Only recently have producers been able to make higher chemical prices stick, he said.
Nova makes the basic building blocks of finished plastics.
At its refinery near Sarnia, it breaks crude oil into component gases and liquids, some of which are processed into fuels and others into chemicals to be made into plastics, adhesives, fibres or other products.
At the same time, plants elsewhere in North America and the world are breaking natural gas into a spectrum of chemical components, much of which overlaps the range of products made from crude oil.
The market price for the chemicals is related to the price of crude oil and natural gas. But each product also follows its own dynamic related to demand, the availability of competing substitute materials or other factors.
Petrochemical firms have some flexibility in what they produce, and they try to respond to the market shifts.
“We have a very sophisticated computer program that models our operations,” says Flint.
“We can put in the demand for the products we produce, what we expect to be the market price, put in the corresponding requirements for the different feedstocks and their costs, and try to optimize operations.”
It’s not just the big petrochemical companies and manufacturers that are feeling the effect of higher crude prices.
Susmit Mahalanabis can see the impact from his vantage point as business co-ordinator at Kal-Trading Inc., a Mississauga plastic recycler.
Just as scrap metal can be more economical than newly mined and smelted material, scrap plastic comes into its own as the price of oil and gas for fresh plastic climbs.
Mahalanabis says business is good, but the company, which employs two dozen people, has to compete more fiercely for scrap that used to be considered garbage.
“So far we’ve done very well, but sources are getting tighter and tighter,” he says. “We’re not getting the scrap plastic the processors used to dispose of.”
Product prices have risen as much as 30 per cent, he says. The downside is that the volume of some scrap plastics has dropped by 30 or 40 per cent.
