P~91171116

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U.S. DEPARTMENT OF COMMERCEInternational Trade Administration. Washington, D.C.

REPRODUCED BY: H.1J§,u.s, Department of Commerce

National Technical Inrormatlon Servh;eSpringfield, Virginia 22161

\

A COMPETITIVE ASSESSMENT

OF THE

U.S. ETHYLENE INDUSTRY

Prepared by

OFFICE OF CHEMICALS AND ALLIEU PRODUCTS

BASIC INDUSTRIES

December 1986

U.S. DEPARTMENT OF COMMERCE

INTERNATIONAL TRADE ADMINISTRATION

FOREWORD

This report presents the results of a competitive assessment ofthe U.S. ethylene industry, one of a series of assessments ofthe future international tompetitiveness of U.S. industriescarried out by the Department of Commerce.

The organization of this report follows the generic outlineused for other reports in this series. 'The key elements ofthis structure include: a description of the industry; ananalysis of recent industry performance and competitiveness;trends in future ethylene supply and demand; futureinternational competitiveness and suggested options forgovernment actions. '

The policy options are for the consideration of policyofficials in the Department of Commerce, and further .study ofspecific issues may be indicated.'

This assessment is based on data and analysis available up toOctober 1986. Perhaps the most critical elements of theworldwide ethylene situation are (1) the extent to whichethylene production in Saudi Arabia will affect U.S. trade and(2) how the projected world ethylene supply/demand balance willbe affected by lower crude oil prices.

The report was prepared by the Basic Industries sector (BI),Trade Development, International Trade Administration, U.S.Department of Commerce. This report was authored by Patrick D.Cosslett under the supervision of Vincent J. Kamenicky,Director of the Office of Chemicals and Allied Products.

A number of individuals and organizations in the Department ofCommerce, other parts of the Feder~l Government, and inindustry contributed to this assessment in the form of data,technical advice and analysis. These include editorialassistance from the Industry Analysis Division, the Office ofthe Near East in the Department of Commerce, and counsel ontrade policy issues from the Office of U.S. TradeRepresentative.

In the U.S. private sector, Celanese Chemical, Dupont, DowChemical, Shell Chemical, SRI International, Chemical MarketingServices Inc., Chemical Manufacturers Association, UnionCarbide, International PC, Reid Associates and others mademajor contributions. In Western Europe, Dow Chemical,

iii

Preceding Page Blank

Essochem, Mobil Chemical, Petrochim, Solvay, and theAssociation of Petrochemicals Producers (APPE) were especiallyhelpful, as were members of the Commission of the EuropeanCommunities and the Energy and Resources Division of the U.S.Mission to the European Communities in Brussels. In SaudiArabia, we were appreciative of the assistance afforded by theExecutives and staff of Saudi Basic Industries Corp. (SABIC),the Secretary General, and others in the Ministry of Industryand Electricity, and representatives of Bechtel, Parsons,Exxon, Celanese, Mobil, Union Carbide, Shell Chemical (Pecten),and the staff of the U.S. Embassy in Riydah.

Michael T. KelleyDeputy Assistant Secretaryfor Basic IndustriesTrade DevelopmentInternational Trade Administration

iv

ABSTRACT

In the mid-1970's, Saudi Arabia announced plans to enter intojoint ventures with western companies to construct 1.6 millionmetric tons of ethylene capacity based on low cost ethaneobtained from the country's extensive natural gas reserves.Most of the output from the plants would be targeted, asderivatives, into the export markets, a practice which couldcause the United States to lose its dominant position in itstraditional export markets.

In an attempt to meet the perceived threat from the SaudiArabia ventures, the United States, Western Europe, and Japanembarked on an extended rationalization program to reduce totalethylene capacity in these countries by nearly 2 million metrictons. The outcome of these extensive 'rationalization'policies enabled the Wester~ world to absorb most of theethylene production from Saudi Arabia plants in 1985 and 1986without a major disruption of the international trade inethylene derivatives.

While current low crude oil prices have given U.S. ethyleneplants a short term economic advantage over Saudi Arabiaplants, the situation is expected to change in themedium-to-long term as crude oil prices gradually increase.These crude oil price increases will, in turn, haveimplications for long term U.S. ethylene derivative trade, andwill raise policy Questions as to the impact of low costimports of ethylene derivatives on U.S. industry, proceduresfor financing new plants overseas, and additional protectionfor the domestic ethylene industry. National securityimplications arising from the loss of competitiveness of U.S.ethylene pronuction could be an important factor, dependingupon the extent to which U.S. producers are forced to give upU.S. market share. Although a number of possible governmentactions are proposed, the maturing nature of the ethyleneindustry suggests the best course of action is for U.S.ethylene producers to pursue independent integration ordiversification policies, or joint venture programs in othercountries.

v

TABLE OF CONTENTS

Executive Summary

Chapter

1

1.

II.

The Ethylene Industry

IntroductionEthylene CapacityThe Manufacture of Ethylene

r

Recent Industry Performance

Ethylene Domestic ConsumptionInternational TradeOther Performance MeasuresSummary of Performance

5

556

31

34414749

Ill. Factors Affecting Future EthyleneProduction and Use

Future Ethylene DemandFuture Ethylene ProductionFuture Ethylene Supply ~nd Demand

51

515460

IV.

V.

Future International CompetitivenessCanadaSaudi Arabia

Factors Affecting CompetitivenessThe International Marketing ofEthylene

Conclusions and Options

Summary of u.S. CompetitivenessImplicationsGovernment Options

vii

656567

68

75

77

77

78

[Preceding Page Blank ll :

)

24

LIST OF TABLES

Table IU.S. Ethylene Capacity 7

Table IIU.S. Ethylene Production by Feedstock Type 10

Table IIITypical U.S. Product Stream Obtained FromCracking Various Ethylene Feedstocks - 1985 11

Table IVU.S. Low Density Polyethylene (LDPE) Capacity 15

Table VU.S. High Density Polyethylene (HDPE) Capacity 18

Table VIU.S. Ethylene Oxide (E.O.) Capacity 20

Table VIIU.S. Ethylene Dichloride (EDC) Capacity 22

Table VIIIU.S. Ethylene (ED) Capacity

Table IXU.S. Merchant Market for Ethylene 1980-1985 30

Table XU.S. Ethylene Production and Unit Sales Value1977-1985 32

Table XIU.S. Ethylene Production/Consumption1975 and 1985 - 000 Metric Tons ofEthylene Equivalents

Table XIIU.S. Ethylene Consumption for DerivativeProduction - 1975 and 1985

viii

33

34

LIST OF ~ABLES (con't)

Table XIIIU.S. Domestic Ethylene Demand by Industry1975 and 1985 35

Table XIVU.S. Ethylene Derivative Demand in Packaging 36

Table XVU.S. Ethylene Derivatives Demand in Construction 37

Table XVIU.S. Ethylene Derivative Demand in Transportation 38

Table XVIIU.S. Ethylene Derivatives Demand - Coatings 40

Table XVII IU.S. Ethylene Derivative Demand - SurfaceActive Agents 41

Table IXXU.S. Derivatives Trade Relative to U.S.Ethylene Consumption 1975-1985 42

Table XXU.S. Ethylene Derivatives Exports 44

Table XXIU.S. Ethylene Derivative Imports 45

Table XXIIU.S. Ethylene Derivatives Exports by Region 46

Table XXIIIU.S. Ethylene Derivatives Imports by Region 48

Table XXIVNational Ethylene Plant Capacities as of07/01/1986 56

Table XXVPotential New Ethylene Production FromFlared Gas 59

ix

LIST OF TABLES (con't)

Table XXVIForecast Western World EthyleneDemand/Capacity Balance

Table XXVIIForecast U.S. Ethylene Demand/CapacityBalance

ChartPlastics Derived from Ethylene

x

62

63

14

EXECUTIVE SUM~1ARY

Ethylene is the backbone ,lor "building block" of the world's.petrochemical industry. It has a highly reactive unsaturated

two-carbon atom structure which polymerizes with itself, othermonomers, or other reactive chemicals to produce such productsas plasti~s, fibers, elastomers, plasticizers, etc. for thePackaging, Transportation, Constroction, Surfactants, Paintsand Coatings and other industries.

Over 90 percent of world ethylene ~upply· is manufactured by thesteam cracking of ethane and propane, ("light feedstocks" fromnatural gas), and naphtha and gas-oi 1, (or "heavy feedstocks"from the refi~ing of crude oil). The ste~m cracking of lightfeedstocks produces mostly" ethylene, while the cracking ofheavy feedstocks produces smaller Quantities of ethylene, andsignificant volumes of co-products such as propylene,butadiene, butylenes, benzene, toluene, and xylene.Geographically, ethylene plants in Western Europe and Japan aredesigned to process m6stly naphtha and gas oil, while mostplants in the United Sta~es can process both light and heavyfeedstocks.

World capacity for ethylen~ was approximately 47 million metr"ictons in 1985. Ethylene capacity in the United States was l5~7

million metric tons, or 33.0 percent of the world capacity,while the combined ethylene capacity of the United States,Western Europe, and Japan accounted for 79 percent of the'total.

Historically, the U.S. ethylene industry has maintained ahighly competitive position versus oihet ethylene producingcountries, because of regulated oil and natural gas priceswhich gave a lower U.S. refiners acquisition cost for crude oilcompared to overseas producers. Other factors that contributedto the U.S. competitiveness in world markets included the readyavailability of an established "infrastructure" of essentialservices particularly on the U.S. Gulf Coast, lower capitalcosts for new plants, and a skilled labor pool. Theavailability of U.S. ethylene storage capacity in salt domes isalso an important factor in the continuity of ethylene supplyduring interruptions of manufacture. In addition, the U.S.Gulf Coast over the years, has a complex pipeline system fortransporting feedstocks and liquid products to and fromethylene plants in the region. This pipeline ~ystem alsotransfers ethylene between competitors as well as betweenproducers and consumers. Such an arrangement maximizesindustry efficiency and contributis to one of the mostcompetitive production costs in the world.

In recent years, the decontrol of crude oil pricing in theUnited States coupled with the development of petrochemicalindustries in developing countries with low cost feedstocks hascaused an erosion of the competitive position of the U.S.ethylene industry vis-a-vis the world. Furthermore, thesecountries used their plentiful supply of low cost feedstocksand cheap labor to enter into joint venture agreements withwestern companies to obtain the latest state-of-the-artethylene plants. Overall, in spite of higher capital andtransportation costs, these plants can supply a range ofethylene derivatives to many areas of the world at prices belowthose of the United States.

One developing country that has recently had the most impact onworld ethylene markets· is Saudi Arabia. Through joint ventureswith U.S. and Japanese companies, Saudi Arabia has added 1.6million metric tons (3.5 billion pounds), of ethylene to theworld's supply. During the early 1980's, concern over theaddition of that increase in world capacity entering theinternational market, forced major rationalization programsthat reduced existing ethylene capacity in the United State,Western Europe, and Japan. Altogether nearly 4 million metrictons of ethylene capacity was closed, or "mothballed", made upof the United States with 1.2 million metric tons; Japan with800 thousand metric tons and Western Europe with 1.8 millionmetric tons closed, (900 thousand metric tons closed and asimilar amount down for extended repairs).

I n r e c-e nt yea r s, the " mat uri ng" 0 £ the U. S. e thy 1ene i ndus try,coupled with low product prices and high capital costs, has·removed the incentive for U.S. ethylene producers to build newplants, forcing U.S. demand to be met by the reactivation of"mothballed" plants, improving the productivi.ty of existingethylene plants, and an increasing volume of ethylenederivative imports. Because new ethylene supplies frommothballed plants and productivity improvements are limited,the United States has inevitably become increasingly dependenton ethylene derivative imports to meet its growing demand. Inthis regard, the low cost production economics'of manydeveloping countries has enabled th~m to ship products into theU.S.A. ,at prices against which U.S. producers cannot compete.In spite of this influx of low cost products, the overallpositive U.S. trade balance on ethylene derivatives increasedfrom 650 thousand metric tons in 1975 to 1. 7 million metrictons in 1985. Net trade during the 1980 - 1985 period,however, showed little, if any growth.

Also affecting the U.S. trade balance in ethylene derivativesis the decrease in U.S. exports. Exports of ethylene

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derivatives from Saudi Arabia and other countries haveincreasingly penetrated traditional U.S. export marketsexploiting both production cost advantages and the relativeprice increase of U.S. exports due to the strength of thedollar. In spite of the recent 20 percent decline in the valueof the U.S. dollar, there are no firm indications that asustained turnaround in U.S. exports of ethylene derivativeswill occur in the near term. On the positive side, while theUnited States is likely to experience some additional importsof ethylene derivatives (such as ethanol) from Saudi Arabia,volumes are not likely to be significant at least in the nearterm, because of hIgh ocean freight costs.

The success of the western world's rationalization program inthe early 1980's, coupled with a surge in world ethylenedemand, has meant that the Saudi Arabia ethylene capacity hasbeen almost entirely absorbed by the world markets. As aresult, Western world ethylene supply/demand in 1986 isgenerally agreed to be "snug" to "tight", depending on thelocation, with South America providing much needed ethylenemonomer to meet the shortages in Western Europe. Worldcapacity/demand is likely to be in rough balance by 1987-1988,which will encourage higher world derivative prices and apossible increase in profitability for all types of ethyleneplants.

Overall, the U.S. ethylene industry no longer has the "edge" ininternational markets that it once had. An increasing relianceon the supply of ethylene derivative from Canada and otherproducing countries, will make it even less likely that anyU.S. company will invest the capital dollars in a new grassroots plant. The extensive resources of low cost NGL's fromnatural gas in many develqping hydrocarbon-rich countries, willform the basis for much of the world's new ethylene capacitythrough, at least, 1990 and probably beyond. Reactivation andext ens i ve mod if i c at ions of ex i s ting " mot hba lIed" f ac i Ii tie sindeveloped (OECD) countrIes will be driven by the prevailingworld price of crude oil. With near term crude oil costs inthe $14-17 per barrel range, U.S. ethylene producers can expectto be more competitive with Middle-East products ininternational markets. Should oil prices return soon to nearhistorical high levels, U.S. ethylene plants would revert tOemarginal economic operation. However, total deregulation ofnatural gas would give U.S. ethylene producers an extra marginof feedstock flexibility. Under the "high oil" scenario, somesmall inefficient U.S. ethylene plants could face shut downeconomics. The shutdown of any significant portion of the U.S.ethylene industry, however, is unlikely to occur.

-3 -

This analysis concludes there is very little Government actionthat can be taken to improve the-competitiveness of the U.S.ethylene industry. Feedstock price controls would have themost effect on plant profitability, but are impractical andwould not be supported by industry.· Subsidizing themaintenance and. reactivation costs of "mothballed" plants(which are considerable), on the other hand, is' a form ofgovernment support that the industry would undoubtedly welcome.

It is too early to tell if the weakened u.S. dollar will haveany positive effect on ethylene derivatives trade. Preliminaryindications are that it will be much less than expected. Someimporting countries are choosing to take a lower profit marginon their products rather than give up market share. If clearevidence of dumping develOps, the United States can pursueappropriate actions. Other actions that could be taken if thecircumstances warrant include bi-lateral negotiations, andimplementation of Sections 406, 202, and 301 of the Trade Actof .1974, Section 232 of the Trade Expansion Act of 1962, andanti-dumping and countervailing duty (CVD) actions.

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I. THE ETHYLENE INDUSTRY

A. Introduction

Ethylene is one of the 'building blocks', of the world'spetrochemicals industry. It has a highly reactive unsaturatedtwo-carbon atom structure which forms long-chain complexchemical derivatives through polymerization with itself, othermonomers or other reactive chemicals. It is one of a number ofprimary petrochemicals produced by the petroleum and chemicalcompanies which make up the petrochemical industry. Otherprimary petrochemicals include methanol, propylene, butylene,butadiene, benzene, toluene, and xylene. All are commodities,traded internationally, as well as domesiically, withspecifications agreed to between buyer and seller, but commonlyto an accepted standard. These primary petrochemicals are usedto make such chemicals, plastics, and consumer products aspolyethylene, polypropylene, phenol, man-made fiberintermediates, detergents and many other industrial andconsumer products.

In this study, three terms will be frequently used that needdefinition. Because they do not yet have universally acceptedmeanings, here are the definitions intended in this paper:

Feedstock. The raw material from which a primarypetrochemical is made. Natural gas (methane), natural gasliquids (ethane, propane and butane)~and naphtha and gasoil (from crude oil) are the principal feedstocks.

Primary Petrochemical. The first derivative of afeedstock. Ethylene is the first derivative of ethane, andmethanol is taken to be a first defivative of ~ethane.

Commodity Petrochemical. A chemical product made to meet auniform specification, interchangeable, with q~ality

independent of the source.

B. Ethylene Capacity

As of December 1985, the U.S. ethylene manufacturing industryconsisted of 33 plants owned by 24 companies. A listing of theplants is shown in Table I.

Most ethylene plants are located within a petro~hemical

complex, and are integrated with that complex in terms ofhydrocarb~n supply and utilization, energy conservat'ion,supervision, maintenance,technical support and administration.

-'5 -

Ethylene is usually distributed in gaseous form by pipeline toderivative plants located adjacent to the ethylene plant, oraccessible to an extended pipeline network. Gaseous ethyleneis also transported in pressurized cylinders. Ethylene canalso be liQuified by cooling in cryogenic facilities and is.also distributed by refrigerated tank trucks, rail cars, (inthe United States) .and barges and dedicated ocean-going tankers(in Western Europe).

In the United States, especially in Texas and Louisiana,numerous pipelines move gaseous ethylene ·within the majorproducing/consuming areas, while in Canada, an 1,800 milepipeline, (the Cochin pipeline) transports ethylene betweenEdmonton, Alberta, and Sarnia, Ontario. It should be notedthat most of the Cochin pipeline in physically located on theU.S. side of the border, and ethylene shipments via thepipeline frequently are the cause of trade data errors on U.S.ethylene imports. Pipeline ethylene that enters the UnitedStates is recorded as an import, but is not recorded as are-export when the ethylene re-enters Canada. As aconsequence, while U.S. trade records show 1980-1983 U.S.ethylene import volumes in the 65-175 thousand metric tonsrange, actual import volume retained in the U.S. wereessentially zero. Esso Canada has trucked a relatively smallquantity of liquefied ethylene to U.S. locations in recentyears, and Dow Chemical of Canada holds permits to export tothe United States by both pipeline and tank truck. Movement bytruck is costly, however, and any large future ethylenemovements to U.S. locations would probably pe by pipeline.

C. The Manufacture of Ethylene

Ethylene is produced by the thermal pyrolysis ("steamcracking") of hydrocarbons in the presence of steam. Thisprocess accounts for virtually all of the ethylene produced inthe world. Other processes to produce ethylene include itsoccurrence in refinery off-gas .streams, ethanol dehydration(primarily in Brazil and India), and from coal and coal-basedliquids (commercialized only in South Africa).

Thermal Pyrolysis

Background

Thermal pyrolysis (or 'steam cracking') is the largest and mostimportant process for producing ethylen~ in the world. Thesteam cracking process, which is highly energy-intensive, canuse a wide variety of hydrocarbons, the choice of which isprimarily driven by the design of the ethylene plant.

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Table I

u.S. Ethylene Capacity(June 1986)

(Thousand metric tons)

Producer

Allied Corp.Amoco Chern. Corp.ARCO Chern: Co.Chevron Corp.(l)

Corpus Christi P.C.Cosden Oil &Chern.Dow Chemical

E.I.DuPont de Nemoursand Co.

EI Paso Chern Co.Exxon Chemical USA

B.F. GoodrichMobil Chemical Co.Northern Petrochemical

Olin Corp. (2)Occidental Chern. Corp.Phillips Petroleum Co.Shell Chemical Co.

Sun-OlinTexaco

Texas EastmanUnion Carbide Corp.

u.S.1.USS ChernVista Chern. Co.

Location

Geismar, LAChocolate Bayou, TXChannelview, TXPort A.rthur, TXCedar Bayou, TXCorpus Christi, TXGroves, TXFreeport, TXPlaquemine, LA.

Alvin, TXOrange, TXOdessa, TXBaton Rouge, LA.Baytown, TXCalvert City, KYBeaumont, TXMorris, ILLClinton, IowaBrandenburg, KYLake Cha rles, LASweeney, TXDeer Park, TXNorco, LA.Claymont, DELPort Art hu r, TXPort Neches, TX (3)Longview, TXSeadrif t, TXTaft, LA.Texas City, TXTuscola, ILLHouston, TXWest Lake, LA.

Capacity

325975

1270432545545

9980682

395410236635635136455430335(50)225

1010810

1018109450

( 170)635562335702180227295

Feedstock

E.P.E.P.B.N.E.P.N.G.LPG.E.P.N.G.LH.N.G.RE.P.B.N.E.P.B.N.

E.P.B.N.G.E.P.E.P.E.P.N.G.N.G.P.LPG.N.E.P.B.E.P.E.LPGB.P.NGLNGL, R.NGL,R.RE.P.B.N.E.P.R.E.P.N.E.P.LPG.NLPG.NE

"NGL, RE

Total U.S.A. 15988

Source: Oil and Gas Journal, September 1, 1986 pp .. 39-44

-7 -

Feedstock Abbreviations

E. - EthaneP - PropaneB - ButaneN - NaphthaLH - Light Hydrocarbons (ethane and propane)R - Refinery gases (mostly ethane and propane)LPG - Liquid petroleum gas (propane and butane)NGL - Natural gas liquids (including ethane, propane, butane, andcondensate)

(1) was Gulf Oil Chemicals(2) closed July 1986.(3) closed

-8 -

Following hasic plant modifications in the late 1970's andearly 1980's, the feedstock selection process changed from"plant design" dependency to one of tailoring the feedstock"slate" to prevailing product demand. Hydrocarbons used forethylene production range from ethane (which produces mostlyethylene and few co-products), to gas-oil (which produces lessethylene and more ~o-products). Other hydrocarbons usedinclude propane, butane, condensate, naphtha, and refineryoff-gas which produce ethylene and co-products at yieldsintermediate between ethane and gas-oil.

The following table shows historical U.S. ethylene productionby feedstock type.

The Process

The steam cracking of hydrocarbons to produce ethylene occursin three separate process operations.

o Cracking of the hydrocarboris and subsequent cooling of thehydrocarbon product mixtures produced.

o Compression of the mixed hydrogen gases in stages to removethe heavier hydrocarbon products. The acid gases (H2S andC02) are removed by passing the mixed gas stream through a"scrubber" and then drying.

o The dried gas mixture is then gradually 'supercooled' toabout minus 150 degrees C to sequentially separate out theindividual components of the gas mixture. The final gasconsists of mostly hydrogen, carbon monoxide and methane.The hydrogen is recovered and the other gases are used asfuel. Any ethane and propane recovered are usuallyrecycled into the feedstock stream.

Each feedstock produces a discrete range of products in themixed gas stream, ~ith the 'lighter' feedstocks producingmostly ethylene and the 'heavier' feedstocks producing a widerrange of co-products. The following table. summarizes a rangeof typical co-products produced by the cracking of thecommonly-used hydrocarbon feedstocks.

The data presented are representative of co-products producedfrom a 454 thousand metric ton (1.0 billion pound) per yearethylene plant.

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Table II

U.S. Ethylene Production by Feedstock Type(million metric tons)

Year RefineryOff-gases Ethane

Gas LiquidsPropane Butane Condensate

Petroleum LiQUidsNaphtha . Gas Oil Total

1975 0.2 5.2 1.8 0.3 0.3 0.6 1.0 9.41976 0.2 5.7 1.7 0.3 0.3 0.8 1.2 10.21977 0.4 6.4 1.5 0.4 0.2 1.2 1.4 1l.51978 0.4 6.3 1.6 0.4 0.2 1.5 1.8 12.21979 0.3 6.6 2.0 0.3 0.3 2.0 2.1 13.61980 0.2 6.8 2.3 0.4 0.3 1.5 1.6 13.11981 0.1 6.8 2.5 0.5 0.3 1.5 1.6 13.31982 ·0.1 6.2 2.5 0.2 0.2 0.7 1.3 11. 21983 0.1. 6.4 2.5 sm 0.2 1.6 2.1 12.91984 0.3 6.9 2.4 0.1 0.6 2.0 1.9 14.21985 0.4 6.9 3.3 0.2 0.6 0.7 1.8 13.9

Source: Chemical Economics Handbook, SRI International, Menlo Park, Ca.International Pic. Houston Texas.Shell Chemical Company, Houston Texas

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Table III

Typical US Product Stream Obtained From CrackingVarious Ethylene FeedstocKs - 1985

(thousand metric tons)

FeedstocKs

Atmos. Vacuum.Products Ethane Propane n-Butane Naphthas Gas Oil Gas Oi 1

Hydrogen-Rich Gas 47-62 21-30 16-18 17- 21 16-26 17-26Methane-Rich Gas 5-37 264-296 225-252 196-232 184-196 176-194Ethylene 454 454 454 454 454 454Propylene 9-16 123-219 191-226 171-253 255-283 299-313Butadiene 8-13 25-39 39-43 62-76 80-85 97-119Butylenes/Butanes 4-5 11-20 54-76 56-90 85-89 138-148Pyrolysis Gasoline 4-13 49-79 67-81 251-384 322-324 327 -426

Benzene 2-5 24-30 22-34 64-98 88-106 83-84Toluene 0-1 4-8 9-10 45-64 51-63 64-66C8 Aromatics 0-1 0-1 4 24-52 38-43 41-54Other 2-4 28-40 32-33 61-190 128-132 212-238

Fuel Oi 1 0-1 5-14 19-29 43-182 314-377 544-606

Total Product 536-567 982-1080 1089-1243 1316-1564 1744-1806 2142-2215

FeedstockReaui rement(t housands ofbarrels) 9,900 12,900 12,700 12_,400 13,600 15,900

Source: Chemicals Economic Handbook report - "Ethylene" SR.I International, Henl0Park CA.

-ll-

There are a number of factors that influence the level and'mix' of co-products produced during ethylene production.These include:

o the feedstock typeo operating conditions of the "pyrolysis" section of the

cracking processo the recycle level for ethane and propane

While operating conditions within the steam cracker vary foreach feedstock type, minor variations in cracking severity(temperature, residence time) and the steam/feedstock ratio,have a major effect on co-product yields.

Several companies also have research programs on the crackingof residual fuel oil and also crude oil. Process designscenter around high temperature steam cracking and thermalcracking. While several companies have progressed to pilotplant operations, none of the processes are likely to becommercialized as long as traditional hydrocarbon feedstocksare readily available.

Refinery Gases

Ethylene is produced as a component of a by-product gas streamfrom various refinery processes, (such as catalytic crackingand catalytic reforming). The 'off-gas' streams from theseprocesses typically contain ethane, propane, butane, ethyleneand propylene. Because the ethylene concentration in thestream is relatively low, it is usually not economic to isolatethe ethylene from the stream. Consequently refinery gases arecommonly used as fuel in the refinery or (where practical), asfeedstock for a contiguous ethylene plant using the "steamc rack i ng" pro c e s s . In recent years , the propo r t i on of e thy 1e neproduced from refinery gases has increased slightly ascompanies have learned how to' process contaminants out of thegases. Shell Chemical and Exxon Chemical are two companiesthat consistently use a high proportion of refinery gases asfeedstocks for ethylene production.

Ethanol Dehydration

Ethylene is also produced by ihe catalytic dehydration ofethanol. The process riquires ethanol to be pre-heated to300-325 degrees C before passing over a fixed bed ofs i Ii c,a - a1umina cat a I ys t. Aft e r "s c rub bing" wit h wa t erandcaustic soda, the gas stream is 'super cooled' to distill outthe ethylene. The process employs a "fixed bed" catalyst,however, a "fluidized bed" catalyst system is underdevelopment.

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Advantages claimed for the fluidized bed process includeimproved ethylene yields stemming from better control of theprocess operating conditions. (The ethylene-from-ethanolprocess is not used in the United States).

Ethylene from Coal

There are two current commercial processes to produce ethylenefrom coal. Both processes are based on Fischer-Tropschreactions of synthesis gas, (1) recovery of ethylene fromby-product gases, and (2) steam-cracking of naphtha producedfrom coal. Both of the South African Sasol projects reportedlyuse a combination of these two processes.

Other Processes

Other non-commercial processes t6 produce ethylene utilize avariety of feedstocks. These processes include: the catalyticcracking of methanol using a Mobil zeolite catalyst; thehydrogenation of acetylene; the thermal cracking of heavyfeedstocks in the presence of hydrogen, and the hightemperature processing of methane. All of these processes aregenerally uneconomic, although some of them have progressed tothe pilot plant level.

D. Ethylene Uses and Products

Ethylene is primarily used to produce polymeric products suchas plastics, films, fibers and elastomers. Two of its largest.end uses - low density polyethylene (LDPE) and high densitypolyethylene (HDPE) ~ are produced directly by thepolymerization-of ethylene. Most of the other poly~eric

products are produced via an intermediate product which is thenisolated and purified before conversion to the final product.A schematic of the important ethylene derivatives is shown inthe following chart.

Low Density Polyethylene /Linear Low Density Polyethylene.

Low-density polyethylene (LDPE) is the largest by far of theethylene derivatives produced in the United States, with 1985production accounting for over 26 percent of total U.S.ethylene demand. A list of U.S. LDPE producers is shown inTable IV.

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lYCO

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Table IV

U.S. Low Density Polyethylene (LDPE) Capacity(l)As of December 31, 1985

(thousand metric tons per year)

Producer Location Capaci ty Comments

Chevron Corp. Cedar Bayou, TX 400 was Gulf Oil ChemicalOrange, TX

Dow Chemical USA Freeport, TX 800 inc. 325 for LLDPE/HDPE prod.Plaquemi ne, LA inc. 30 for LLDPE/LDPE prod.

E.I. Dupont de- Orange, Ix 325Nemours &- Co. Victoria, TX

Eastman Chern. Longview, TX 275 inc. 100 for LLDPE prod.

El Paso Chern. Co. Odessa, TX 200 inc. 15 or LLDPE/HDPE prod.

Exxon Chern. USA Baton Rouge, LA 550 inc. 275 for LLDPE!T1OPE prod.Ht. Belvieu, TX

Enron (2) Clinton, Iowa 600 inc. 80 forLLDPE/HDPE prod.l'1orris, ILL

Mobil Chern. Co. Beaumont, TX 350 inc. 160 forLLDPE prod.

Union Carbide Coq). Seadrift, TX 950 inc. 700 for LLDPE/HDPE prod.Taft, LA

U.S. Ind. Chern. Co. Deer PK, TX 375Pt. Arthur, TXTuscola, ILL

Total Capaci ty 4,825

(1) Includes capacity to produce linear low density polyethylene (LLDPE)(2) Formerly Internorth Inc.

Phillips Petroleum Co. and Solvex Polymer Corp. are believed to have thetechnology to produce LLDPE in their HDPE plants, but no LLDPE capacity dataare avai lable.

Source: Directory of Chemical Producers, SRI International, Menlo Park, CA.

-15-

LDPE resins are produced by high-pressure processes that operate_in the range 15,000 to 50,000 PSI in the presence of a peroxide(or peroxy) based catalyst. There are two types of reactors incurrent use (1) a continuous flow a~toclave, and (2) a tubularreactor.

Both processes are highly exothermic. Unreacted monomer isrecycled to the feed, and the liquid polymer is cooled andpelletized.

Linear Lower-density Polyethylene (LLDPE) was developed duringthe 1970's as a low pressure copolymer resin.. The processeliminated the complexity, capital, and operating costs of thehigh pressure process as well as permitting much closer controlof the linearity and degree of branching in the re~ins. Theco-monomers used in the process are alpha-olefins in the generalrange of 5-15 percent by weight. The new class of LLDPE resinshave qualities and characteristics more closely allied to HDPEthan LDPE.

End-Use Applications

Over two-thirds of U.S. LLDPE resin demand is used for theproduction of film. The major end use markets for film includepackaging, industrial trash bags and drum liners, and consumertrash bags and food wrap/bags. LLDPE has currently replaced20-25 percent of LDPE in some segments of the film market.

Injection molding resins are the other large-volume use forLLDPE, accounting for about 10 percent of U.S. LDPE demand.Major end-use applications for these resins include h~~sewares,containers, and various novelty and to~ applications. LLDPE isshowing strength in this market segment because of its improvedstress crack resistance and overall superior strength at lowergauges. Other significant LLDPE uses include extrusion coatingfor (e.g.) paperboard coating and for wire and cable production.

LLDPE is also expected to replace other resins - such aspolyvinylchloride, (PVC) and high-density polyethylene (HDPE) ­in a wide range of applications.

High Density Polyethylene

High density polyethylene (HDPE) is the second largest ethylenederivative, accounting for about 14 percent of total U.S.ethylene demand. A list of U.S. HDPE producers is shown inTable V.

-16-

HDPE resins are produced using a low pressure process (100-1500psi) in the presence of a chromium and/or titanium-basedcatalyst. There are, essentially three distinct processes forthe manufacture of HDPE.

the gas-phase process where the ethylene is directlypolymerized in the gas-phase.the slurry phase process were the ethylene is dissolvedin a hydrocarbon diluent prior to polymerising, but theHDPE formed is insoluble in the diluent.the solution-phase process where ethylene is dissolvedin a hydrocarbon solvent prior to polymerizing, and theHDPE also dissolves in the reactive solvent.

All of the process and reactor systems are economicallycompetitive with each other. However, there is not universalcompetition because each process produces an optimum range ofproducts, grades and density that is dictated by the plantconfiguration.

End-Use Applications

Blow-molded containers accounted for about 34 percent of theU.S domestic demand for HDPE in 1985, with most of thecontainers sized for domestic household use for liquid foods,household chemicals etc. Other container uses includepenetration into the 55-gallon drum and 5-gallon pail markets.

Injection moldfng applications are the second largest end usefor HDPE accounting for about 22 percent of demand in 1985.Specific applications in this category include housewares, foodcontainers (e.g Tupperware), trays, crates, etc.

Other end-use markets for HDPE are extrusions (21 percent ·ofdemand in 1985), which includes pipe and tubing, wire andcable, sheet, extrusions, etc. The potential for HDPE film,once .thought to be significant, may not materialize b~cause ofcompetition from LLDPE.

Ethylene Oxide

Ethylene oxide (EO) is the next largest ethylene derivative,accounting for about 22 percent of U.S. ethylene demand in1985. A list of U.S. EO producers is shown in Table VI.

-17-

Table V

u.s. High Density Polyethylene (HDPE) CapacityAs of December 31,1985

(Thousand metric tons per year)

Producer

Allied Corp.Am. Hoechst Corp.

Amoco Chern. Corp.Chevron Corp.

Dow Chemical USAI

E.I.Dupont de Nemoursand Co.

Exxon Chemical USA

Himont USAMobil Chern Co.

Enron Inc. (1)

Phillips Petroleum Co.

Soltex Pqlymers

Union Carbide Corp.

U.S. Ind. Chern. Co.

TOTAL

Location

Baton Rouge, LABayport, TX

Chocolate, Bayou, TXOrange, TX

Freeport, TXPlaauemine, LA.Bay City, TXOrange, TXVictoria, TXHont Belview, TX

Lake Charles, TXBeaumont, TX

Clinton, IowaMorris, ILLPasadena, TX

Deer Park, TX

Seadrift, TXTaft, LALaporte, TXPort Arthur, TX

Capacity Comments

350110 inc 10 for Ultra

HDPE Prod.

150250 was Gulf Oil and

Chern.500 inc. 325 for

LLDPE/HDPE prod.400

275 all used forLLDPE/HDPE prod.

15 Ultra HDPE prod.175 all used for

LLDPE/HDPE prod.200 inc. 80 for

LLDPE prod.625 may include some

LLDPE/HDPE cap.350 includes some

LLDPE/HDPE cap.700 all used for

LLDPE/HDPE prod.400 all used for

LLDPE/HDPE prod.4500

(1) formerly Internorth Inc.

Source: Directory of Chemical Producers, SRI International, Menlo Park, CA.Society of the Plastics Industry, "Facts and Figures".

-18-

Virtually all EO is currently produced by the direct oxidationof ethylene at elevated temperature and pressure, over a silveroxide catalyst in the presence of either air or oxygen. Priorto the early 1970's EO was produced by the chlorohydrinprocess, which reacted ethylene with hypochlorous acid to giveethylene chlorohydrin, followed by treatment with calciumhydroxide (or caustic soda) to form the oxide. All U.S.chlorohydrin capacity is now used to produce propylene oxide;however, some plants have the flexibility to switch fro~

propylene oxide to ethylene oxide production.

End-Use Applications

With the exception of a small amount of EO used for eq'uipfTlentsterilization applications, EO is converted to other'derivatives before being used in a wide range of applications.

The largest single derivative of EO, is the production ofmonoethylene glycol, (MEG), which accounted for an estimated 65percent of U.S. EO demand in 1985. MEG is mostly used as anintermediate for terephthalate resin production (used in themanufacture of polyester fibers/films), automotive antifreeze,and in polyethylene terephthalate (PET) resins for bottles.Other end-use applications for MEG include its use as asolvent, and as a de-icing fluid. The process that converts EOto MEG also produces significant Quantities of the higherglycols, such as di-ethylene glycol (DEG), triethylene glycol(rEG) and tetra-ethylene glycol (which together accounted f~r

approximately 12 percent of U.S. EO demand in 1985). DEG ismostly used in unsaturated polyester resins, textilelUbricants, and as a dehydrating agent for natural gas.Tri-and tetra-ethylene glycols are also mostly used asdehydrating agents for natural gas.

The second largest use for EO, is the production of non-ionicsurface-active agents which accounted for about 13 percent ofEO demand in 1985. Most products in the category areethoxylated linear alcohols, which are a major component of thebiodegradeable heavy duty laundry detergents, and anintermediate for the production of alcohol ether sulfates forhome laundry and dishwashing detergent formulations.

Ethanolamines (mono-di, and tri-) are the next major E.Oderivative with about 9 percent of U.S. E.O. demand in 1985.Honoethanolamines (MEA) are primarily used in "scrubbing"processes to remove acidic components from sour natural gasstreams. Di- (DEA) and tri- (TEA) ethanolamines are used as

. intermediates in the production of a wide range of surfactantproducts for detergents, shampoos, soaps, cosmetics, etc.

-19-

Table VI

U.S. Ethylene Oxide (E.G.) CapacityAs of December 31, 1985

(Thousand metric tons per year)

Producer

BASF Wyandotte Corp.

Celanese Corp.

Dow Chern. USA

Eastman Chern.

I .C. 1. Americas Inc.

Internorth Inc.

Olin Corp.

PD Glycol

Shell Chern. Co.

Sunolin Chern. Co.

Texaco, Chern. Co.

Union Carbide Corp.

Total

Location·

Geismar, LA

Clear Lake, LA

Freeport, TXPlaquemine, LA

Longview, TX

Bayport, TX

Morris, ILL

Brandenburg, KY

Beaumont, TX

Geismar, LA

Claymont, DE

Port Neches, TX

Penuelas, PRSeadrift, TXTaft, LA

Capac i.ty

220

200

325

85

200

100

50

200

375

50

325

1200

3330

Source: Directory of Chemical Producers, SRI International,Henlo Park, Ca.

-20-

Glycol ethers are a small but important end-use, accounting forabout 9 percent of U.S. EO demand in 1985. Mono- di-, and tri­ethylene glycol ether are the major products in this category,and are used as solvents for water-based coatings, lacquers,adhesives, dyes, printing inks, pesticides etc. Acetatederivatives of these products are used as jet fuel anti-icingadditives and as solvents for nitrocellulose and acryliclacquers.

There are a variety of smaller, miscellaneous end-useapplications for E.O. which include the production of polyetherpolyols, cellulose ethers, choline and acetal copolymer resins.

Ethylene Dichloride

Ethylene dichloride (EDC), is currently the fourth largestend-use market for ethylene, accounting for 13 percent of totalU.S. ethylene demand in 1985. A list of U.S. EDC producers isshown in Table VII.

Virtually all EDC is produced by the chlorination oroxychlorination of ethylene at elevated temperature over a'metallic chloride catalyst. Yields and reaction conditionsdepend on the process used. Companies that havp. integratedforward to produci vinyl chloride monomer (VCM) , prefer tomanufacture EDC by the oxychlorination process because the VCMprocess produces HCl which can be recycled for use in the EDCproduction process. The other source of EDC is from the E.O.chlorohydrin process where small volumes of EDC are produced asa by-product. (As noted in the Ethylene Oxide section, thechlorhydrin process to E.O has been essentially replaced by thedirect oxidation process.)

End-Use Applications.

Vinyl chloride monomer (VCM) production currently accounts forover 88 percent of total U.S. end-use demand for EDC. The VCNis almost entirely converted to polyvinyl chloride (PVC) for usein such industries as Housing, Construction, Furniture,Packaging, Flooring, and Wire and Cable;

Two-carbon-atom chlorinated solvents (1,1,1, trichloroethane,perchloroethylene, and trichlorethylene) together account Eorabout 5 percent of the end-use demand for EDC. Hajor end-useapplications for these products include metaldegreasing/cleaning, aerosol propellants, coatings solvents,drain cleaners, dry cleaning, textile processing, and as aprecursor for a range of two carbon atom fluorocarbons forsolvents, refrigerants, blowing agents etc.

-21-

Table VII

U.S. Ethylene Dichloride (EDC) CapacityAs of December 31, 1985

(Thousand metric tons per year)

Producer

Arco Chern. Co.

Borden Chern. Co.

Diamond Shamrock Chern. Co.

D~ Chern. USA

Fonnosa Plastics

GRP, USA

Georgia Gulf Corp.

B.F. Goodrich Co.

P.P.G. Industries Inc.

Snell Oil Co.

Locat ion

Pt. Arthur, TX

Geismar, LA

Deer Park, TX

Freeport, TXOyster Creek, TXPlaquemine, LA

Baton Rouge, LA

Pt. Comfort, TX

Plaquemine, LABaton Rouge, LA

Laporte, TXCalvert City, KYConvent, LA

Lake Charles, LA

Deer Park, TX

Capacity Comments

225

225

90

2400

650

750315

1550

1250

.650

Union Carbide Corp.

Vista Chern. Co.

Vulcan Chern. Co.

TOTAL

Taft, LA

Lake Charles, LA

Geismar, LA

90

525

160

8880

Captive use only

Note: Capacities are flexible depending on finishing capacities for vinylchloride and Chlorinated solvents.

Source: Directory of Chemical Producers, SRI International, ~1enlo Park, CA.

-22-

Ethy1eneamines (mono-di-, and tri-) production togetheraccounted for 2-3 percent of u.s. EDC consumption in 1985.Ethy1ene-diamine, which accounts for about 50 percent of theethyleamine group, is primarily used in the manufacture ofchelating agents and carbamate fungicides; exports account formost of the balance. Higher ethyleneamines are mostly used forthe manufacture of detergents, softening agents, specialtyresins, epoxy hardeners, and corrosion inhibitors.

Vinylidene chloride (VDCM), accounted for 2 percent of U.S. EDCdemand in 1985. Most VDCM is used for the manufacture ofVDCM!VCM copolymers (such as Dow Chemical's "Saran"). Thecopolymer, which has outstanding vapor barrier characteristics,is used as a film for food packaging and as a coating resin forpaper and paperboard. VDCM is also used as a component ofmodacry1ic fibers.

A minor use of EDC is its use as a component of lead-alkyloctane enhancers in gasoline~ The EDC scavenges the lead-basedcombustion products to minimize deposits on combustion chambersurfaces. The use of EDC in this application has steadilydeclined since the early 1970's, in line with the governmentmandated reduction in auto emissions and the decline in the useof leaded gasoline, and accounted for less than 1 percent ofu.S. EDC demand in 1985. Other miscellaneous EDC applicationsinclude solvents for adhesives and coatings, vegetable oilextraction, textile cleaning, grain fumigation, etc.

Ethylbenzene

Ethylbenzene (EB) currently accounts for about 7 percent ofu.S. ethylene demand. A list of U.S. E.B. producers is shownin Table VIII.

Over 95 percent of ethylbenzene is produced by the alkylationof benzene with ethylene, over an aluminum chloride (liquidphase) or alumina-silica (vapor phase) catalyst. Othercatalysts used include phosphoric acid and the zeolite resintypes. The most widely-used process now in operation is theMobil/Badger vapor phase process using a zeolite catalyst, andwhile the older liquid phase plants will continue to operate,all new plants in the future are expected to be based on theMobil/Badger technology. '

Ethylbenzene is also separated from mixed xylenes streams whichoriginate from refinery reformate or steam cracker pyrolysisproducts. In the United States, most mixed xylenes streams arebased on refinery reformate. The amount of ethy1benzenerecovered from this source represents less than 5 percent oftotal U.S. E.B. production.

-23-

Table VIII

u.s. Ethylbenzene (EB) CapacityAs of December 31, 1985

(Thousand metric tons per year

Producer

Huntsman Chemical Co.

Arco Chern. Co.

Chevron, Corp.

Cos-Har Inc;

Dow Chern. USA

E. I. Dupont deNemours &Co.

El Paso Products Co.

Koc hInd., Inc.

Sterling Chemical

Tenneco, Inc.

Amoco Chern. Corp.

TOTAL

Location Capacity

Bayport, TX 475

Channelview, TX 525

St. James, LA 300

Carville, LA 800

Freeport, TX 850

Chocolate Bayou, TX 25

Odessa, TX 150

Corpus Christi, TX 10

Texas City, TX 700

Chalmette, LA [ 15]

Texas City, TX 400

4235

Comments

Captive

Merchant

Captive

[on stand-by]

Source: Directory of Chemicals Producers, SRI International, MenloPark, CA.

-24-

End-Use Applications.

Almost all ethylbenzene is converted to styrene monomer withless than 1 percent used for specialty solvent applications,and for the production of diethylbenzene, acetophenone, andethyl anthraQuinone. Major end-use applications for styrenemonomer include its polymerization to polystyrene, styrenecopolymer resins (such as acrylonitrile-butadiene-styrene (ABS)and styrene - acrylontrile(SAN) resins), styrene-butadieneelastomers (SBR), and unsaturated polyester resins.

Oligomers

Oligomers (linear alpha-olefins and linear alcohols)represented approximately 5 percent of total U.S. ethylenedemand in 1985. Ethyl Corporation, Chevron Corporation, andShell Chemical Company, are the only producers of linear alphaolefins in the United States.

Virtually all oligomers are now produced by the ethylene "chaingrowth" (or oligomerization) process. Other processes areparaffin cracking for alpha-olefin production and coconut oilsplitting for higher linear alcohols production.

There are several oligomerization processes. While the basic"chain growth" reaction is the same for each process,individual companies have modified various steps in the processto produce a specific range and type of product(s).

The basic oligomerization ziegler process makes ethylene withtriethylaluminum, in a gas phase, to form the longer chaintrialkylaluminum product. Further reaction with ethyleneproduces even-numbered alpha-olefins; alternatively airoxidation followed by hydrolysis produces highly linearalcohols. Refinements to the basic process concentrates theproduct into discrete "chain lengths" within a particular range.

The Shell Chemical Company "SHOP" oligomerization processproduces alpha-olefins using technology similar to the Zieglerprocess "but with a nickel-phosphine ligand catalyst. Otherprocess steps include isomerization and disproportionation toconcentrate the olefins in the detergent range. These olefinsare then converted to detergent range alcohols via the oxoprocess

End-Use Applications.

Oligomerization products are used to manufacture three maincategories of products: Detergent range alcohols (C12-C15);Plasticizer range alcohols (C6-Cll) and other uses foralpha-olefins.

-25-

Detergent-range alcohols are reacted with other chemicals toproduce a range of surfactant products which are mostly used inlaundry, dishwashing and cleaning powders/liquids, and soaps.Other uses for detergent alcohols include viscosity indeximprovers for oil, cationic surfactants and specialtyplasticizers.

Plasticizer alcoholsrange of plasticizer(PVC) modification.alcohols include itsetc.

are mostly used to manufacture a wideproducts for (mostly) polyvinyl chlorideOther, smaller, markets for plasticizeruse in oil field chemicals, surfactants,

Alpha-Olefins are used in a wide variety of applications,including: high performance synthetic lubricants, surfactantsfor cosmetics and shampoos, and germicidal/bactericidalproducts for swimming pools, oil wells, cleaners etc.

Ethylene is also used to manufacture a number of otherderivatives. These include:

Ethyl Alcohol is produced synthetically by the directhydration of ethylene with water vapor over a phosphoricacid catalyst. Major applications include its use inprinting inks, toilet and cosmetic formulations, solvents,coatings and as a high octane blending additive ingasoline. Ethyl alcohol is also reacted with otherchemicals to produce ethylamines, ethyl acetate, ethylacrylate, acetaldehyde, glycol ethers, etc.

Acetaldehyde is manufactured by the hydration of ethyleneover a copper/palladium catalyst. In the last 10 years,acetaldehyde demand has fallen as new technologies usingdifferent feedstocks have replaced acetaldehyde'straditional end-uses. Currently, the principal outlet foracetaldehyde is acetic acid, with smaller volumes used toproduce pentaerithritol, peracetic acid, pyridine, butyleneglycol, etc..

Vinyl Acetate Monomer is produced by the vapor-phasereaction of ethylene with aqueous acetic acid over apalladium chloride catalyst. Most vinyl acetate monomer isused to produce a range of polyvinyl acetate emulsions andresins, which, in turn, are used in paints, adhesives andpaper coatings. Polyvinyl alcohol, ethylene-vinyl acetatecopolymers and other polymers are the other principalend-use applications for vinyl acetate monomers.

-26-

Ethyl chloride production currently represents less than 1percent of total ethylene production, and is produced bythe anhydrous hydrochlorination of ethylene over analuminum chloride catalyst. Ethyl chloride is mainly usedfor the manufacture of tetraethyl lead (TEL) which is usedin gasoline as an octane enhancer. Ethyl chloride demandhas fallen sharply over the past decade in line with themandated decline of lead levels in gasoline. Other usesfor ethyl chloride are small and include the production ofethyl cellulose for lacquers, inks, etc.

Ethylene-Propylene Elastomers are produced by thepolymerization of ethylene with propylene with (or without)the addition of a non-conjugated diene. The polymerizationreaction occurs in an organic solvent in the presence of aZiegler-Natta catalyst. Ethylene-propylene elastomers aremostly used in a wide variety of non-tire applicationsutilizing its outstanding heat and ozone resistance. Theseapplications include radiator/steam hoses, car bumpers,weatherstripping, appliance parts, and wire and cable.Other applications include its use as an impact modifierfor plastics, viscosity index improver for oil, and as aroofing material. Ethylene-propylene elastomers are alsoused in white sidewall compounds, and cover strips, intire s .

Propionaldehyde is produced by the oxo-reaction of ethylenewith synthesis gas. The propionaldehyde produced 1s mostlyconverted to propionic acid (for agricultural end-useproducts) and n-propanol (mostly for herbicides). Otherpropionaldehyde end-uses include the production oftrimethylolethane which is used in the manufacture of alkydresins.

Ethylene Dibromide is produced by reacting bromine withethylene. Its major end-use application is in leadedgasoline, where it 'scavenges' the lead to prevent itsdeposition on combustion surfaces. Ethylene dibromidedemand has declined sharply over the past decade in linewith reduced demand for lead alkyls in gasolineformulations. Ethylene dibromide was also used as a soiland grain fumigant, especially for cotton, soybeans, andpeanuts, until early 1984 when the EPA banned its use forall grain fumigation. Other minor uses for ethylenedibromide currently include the manufacture of vinylbromide (a flame retardant), its use as a solvent, and asan intermediate for the production of drugs and dyes.

-27-

There are a wide range of very small miscellaneous end-useapplications for ethylene, which include the production ofethylaniline, vinyl toluene, and ethylmercaptan, and itsuse as a co-monomer for modifying polypropylene and othercopolymer resins.

E. The Structure of the U.S. Ethylene Producing Industries

There are approximately 24 companies in the United States whichmanufacture ethylene. Of these, 10 companies - representing9.5 million metric tons of ethylene capacity (or 54 percent ofthe total) - are subsidiaries of, or affiliated with, themajor oil producers. These oil company affiliations provide acaptive supply of feedstocks to the ethylene plants from therefinery. The other 8 million metric tons of ethylene capacityare owned by chemical companies not affiliated with the o~l

industry, and who generally purchase their feedstocksrequirements in the merchant market.

Historically, the ethylene plants associated with oil producerstended to use oil-based feedstocks (such as naphtha andgas-oil) that were produced by the refinery. This isparticularly true in Europe, where many oil companiesintegrated "forward" from oil refining into ethylene productionin order to utilize and "add value" to the low octane naphthastreams produced in the refinery that were surplus to the needsof the gasoline pool. The history of the U.S. chemicalcompanies feedstocks use is less precise. After initialconstruction of ethylene plants based on the abundant lighthydrocarbons on the U.S. Gulf Coast (USGC), the chemicalcompanies switched to constructing naphtha/gas-oil based plantsin the mid '60's when USGC reserves of natural gas, with theassociated natural gas liquids, were perceived to be drying up.

This continued until the first oil crisis of 1973/74, when therapidly escalating price of crude oil forced both the oil andchemical companies to modify many of the naphtha and gas-oilbased ethylene plants to permit the additional cracking oflight hydrocarbon feedstocks (such as ethane, propane, andbutane).

Japanese and European chemical companies have also looked atalternative feedstocks, especially NGL's from North Sea andMiddle-Eastern reserves. Some ethylene producers in thesecountries have also modified their plants to accommodate asmall percentage of NGL's in the feedstock slate.

-28-

The re-vamping of the heavy liquids based ethylene plants toalso permit the cracking of light feedstocks had far-reachingimplications for the future profitability of the ethyleneplants. As detailed earlier in the report, ethylene plantsbased on light hydrocarbons are much simpler and cheaper tobuild and operate than plants designed to use heavyfeedstocks. The net result of introducing ·f~edstocks

flexibility into the ethylene plants, enabled the ethyleneproducers to exercise much greater control over the compositionof the final product stream. This is achieved by tailoring thecomposition of the feedstocks stream to reflect the marketneeds for co-products, while at the same time minimizing thefeedstocks costs of the plant. As a result of these actions,plant profitability was optimized.

Captive/Merchant Implications of Ethylene Production

Because ethylene monomer is a gas, it is difficult to transportunless moved by pipeline or in liQuified form. As a result,ethylene plants are usually constructed surrounded by a numberof different ethylene derivative plants. In this way theethylene produced is readily converted into a derivative form(usually liquid or solid), thus facilitating its ease ofshipping into either the domestic or export markets.

In addition, most derivative plants are constructed by theethylene producing company which views the downstream (orforward) integration as a means of "adding value" to theethylene monomer (as well as facilitating its ease oftransportation). In spite of this integration, a company'sethylene capacity and its ethylene demand rarely proceed in"tandem". As a result, most ethylene producers have either a"shortfall" or "surplus" in their supply/demand balance.

In order to maintain a balance between production and needs,companies, both in the United States and in Western Europe,have developed a complex pipeline system which allows for thewidespread distribution of ethylene between suppliers, andbetween suppliers and consumers. In this way, surplus ethylenefrom one supplier can be sold to a competitor experiencing a"short" position. Since these transactions are usually"arms-length" (between non-:-related companies), a merchantmarket in ethylene is created. The extent of the U.S. merchantmarket for ethylene in recent years is shown in the following

f table.

-29-

Some of the major U.S. ethylene producers that participated inthe merchant market in 1985 included: (million metric tons)

Sellers

Lyondell Chemical 1.1Shell Chemical 1.0Exxon Chemical 0.7Amoco Chemical 0.5Chevron Chemical 0.3USS Chemical 0.2DuPont 0.2Union Texas 0.2Texaco 0.1Phillips 0.1

Buyers

U.S.I. 0.8Ethyl Corp. 0.5Allied Chemical 0.4Goodrich Chemical 0.3Hoechst 0.2Celanese Chemical 0.2Georgia Gulf 0.2Union Carbide 0.2P.P.G. 0.2Soltex 0.1

Source: International PC Inc., Houston, TexasShell Chemical Co., Houston, Texas

Note these data only reflect transactions within the UnitedStates.

Table IX

U.S.r.1erchant ,Market for Ethylene 1980-1985(thousand metric tons)

Years Production Merchant Merch. Mkt. %Sales

1975 9301 2634 28.31979 13568 5282 38.91980 13007 4883 37.51981 13348 4271 32.01982 11117 3073 27.61983 13013 3985 30.61984 14239 4497 31. 61985 13861 NA NA

Source - Synthetic Organic Chemicals Annual Report, U.S.International Trade Commissions

The data shows the U.S. merchant ethylene market accounts forslightly less than one-third of total U.S. ethylene production.

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II. RECENT INDUSTRY PERFORMANCE AND COMPETITIVENESS

On a classification basis, ethylene is included in SIC 2869,Industrial Organic Chemicals, NEC, and while statistical dataon production, sales, imports, exports and unit values areavailable from government sources, the data are not alwaysproduced in a timely manner to tr~ck the important changes insupply and trade. Ethylene demand is not identifiedstatistically and can only be derived from production data onethylene derivatives. It is beyond the scope of the report tosurvey the derivatives in detail, however, general trends indemand for these derivatives will be addressed to support theethylene position.

World ethylene demand reached an estimated 40 million tons in1985, a 4.8 percent per year increase over the 25 million tonsof demand in 1975. During the same period, U.S. ethyleneproduction grew ~n average of 4.1 percent per year, from 9.3million tons in 1975 (37% of world demand) to 13.9 million tonsin 1985 (35 percent of world demand). At the same time, theunit value of shipments fell by 50 percent from 31.0 cents perpound (in 1975) to an estimated 15.0 cents per pound in 1985.Ethylene prices fluctuated sharply during the 1975-1979 periodas prices were affected by the recession of 1975, the inventorydrawdowns, and the declining demand for ethylene.

Ethylene prices rose sharply in 1979 in response to the Iranianoil crisis, and continued to increase through 1981.

The price increase occurred in the face of declining demand,and stemmed primarily from a massive 1.4 million-ton inventorybUildup. This inventory increase occurred between 1979 and1981 in anticipation of increasing energy prices driving up thefuture price of ethylene. By 1982, the continuing fall inethylene demand made the record inventories increasinglyuneconomic with the result that ethylene production was sharplycurtailed and the ethylene price fell hy 25 percent. Since1982, ethylene prices have generally been in the range from thelow to high teens (U.S. cents per pound).

Ethylene demand can be divided into domest.ic and exportmarkets. Demand, in this context, refers primarily t'o ethylenedemand for.production of ethylene derivatives. While minorvolumes of ethylene are traded in monomer form by pipeline andin liquid form via cryogenic tankers, the difficulties andcosts associated with transporting ethylene monomer means thatthe derivative form is preferred for trade because of its easeof handling, 'transportation etc.

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Table X

U.S. Ethylene Production and Unit Sales value1975 - 1985

Year

19751979198019811982198319841985 (E)

Production(OOO'metric tons)

9301135'68130071334811117130131423913861

Unit Sales Value(U.S. Cents/lb.)

31. 014.,022.025.018.019.019.015.0

Source:" '

Synthetic Organic Chemicals t Annual Report.U.S. International Trade Commission.

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The following Table summarizes ethylene consumption in theUnited States in 1975 and 1985.

Table XI

U.S Ethylene Production/Consumption, 1975 and 1985(1)(000 metric tons of Ethylene Equivalents)

Consumption

Domestic

Net ExportsNonomers (2)Derivatives

Total Eth.Prod.

1975

8946

6349

9301

Volume1985

12759

1102

13861

A.v. Ann. Growth(% per year)

3.6

12. 2

4.1

Sources: U.S. International Trade CommissionBureau of Census, U.S. Department of Commerce.

(1) Ignores inventory changes of ethylene monomer or itsderivatives.

(2) Tank car shipments in 1975.

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u.s. Ethylene Consumption has undergone major changes duringthe 1975-1985 period, with domestic demand now accounting for92 percent of consumption, compared to 96 percent in 1975.

A. Ethylene Domestic Consumption

The following table details the U.S. consumption of ethylenefor the production of ethylene derivatives in 1975 and 1985.

Table XII

U.S. Ethylene Consumption for Derivative Production1975 and 1985

(Thousand Metric Tons of Ethylene Equivalent)

De ii va t ive

LDPEHDPEE.OE.D.C.E.B.V.A.M.Etoho t he r (1)

Total(2)

Derivative Production Av. Ann. Growth% per year

1975 1985Vol. pet. Vol. pet.

2329 25.1 3976 28.7 5. 51271 13.7 3450 24.9 10.51926 20.7 2515 18.2 2.71158 12. 5 1980 14.3 5. 5

613 6.6 1086 7.8 5.9222 2.4 364 2.6 5.1415 . 4.5 188 1.4 (7.6)

1361 14.5 302 2. 1 (14.0)

9295 100.0 13861 100.0 4. 1

(1) Includes Ethyl Chloride, Ethylene Propylene Rubber, EthylBromide, other Ethylene Derivatives.

(2) Does not include 6 thousand metric tons of net ethylenemonomer exports in 1975

Source: U.S. International Trade Commission

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Polyethylene production dominates U.S. ethylene consumption,followed by the production of ethylene oxide (E.O), ethylenedichloride (E.D.C.), ethyl benzene (E.B.), and the other,smaller volume ethylene derivative production.

A clearer understanding of the ethylene derivatives growthduring the 1975-1985 period can be obtained through a summaryanalysis of the ultimate end-use markets. The following tablesummarizes 1975 and 1985 domestic ethylene demand broken downinto the major end-use industry markets.

Table XI II

u.S. Domestic Ethylene Demand by Industry, 1975 and 1985 ,(000 Metric tons of Ethylene Eauiv~lent)

End-Use Market 1975 1985 Av. Ann. Gr.Vol. Percent Vol. Percent ( % per yr.)

Packaging 1908 21. 3 3794 29.8 7. 1Construction 850 9.5 1625 12. 8 6. 7Transportation 905 lO. 1 935 7.3 O. 3Coatings 1345 15.0 1700 13.3 2.4SIJrfactants 880 9.8 1300 10. 2 4.0Other (a) 3058 34.3 3405 26. 6 1.0

'r:,

Total 8946 100.0 12759 100.0 3.6

(a) comprised of Housewares, Furnishings, Apparel, Electronic, etc.

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L Packaging

The following table shows the demand for ethylene derivativesin the packaging industry in 1975 and 1985.

Table XIV

u.s. Ethylene Derivative Demand in Packa in000 metric tons of ethylene eauivalents

Derivative

HDPELDPEEB/Styrene/PSEDC/VCH/PVCOther (1)

Total

Demand Av. Ann. Growth1975 1985 ( % per Year)

593 1507 9.81063 1848 5.7

142 160 1.273 160 8.237 119 12.4

1908 3794 7. 1

Per CapitaIncome·(1972 Dollars) $4525 $4575 O. 1

(1) includes vinyl acetate, ethylene oxide, and alpha-olefinderivatives.

Source: Modern Plastics, January issues, 1976 and 1986.

The major changes that have ~aken place during the 10-yearperiod includes the continued dominance of the packagingindustry by the polyethylene resins which continue to accountf~r 87-88 percent of the industry's total ethylene use.

HDPE demand, which is used primarily to produce bottles andother blow-molded containers, grew sharply between 1975 and1985, at an average 9.8 percent per year growth. The slowergrowth in the LDPE resins was partly attributable to thedevelopment of the LLDPE (linear low density polyethylene)resins which permits the use of 30-40 percent less resin inpackaging films. In addition, LDPE/LLDPE resins are mostlyused in flexible packaging applications, - areas where the

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resin market is more mature. PVC film and bottles and alsopolystyrene (mainly the expanded grades) contributed to thegrowth in ethylene demand in packaging applications during theperiod.

There continues to be considerable potential for additionalplastics penetration of the packaging industry against (e.g.)glass t metal t paperboard etc. This is demonstrated by the factthat during the 1975-1985 period t the constant dollar percapita income increased an average of only about 0.1 percentper year (according to the Department of Commerce statistics.)This increase; (in what is generally accepted to be a reliableindication of packaging demand)t is in direct contrast to the7.1 percent per year increase in consumer demand .forethylene-based packaging. Taking into account a populationincrease averaging about 1.0 percent per year during theten-year period t the data strongly indicates that productsubstitution in packaging is still a very important activity.

2. Construction

The consumption of ethylene-based derivatives in theconstruction industry in 1975 and 1985 is shown in thefollowing table.

Table XV

u.s. Ethylene Derivatives Demand in Construction(000 metric tons of ethylene equivalents)

Derivative

PVCHDPELDPEPSOTHER(l)

TOTAL

Demand Av. Anl1. Growth1975 1985 (% per year)

420 750 6.0120 315 10. 1

85 120 3.525 40 4.8

200 400 7.2

850 1625 6"":7 •

ConstructionActivity(billions of

1972 dollars)$120 $106 ( 1. 2)

(1) includes E.P. rubbers t alpha-olefin derivatives and ethyleneoxide derivatives.

Sourc~: Modern Plastics t January issues t 1976 and 1986.

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While overall construction activity (as measured in constantdollars) declined during the 1975-1985 period, the consumptionof ethylene-based derivative products increased at an averageof 6.7 percent per year.

PVC is still the most important plastic material used, with avolume more than double that of the next largest product. PVC'sability to occupy the position as the number one plastic usedin construction, stems from its wide diversity ofapplications. These include, pipe and fittings, flooring,frames, siding material, and wire and cable insulation and·sheathing. The next largest plastic, HDPE resin, is mostlyused in pipes and fittings that carry potable water, and hasdemonstrated the greatest growth during the period. LDPE isused in film and in a variety of miscellaneous, non-dynamicapplications. In "other" applications, E-P elastomers arefinding increasing usage as glass weatherstripping in "highrise" buildings, while expanded polystyrene insulation has goodpotential for replacing conventional insulation materials.

3. Transportation

Ethylene derivative demand in transportation applications hasshown little growth over the 1975-1985 period.

Table XVI

U.S. Ethylene Derivative Demand in Trans ortation000 metric tons of ethylene equivalents

Derivative Demand1975 1985

Av. Ann. Growth(% per year)

EO/EG 650Eth.chloride 60PVC 60EB/PS 70OTHER( 1) 65

TOTAL 905

H.V. and fuelexpend. $79(billions of1972 dollars)

665404070

120

935

$83

0.2(4.0)( 4.0)

11. 9

0.3

0.5

(1) includes E.P. rubbers, alpha-olefin derivatives and ABS/SANresins.

Source - Modern Plastics, January issues, 1976 and 1986.

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The data shows there have been small gains in the demand forethylene glycol in anti-freeze, with changes in the overallcombination of vehicle sizes essentially balanced by variationsin total vehicle production. These small gains were largelyoffset by the decline in ethyl chloride demand for gasolineanti-knock compounds. Demand for PVC in upholstery an1 vinyltops for automobiles decreased during the period as velour andother soft seating covers penetrated PVC's traditional seatingmarkets. In the "other" category, E-P elastomers demonstratedsignificant growth, replacing other elastomers in applicationssuch as weatherstripping because of its superior ozoneresistance and overall ageing characteristics. Demand forethylbenzene derivatives similarly flattened as smaller tiresand the conversion to radial-ply design, reduced the amount ofSBR used in tires in favor of natural rubber andpolybutadiene. Small volumes of ABS (Acrylonitrile-butadienestyrene resins) continued to be used in various mOlded parts ofcars and trucks.

Because ethylene derivatives are used in all areas of avehicles day-to-day operation, ethylene demand in this area canbe compared directly to total motor vehicles and motor fuelexpenditures in constant dollars. The comparison shows thatdemand for ethylene derivative products in transportation hasessentially matched overall consumer expenditures for motorvehicles and motor fuel (in constant dollars). From this itmay be concluded that the existing ethylene derivatives used inthis industry have reached a level of maturity, and that futuregrowth will match overall industry growth .until such time as anew ethylene derivative penetrates the market.

4. Coatings

Demand for ethylene derivatives in coatings applicationsdemonstrated only modest growth during the 1975-1985 period.

Ethylene derivatives are used in coatings as solvents and asfilm-forming vehicles. LDPE is llsed as an extrusion coatingresin, primarily to coat paper milk cartons and provide barrierproperties to other containers. Ethyl alcohol is used as asolvent and for the production of ester solvents. PVC-basedresins are used primarily in can coatings.

The change in acetic acid manufacture to a non-ethylene basedprocess, has limited the demand for acetaldehyde (and ethylene)in coatings. Accordingly, while future demand for vinylacetate in emulsion coatings will continue to show growth, theethylene"component will decline.

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Table XVII

U.S. Ethylene Derivatives Demand - Coatin s000 metric tons of ethylene equivalents

Derivatives Demand1975 1985(E)

Av. Ann. Growth(% per year)

LDPEEDeEthyl alcoholVinyl acetateOther(a)

Total

Durable GoodsExpenditures(billions of1972 dollars)

425230200

90400

1345

$122

615275250120440·

1700

$146

3.71.82.32.91.0

2.4

1.8

(a) includes ethylene oxide, EB, Acetaldehyde, alpha-olefins,ethylene Chloride, propionaldehyde, vinyl chloride, linearprimary alcohols.

E - Partly Estimated

Source: Chemical Marketing Services Inc. Cincinnati, Ohio.

Overall, ethylene derivative use in coatings has shown onlymodest growth between 1975 and 1985. Compared to Durable GoodsExpenditures, the data shows the two growth rates have generallykept pace with each other during the 1975-1985 time period.

5. Surface Active Agents

Demand for ethylene derivatives in surface active agents duringthe 1975-1985 period~ is shown in the following table.

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Table XVIII

u.s. Ethylene Derivative Demand - Surface Active A ents000 metric tons of ethylene equivalents

Derivative Demand1975 1985(E)

Av. Ann. Growth(% per year)

EODetergent AleAlpha-olefinsOtherCa)

Total

500 .206070

880

740400100

85

1300

4.04.04.02.0

4.0

Non-DurableGoods expendit.(billions of) $3181972 dollars)

$388 2.0

(a) includes plasticizer alcohols and other derivatives.

E- Partly Estimated

Source: Chemical Economics Handbook, SRI International, MenloPark, CA.,Chemical Week, May 7, 1986. PP. SAS 3-46.

Growth in demand for these ethylene derivatives has been drivenby the biodegradability of straight - chain surface activeagents produced from detergent range alcohols and alpha-olefins,and the popularity of heavy duty liauid detergents produced byethoxylating detergent range alcohols with ethylene oxide. Therecession-resistant nature of the industry combined with thesubstitution of ethylene derivatives for other cleaning agents,resulted in an average growth of 4 percent per year during the1975-1985 period. The industry's resistance to economicdownturns is demonstrated by the fact that its average growthrate is twice the growth shown by the non-durable goodsexpenditures over the ·same time period.

B. International Trade

World trade in ethylene and ethylene derivatives represented anestimated 10-11 million tons of ethylene equivalents in 1985.Of the total, an estimated 80-90 percent was traded as t~e

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derivative, with the balance traded as ethylene monomer. Mostof the ethylene monomer was shipped by pipeline between thecountries of Western Europe, and between Canada and the UnitedStates. In addition, a reported 370 thousand metric tons ofliQuid ethylene was transported by 'deep-sea' tankers from theMiddle East and from South America to Western Europe.

The following table summarizes the importance of U.S. trade inethylene derivatives relative to U.S. ethylene demand, 1975-1985.

Table IXX

U.S. Derivatives Trade Relative to U.S. Ethylene Consumption1975-1985

(1000 metric tons of ethylene equivalents)

Derivative and Monomer TradeEthylene Imports Exports Ethylene

Years Production Vol Pet Vol Pet Consumption

1975 9301 183 2.0 538 5.9 89461979 13568 79 0.1 1882 16.0 117651980 13001 167 1.5 1873 16.0 112951981 13348 251 2. 1 1701 14.3 118981982 12117(1) 163 1.6 2101 20.6 101791983 13013 300 2. 7 2011 17.8 113021984 14239 674 5. 2 1839 14.1 130741985 13861 893 7.0 1995 15.6 12759

(1) includes approximately one million metric tons of ethylene takenfrom inventory.

Source: Synthetic Organic Chemica1s--Annual Reports, U.S.International Trade Commission.Bureau of the Census. U.S. Department of Cqmmerce.

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Total Exports

u.s. exports of ethylene monomer and deri~atives demonstratedalmost uninterrupted growth from 5.7 percent of u.s. ethyleneconsumption in 1975, to over 17 percent in 1982, (thereafterdeclining to 14.4 percent in 1985). There were two majorfactors that influenced the rapid rate of export growth duringthis period.

The production cost advantage of the U.S. Gulf Coast (USGC)ethylene plants compared to production cost economics inother countries.The rapid economic growth in developing .countries whichaccelerated the demand for consumer products.

The relative strength of the U.S. dollar on foreign exchangemarkets compared to the currencies of the major trading partnersalso had a major influence on exports. The fall-off in exportsafter 1982 was partly attributable to the strength of the U.S.dollar which also attracted increasing quantities of ethylene ­based derivative imports from other countries.

Total Imports

U.S. Imports of ethylene monomer and derivatives during the1975-1985 period, demonstrated a pattern almost exactly oppositeto the export position. During the early years (1975-1982),imports were maintained at a fairly low level as overseasproducing countries concentrated on marketing product in thenewly emerging developing countries, and the exchange rate ofthe U. S. dollar discouraged large volume shipments into theUnited States. With the development of the strong dollar inearly 1982, the United States became the means by whichdeveloping countries could recover from the worldwide recession,by exporting large quantities of ethylene derivatives into theUriited States. As a result of these increased imports, U.S.ethylene production essentially plateaued during the first partof the 1980's.

An analysis of the international trade in ethylene derivati~es

demonstrates the large number of products that are involved.The following tables show the volume and growth of the majorderivative imports and exports.

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Derivative Exports

Table XX

U.S. Ethylene Derivative Exports(000 metric tons of Ethylene Eauivalents)

Derivative Exports Av. Ann. Growth1975 1985 (% per yea r)

Polyethylene 231 878 14.3EDC/VCH/PVC 177 450' 9.8EB/Styrene/PS 22 240 27.0Oxide/Glycols 44 254 19.2VAM/PVAC 42 108 9.9Others 16 43 10.4

Total(l) ---sTI 1973 . 14.0

(1) excludes monomer net exports (6 thousand metric tons in 1975 and22 thousand metric tons in 1985)

Source: Bureau of the Census. U.S. Department of Commerce.

Of the nearly 1 1/2 million metric ton increase in ethylenederivative exports between 1975 and 1985, polyethylene resinsaccounted for about 44 percent of the total with an increase ofnearly 650 thousand metric tons. While EDC/VCM/PVC exportsincreased by over 270 thousand tons, the percentage fell from 33percent to 23 percent of the total export volume. Thearomatic-ethylene derivatives, EB/styrene/PS, showed the most growthbecause of the economic advantages from the heavy feedstock costs toethylene plants. Exports of oxides and glycols grew sharply at arate second only to the aromatics, while vinyl acetate grew sharplyfrom a small base, driven by the use of low-cost methanol as itsChief raw material.

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Derivative Imports

Table XXI

u.s. Ethylene Derivative Imports(000 metric tons of Ethylene Equivalent)

Derivative Imports1975 1985

Av. Ann. Growth(% per year)

PolyethyleneEOC/VMC/PVCEB/Styrene/PSOxides/GlycolVinyl AcetateEthyl AlcoholOthersTotaH!)

2921

2128

aa3

183

230139

52125

a279

25850

23.020.038.5(0. 2)

23.616:""6

(1) excludes ethylene monomer imports. (none in 1975 and 43thousand metric tons in 1985).

Source: Bureau of the Census, U.S. Department of Commerce.

Imports of ethylene derivatives increased over 650 thousandmetric tons between 1975 and 1985, with ethyl alcohol exportsaccounting for 42 percent of the increase, and polyethyleneresins accountirig for a further 30 percent. EDC/VCM/PVCimports increased over 115 thousand metric tons, or 18 percentof the total, while the oxide and glycol imports stayedessentially the same. Imports of EB/Styrene/PS and "Other"derivatives grew sharply from small bases.

Regional Analysis

A different picture of growth in international trade emergesfrom an analysis of trade with the major trading partners ofthe United States. The following tables show the changes indistribution of products, and in the countries for U.S. tradein ethylene derivatives.

Exports

Table XXII ~hows the pattern of U.S. exports of ethylenederivatives changed" significantly during the 1975-1985 period.While the percentage of exports to South America and Canadadeclined dramatically, exports to Mexico, Japan, Pacific Basin,and "other" countries increased'significantly.

'- 45-

;(

/

The percentage of exports to Western Europe stayed about thesame as in 1975. The principal products exported to Canadaduring the period changed little, as did the product 'mix' toSouth America. The types of products shipped to Western Europeand to the Pacific Rim countries showed the most change whileproduct shipments to Japan and " other" countries changed littleduring the period;

TABLE XXII

u.S. Ethylene Derivative Exports by Region(Percent of Quantity)

1975 1985

Region ,Percent Derivatives Percent Derivatives

Canada 17.5 LDPE,HDPE,EG 5.0 LDPE, HDPE, SBRHexico 7.5 HDPE,VCM,SAN 11. 8 Styrene, VCM, LDPESo.Amer(l) 27.5 VCM,LPDE,VAM 8.8 Styrene, LDPE, VCMW.Europe 24. 5 VCM,VAM,PS 21. 5 Styrene, VAM, EGJapan 1.0 EDC,VAM,PS 14.4 EDC, Styrene, VAMPac. Bas. 20.0 EDC,VCM,LPDE 30.6 LDPE, HDPE, StyreneOther 2.0 PVC,HDPE,SBR 8.0 HDPE, LDPE, PVC

Total 100.0 100.0

Total Volume(2) 530.0 1973.0

Exp.Value 472.2 1934.0($Mi11ion)

(1) includes the Caribbean Basin(2) thousand metric tons of ethylene equivalents.

Source: Bureau of the Census. U.S. Department of Commerce.

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Imports

The pattern of U.S. imports of ethylene derivatives changedduring the 1975-1985 period as imports from the traditionaltrading partners, Western Europe and Japan, ~eclined sharply infavor of a very strong increase in imports from Canada andsmaller increases from Mexico and South America.

Canadian imports increased sharply during the period from 6.5thousand metric tons of ethylene equivalents in 1975 to about400 thousand metric tons in 1985. In the 1960's and early1970's imports from Canada were mostly composed of SBR, ABS,and EO, but by the late 1970's, the production of LDPE, HDPEand PVC from the export-oriented plants in Alberta and Ontarioreplaced the small volumes of SBR and other products as the keyexports.

The percentage of shipments from Western Europe declinedsharply during the period, although the actual volume ofimports declined only slightly from 112.2 thousand metric tonsof ethylene equivalents in 1975 to about 70.0 thousand metrictons in 1985. The product 'mix' of shipments from WesternEurope also changed during the period from mostly EG, LDPE, andEDC in 1975 to styrene, PS, E-P elastomer products in 1985.

Similarly, Japan shipments of ethylene derivatives to theUnited States also fell sharply during the 1975 -1985 period,from 62.9 thousand metric tons of ethylene equivalent in 1975,to about 10 thousand metric tons in 1985. At the same time,the product 'mix' also changed from mostly EG, EDC and HDPE in1975 to PS and PVAC in 1985.

Other Performance Measures

Data on capital investment, R&D expenditures, finanCialperformance, levels of employment and productivity measures,etc. are not detailed separately for the ethylene segment ofthe petrochemicals industry. The only data specific toethylene that is pUblished in this area, is the ethylenecomponent of the Producer Price Index. Ethylene w~s includedas a component of the index beginning in 1974, and the seriesis generally accepted as being a fair reflection of the impactof changes in ethylene prices on a quarterly basis.

The chemical and petroleum industries in general, and ethyleneplants in particular, have experienced steadily decliningprofit margins from the late 1970's through the mid-1980's. Inrecent years, profit margins have declined to levels close tothe lowest point in the history of many industries. As aresult, some older ethylene plants were shut down permanentlyand marginal plants were 'mothballed' or shut down forupgrading in anticipation of more profitable operation in thefuture.

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TABLE XXIII

u.s. Ethylene Derivative Imports by Region

(Percent of Quantity)

1975 1985

Region Percent Derivatives Percent Derivatives

Canada 9.0 SBR,ABS,EO 66.0 LDPE,HDPE,PVC,EOHexico 6.0 PS, PVCSo.Amer(l) 10.0 EG,EDC,EtohW.Europe 54.0 EG,LDPE,EDC ll~. 5 .Styrene,PS,EPRJapan 36.0 EG,EDC,HDPE 1.0 PS, PVACPac.Bas. 1.0 PVC,HPDE 1.0 SANOther 4.5 PVC,EG,LDPE,Etoh

Total 100.0 100.0

Total Volume(2) 183.0 893.0

ImportValue 140.3 692.0($ millions)

(1) includes the Caribbean Basin(2) thousand metric tons of ethylene equivalents

Source: Bureau of the Census, U.S. Department of Commerce

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The rebounding ethylene prices in late 1985 coincided with thesharp decline in the ptice of oil during the first quarter of1986. Because fuel and feedstock costs account for over 50percent of ethylene production costs, the sharply lower oilprices reduced cash costs of those ethylene plants based onheavy liquids, and realized profit margins during the firstquarter of 1986, that were higher than anything realized in morethan a decade (but still below re-investment levels). By thesecond quarter of 1986, however, ethylene prices had fallen toearly 1985 levels (under pressure from the "downstream"industries), with the result that profit margins- were sharplydown from the levels enjoyed during the first quarter. Thegenerally optimistic outlook for GNP growth in 1986 and 1987,coupled with the lower oil prices and the weaker dollar, hasraised expectations for a steady increase in ethylene demand,both for the domestic and export markets. Two ethylene plants,previously 'mothballed, I were reactivated in the second quarterof 1986 to provide additional capacity into a "snug'supply/demand market. This increase in capacity was offsetsomewhat by Olin Corporation's closing of its small "steamcracker."

Summary of Performance and Competitiveness

The profitability and viability of the U.S. ethylene industry isessentially driven by factors that are outside the control ofthe industry. Most U.S. ethylene plants are of worldscalecapacity, and many have been retrofitted to give them maximumflexibility in selecting the optimum feedstock mix to meet theproduct needs of the market. In recent years, the high oil andnatural gas costs, (coupled with the overall effect of Superfundtaxes on the chemical industry), have made U.S. ethylene (andethylene derivative plants) uneconomic in the face of increasingimports of low cost ethylene derivatives. U.S. producers havechosen not to increase operating losses to retain marketposition, with the result that imports have captured anincreasing share of the U.S. ethylene derivative market.

While the U.S. industry has been losing its competitive edge inworld markets, the possibility of continuing lower oil prices inthe future, coupled with the prospect of an even weaker dollaragainst the major currencies, presents an opportunity for theU.S. industry to recover some of its domestic market share.

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III. F~CTORS AFFECTING FUTURE ETHYLENE PRODUCTION AND USE

A. Future Ethylene Demand

In assessing the future demand for ethylene and ethylenederivatives both in the world and in the United States, it isimp~rtant to recognize that ethylene is a maturing product andthat its future glowth will largely depend upon overall economicgrowth. This is more true of ethylene consumption in developedcountries than in developing countries where ethylene-basedplastics are still replacing the traditional natural products ofglass, stone and metal. However, because absolute demand forderivatives in these countries is small compared to demand inthe developed countries, the weighted effect on world demandwill be minimal in the short term.

Within the developed countries, and in the United States inparticular, future demand for ethylene will be essentiallydriven by the demand for derivatives in established industries.While technology will continue to develop new specializedpolymeric products, possibly based on, or including, ethylene,it is becoming increasingly likely that these will bespecialized products designed to perform a specific task in aparticular industry. While not impossible, the probability islow that a new general purpose 'commodity' plastic would bedeveloped capable of generating a significant volume ofadditional ethylene sales, similar to the volumes of lowdensity, linear low density, or high-density polyethylene resins.

Accordingly, forecast demand for ethylene and its derivativesthrough the early 1990's will be generally driven by the economyas a whole, and by the "intra-polymer" competition within eachindustry where the products are used.

As detailed in Chapter ,I and in Chapter II, ethylene derivativesare used in a wide range of end-use applications andindustries. For convenience, the outlook for the products aresummarized under the industry headings used in Chapter II.

B. Packaging

Linear low density polyethylene (LLDPE) will increasinglydominate film applications where its high strength, permittingup to 30 percent downgauging in film thickness, will make it thepreferred film polymer over low density polyethylene (LOPE),high density polyethylene (LLDPE) and polyvinyl chloride (PVC).LLDPE is also showing strength against LOPE and HOPE in someinjection molding applications because of its superior 'stresscrack' resistance. Blow-molded applications, - mostly

-51-

Preceding Page Brank

containers and drums - will continue to be dominated by HDPE.Growth in this area will occur through its increased penetrationagainst metal in the smaller size containers.

Penetration into the traditional glass bottle beverage market bythe ethylene derivative, polyethylene terephthalate (PET), isforecast to continu·e strong with the introduction of the newcrystalline PET polymer. This should ensure that a highproportion of these containers will eventually convert to thenew polymer over the long term.

C. Construction

Polyvinyl chloride (PVC) will continue to dominate this industryin the near term. The versatility of the polymer allows it tobe compounded into a wide variety of applications ranging fromsiding to flooring and this trend will continue. HDPE willcontinue to penetrate against copper tubing for potable watertransmission where building codes permit its use. The excellentozone and weathering resistance of E-P elastomers will ensureits continued use as the preferred elastomer forweatherstripping windows in high-rise buildings, and expandedpolystyrene sheeting should find increased usage as aninsulating material, (again, where building codes permit itsuse). .

D. Transportation

There are several trends, some near term and some long term,that will affect the demand fDf ethylene derivatives products inthis industry. These trends include,

o The slow development of an automobile that contains themaximum amount of plastic will insure the expanding useof ethylene-based polymers, both plastics andelastomers. One area where demand will increasesubstantially is in the continuing replacement of sheetmetal by the development of newer types of sheetmolding compounds (SMC) and bulk molding compounds(BMC). Both compounds are now based on unsaturatedpolyester resin technology where styrene monomer playsan important role and ethylene glycol is also used.

o The demand for styrene in styrene-butadiene rubber(SBR) for use in tires is expected to demonstratelittle, if any, growth over the near term. Thede.velopment of radial tire technology has increased the

-52-

demand for competitive elastomers (natural rubber andpolybutadiene) such that SBR demand in this applicationhas declined. The slow overall trend to smaller,lighter cars, is also leading to a general reducti~n inthe average size of passenger car tires. This, inturn, is causing a further decline in the demand forSBR in tire applications.

o In the long term, tne development of high temperatureceramic materials could ultimately have a majornegative affect on the demand for ethylenederivatives. While development of several ceramiccomponents for "under the hood" applications arealready in place, the long term goal of the industry isto develop an entire ceramic engine. Industry reportssuggest that such an engine would permit a much simplerdesign of the engine compartment which could include,for example, the total elimination of the coolingsystem. Such a development would totally eliminate theneed for coolants in general and for ethylene glycol inparticular. The development of such a system is notexpected to become a commercial reality until the late1990's and therefore the perceived effect on futureethylene demand is outside the scope of this report.

While these developments have been described in terms of theirimpact on the automotive industry, parallel developments withthese and other, more specialized polymers are expected to occurin other areas of transportation, such as in trucks, buses,aircraft and aerospace vehicles. Continued development ofplastics use in these applications are expected to have anoverall positive effect on the demand for ethylene derivativeproducts in the near and long term.

E. Coati ng s

The future demand for ethylene derivatives in film forming andcoating applications, is not expected to show significant growthover present day use. Environmental concerns over the releaseof solvents into the atmosphere, has forced many coating andpainting applications to develop either 'dry' coating techniquesor aqueous-based procedures. In those areas where the coatingapplication mand~tes solvent use, extensive and sophisticatedsolvent recovery systems have reduced solvent release into theatmosphere to a minimum and reduced sharply the ongoing need for"topping up" purchases.

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Except for some small specialized areas of use, athylenederivative use in the industry is essentially mature, and futuredemand will be almost entirely driven by the overall growth inthe economy.

F. Surface Active Agents

Demonstrated gains by ethylene derivatives in this area duringthe 1975-1985 period, are unlikely to be repeated in the future,at least, in the near term. With industry, and the averagehousehold, now mostly converted to the advantages ofbiodegradable products, future growth in demand for ethylenederivatives in this essentially recession proof industry, shouldmaintain a growth rate significantly higher than the overallgrowth in the economy. Any new detergents introduced into thehousehold or industrial markets in the future, are expected tobe minor variations on the established biodegradeable principal,and thus should have little, if any, effect on the forecastdemand for ethylene.

G. Other Industries

Ethylene-derivatives demand in other end-use industries isexpected to grow in line with the overall economy of the UnitedStates. Most of the demand for ethylene in these otherapplications will continue to be dominated by existingderivative products and established end-uses. As such,significant penetration by new,non-ethylene based products, isunlikely, and the forecast total demand for ethylene recognizesthis assumption.

H. Future Ethylene Production

There has been intensive restructuring of the developedcountries ethylene capacities in recent years, in anticipationof the 1.6 million metric tons of new "grass roots'! ethylenecapacity recently commissioned in Saudi Arabia. Therestructuring, or plant rationalizations, effectively reducedthe world ethylene overcapacity by nearly 4.0 million metrictons, made up of about 800 thousand metric tons in Japan, 1.8million metric tons in Western Europe, (900 thousand metric tonsclosed, and an additional 800-900 thousand metric tons ofcapacity down for extended repairs) and 1.2 million metric tonsin the United States. There were no ethylene capacityreductions in other countries. In addition to these closings,Japan reportedly has an additional 500-600 thousand metric tonsof "old" ethylene capacity slated for shutdown, but delayedbecause of a surge in ethylene demand.

-54-

The net effect of these rationalization policies has been toessentially eliminate surplus ethylene capacity from thesecountries. So much so, that in 1985, ethylene consumers inWestern Europe were forced to import over 350 thousand metrictons of liquid ethylene from the Middle-East and Saudi Arabiato meet demand. At the same time, the tight ethylene situationin the United States raised ethylene prices in fourth quarter1985, prompting moves by both Phillips Petroleum and OccidentalPetroleum to make plans to reactivate a total of nearly 450thousand tons of 'mothballed' ethylene capacity.

Looking to the future of world ethylene capacity, it isapparent that new ethylene plant construction will take placein those oil and gas rich developing countries that have so farrelied on imports of ethylene derivatives (and ethylene basedfinished goods), to meet their domestic demand.

There are several developing countries that fall into thiscategory and that have recently constructed, or have announcedplans to construct, ethylene plants. The following tablesummarizes existing world ethylene production capacities, andshows those countries that have ethylene plants planned orunder construction.

The table confirms the position that most future ethyleneprojects are planned for developing countries. Suchundertakings by developing countries have only occurred sincethe energy price increases of the 1970's. Prior to thatperiod, most developing countries had little, if any,comparative advantage in ethylene products, because of thecapital-intensive nature of the industry.

Following the oil prices increases of the early 1970's, fueland feedstock prices replaced capital costs as the mostimportant factors in ethylene production costs. As a result,the large amounts of associated natural gas flared by Mid-East(and other hydrocarbon-rich) developing countries became anattractive potential source of fuel and feedstock for anethylene plant. As detailed in Chapter I r ethylene can beproduced from a range of hydrocarbon feedstocks, such asethane, propane, butane, condensate (all from natural gas) andnaphtha, gas oil (from petroleum refining operations). Thedecision by most developing countries to focus on ethane as the

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Table XXIV

National Ethylene Plant Ca acities as of 07/01/1986000 metric tons of ethylene equivalent

North America

USA

CanadaMexicoSub-total

South America

ArgentinaBrazilOtherSub-total

w. Europe

United Kingdom

Francew. GermanyItalyBeneluxSpainPortugalAustriaScandinaviaOther( 1)Sub-total

Existing

15720

2242932

18894

2531427

2701950

2620

2270399014852780

956300285910

4515641

Add. Cap

330500830

4532

-n

-56-

YearOn-stream

exc1. 1.0-1.1million in mothballs

planningafter 1990

19861986/1987

inc. 500 atHossmorran.

closed mid 1986

North America

Mid East/A.frica

Saudia ArabiaQatarSouth AfricaIranIsraelAlgeriaSub-total

Pacific Rim

Existing

1600280150

2624

l202200

Planned On-stream

indefiniteindefinite

JapanAustralia/N.Z.IndiaS. Korea

:TaiwanSingaporeSub-total

Total(l)

(1) Western world

5581420 200 1986/198725.2 400 1989505 550 1988953 400 planned300 0

8011 1550

46707 2457

Note: Thailand, Malaysia, Libya, Nigeria, Kuwait, ~nd Egypt,all have ethylene pl~nts in planning or underconstruction for tentative completion dates after 1990.

Source: Oil and Gas Journal, 'September 1, 1986Discussions with industry

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feedstock for ethylene production stems from a number of reasons:

1. Natural gas prices are usually low within the country,because its opportunity cost is essentially zero. Althoughexports of LNG (liQuified natural gas) are feasible,construction of the LNG facility is very expensive, and also thecost of establishing an infrastructure to pipe the gas to thefacility is out of proportion to the world demand for theproduct. Furthermore shipping natural gas (as LNG) comparesvery unfavorably with the shipping costs of almost any othertype of hydrocarbon feedstock.

2. Construction costs for the ethylene plant. Becauseconstruction costs increase with the complexity of the plant, anethane-based plant represents the simplest (and cheapest) plantto construct. The selection of one of the 'heavier' feedstocks(such as naphtha or gas-oil), would have sharply increased thecomplexity (and cost) of the ethylene plant. In addition, anethane-based ethylene plant is much easier to operate than anyother feedstock-based plant, because ethylene is essentially theonly product produced from ethane. All of the other feedstocksinvolve the production of additional "co-products" with acorresponding increase in the complexity of running the plant.(see Table III in Chapter I for further details on co-productproduction by feedstock type).

3. A third factor influencing the choice of ethane as thefeedstock,involves the utilization of the products produced fromthe plant. As detailed in 2 abbve, the use of 'heavier'hydrocarbons feedstocks produces a wide range of 'co-products'in addition to the productions of ethylene. These co-productsmust also be 'marketed', (a) as monomer within the country (e.g.benzene, toluene and xylene for use as octane enhancers forgasoline); (b) exporting monomers to other countries; (c)converting the monomers into derivatives for domesticconsumption, or (d) exporting, the derivatives in (c) to othercountries.

Because developing countries usually have a small domesticdemand for petrochemical products, and for ethylene-basedproducts in particular, plants are primarily built to produceproducts for the export market. In addition, the economics ofproduction require that the plants be built on a worldscalecapacity, so that production costs are competitive on a worldbasis and the products exported can compete economically ininternational markets.

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Another factor which bears on the feedstock selection for anethylene plant, is the great sophistication and experience thatis required to successfully market a wide range of petrochemicalproducts in international markets. Because an ethane plantproduces only ethylene, and a limited range ofethylene-derivative products, its simplicity of operation andnarrow product line, makes in the most obvious choice of plantfor such an industry.

Other developing countries having the potential to utilize NGL'sfrom existing flared natural gas for ethylene production areshown in the following table. Note that the calculationrelating the yearly amount of flared gas to potential ethyleneproduction, is strictly theoretical and does not take intoaccount other existing, or planned uses for the gas.

Table XXV

Potential New Ethylene Production From Flared Natural Gas(billion cu. ft. per year)

·E qu i val entHo fCountry Flared Gas (1)Ethylene Plants/year

Saudi Arabia 900 13Nigeria,Cameroons etc 570 8Baharain 270 ·4Iran 270 4Hexico 250 3-4Algeria 240 3-4Indonesia 220 3Un it ed Arab Emirates 150 2Iraq 120 2

Worldwide 3,270 46

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1. Reported and rounded, actual volumes of flared gas arebelieved to be much higher. Assumes ethane accounts for anaverage 23 percent of gas.

2. Based on 500 thousand metric ton per year plants, operatedat capacity, and assumes 591,100 metric tons/year of ethane asfeedstock.

3. Prior to the start up of the ethylene plants at Al Jubailand at Yanbu.

Source: 1982 International Energy Annual, U.S. Department ofEnergy

As the country listings in table XXVI show, most the countriesdetailed in the above Table also have ethylene plants in place,under construction, or planned.

Future Ethylene Supply and Demand

A forecast of world ethylene supply and demand is dependent onthe as~umptions made. These include:

o What will be the accepted projections for world ethylenedemand?

o What part of the new capacity under consideration in othercountries will be built, and when will it be on-stream?

o How much additional rationalization of existing capacitywill take place (if any)?

o What will be ·the impact of the competitive priceenvironment on operating levels?

Because many of these assumptions are mutually dependent oneach other, .it is not possible to precisely quantify eachseparate issue.

Future world demand for ethylene will he largely dri~en hy theprojected growth in world economies. In de~eloped countries,ethylene demand is tied directly to economic growth, indeveloping countries, the relationship is less direct, althoughthe two variables are closely related and interdependent.

The recent sharp decline in the world price of crude oil isgenerally expected to exert a positive effect on the economicsof the world's oil consuming nations. These nations accountfor a very high percentage of the world's economic growth. As

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a result near term 'world economic growth, and world ethylenedemand, should show an increase over previous "high oil" pricescenario forecasts.

Lower oil prices are driving down petrochemical feedstockprices and while profit margins were at historical high levelsin the first qtiarter 1986, margins fell in the second quarterof 1986 as product prices declined in line with lower feedstockcosts. These lower margins will.:

o accelerate the temporary shutdown of marginallyeconomic ethylene plants, until ethylene prices riseagain to economic levels.

o make it less attractive for hydrocarbon-rich nationsto construct new ethylene plants based on low costnatural feedstocks.

As a result, many of the countries listed in Tables XXV andXXVI will not pursue ethylene plant construction until worldproduct prices increase to lev~ls that would make the proposedprojects economically viable.

Under these conditions, forecast world ethylene capacity willincrease slowly, with only those plants now under constructionbeing completed on an extended or delayed basis.

In the United States the p-reviously "mothballed" plants ofPhillips Petroleum and Occidental Petroleum have been .reactivated, bringing a total additional 450 thousand tons ofethylene capacity on stream in second quarter 1986. Aside fromthese two plants, there are no prospects of there being- any new"grass roots"ethylene plants built in the United Statesthrough the early-to-mid 1990's.

Forecasts for the world and United States ethylene capacity anddemand are shown in the following tables:

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Table XXVI

Forecast Western World Ethylene Demand/Ca acity Balancemillion metric tons of ethylene

1985 1986 1987 1988 1989(2) 1990(2)

Demand (1) 40.0 40.8 41. 6 42.4 43.2 44.0Capacity 46.7 46.9 47.1 47.1 48.7 48.7

Surplus/(Shortfall) 6.7 6.1 5.5 5.7 5. 5 4.7

Av. Operating 86 87 88 90 89 90Rate ( %)

Source: International PC Houston, TexasShell Chemical Company, Houston, Texas

1. Forecast annual average growth rate of 2.0 percent peryear.

2. Assumes additional new capacity will be commissioned,or existing "mothballed" capacity re-activated, to meetprojected Western world demand. '

If world demand/capacity balance tightens as forecast, productprices would be expected to increase which, in turn, couldre-activate marginal plants and also improve the potentialprofitability of some proposed plants in developing countriesto be on stream in the early 1990's.

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Table XXVII

Balance

1985 1986 1987 1988 1989(2) 1990(2)

Demand (1) 13.9 14. 1 14.3 14. 5 14.8 15.0Capacity 15. 7 15.9 16.1 16.3 16.6 16.7

Surplus/(Shortfall) 1.8 1.8 1.8 1.8 1.8 1.7

Av. Operating 89 89 89 89 89 90Rate ( %)

Source: International PC, Houston, TexasShell Chemical Company, Houston Texas.

1. Forecast annual average growth rate of 1.5 percent peryear.

2. Assumes additional capacity will come onstream fromre-activated "mothballed" plants and/or fromdebottlenecking of existing facilities.

If forecast oil prices continue in the $15-18 per barrel range,forecast U.S. ethylene demand is expected to continue "snug" ifnot "tight" through the end of the decade.

On the other hand, if oil prices rebound soon to previouslevels ("nigh oil" scenario), ethylene demand is likely to bebelow the le~els forecast in Table XXII. The result of thisfebound would be a U.S. (and world), overcapacity for ethylenewhich could create increased price competition between newproducers in hydrocarbon-rich developing countries, and theestablished producers in the developed countries of WesternEurope, Japan, and the United States.

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IV. FUTURE U.S. INTERNATIONAL COMPETITIVENESS

An analysis of the Western world's chemical industry showsthere is little relationship between the size of a country'schemical industry, and its activity in the area ofinternational trade. While U.S. exports account for only about12 to 15 percent of annual sales, and imports 6 t08 percent ofconsumption, exports to world markets from Western Europeaccounts for a much greater percentage of that regions sales.In a typical year, Western Europe accounts for approximately 75percent of total world trade in chemicals, of which about 50percent is intra-European trade between Weste,rn Europeancountries. This has little effect on global trade patterns,but even if it is excluded, Western Europe still accounts fornearly 50 percent of world chemical trade. Developingcountries as a group import about half of the world chemicaltrade, with most of the chemicals coming in various forms fromWestern Europe.

ThUS, exports are much less critical to the health of the U.S.petrochemical (and ethylene) industry than is the case inWestern Europe and Japan.

The two countries that will have the most imp~ct on future U.S.international competitiveness are Canada and Saudi ~rahia:

CanadaSummary

Canada and the United States have been major trading partnersin petrochemicals since the industry's inception. In 1985 theUnited States accounted for approximately 67 percent ofCanada's total chemical exports, and supplied about 78 percentof Canada's total chemical imports. Over the years, tradebetween the two countries has been broadly balanced with theUnited States enjoying a $850 million surplus in 1985, on totalU.S. chemical exports to Canada of $2.8 billion.

The trade balance is expected to move in Canada's favor duringthe rest of th~ decade, as Canada's traditional export marketsare penetrated by petrochemical products from new Middle Eastplants.

Background

Investment in large (world scale) facilities by the Canadianpetrochemical's industry dates back to the mid 1970'5. Severalof these ethylene and derivative plants are now operating and,

-65 -

IPreceding Page Blank J

with the relatively small domestic market, much of the plantoutput has been targeted into an expanding export market. Asan example, Canadian ethylene derivative exports to the UnitedStates were 60 times greater in 1985 than in 1975, compared toonly a 16 percent increase in comparable U.S. exports to Canadaover the same period. As a result, the U.S. net balance oftrade with Canada for these products fell from a healthysurplus in 1975, to a large deficit in 1985.

Table XXVII I

u. s. Trade with Canada in Ethylene Derivatives, 1975 and 1985(thousand metric tons of ethylene equivalent)

1975 1985Product ~ ~ Bal. ~ ~ Bal.

LDPE 30 30 209 41 (168)HDPE 1 16 15 11 35 24EG 12 12 88 50 (38)PVC (1) 18 18 40 12 (28)othe r 6 16 10 72 14 (58)Total -7 92 85 420 152 (268)

(1) included copolymer resins.

Canada's petrochemicals industry is driven by the country'slarge reserves of natural gas and the governments policy ofpricing the gas below world market levels. This feedstock costadvantage has been largely offset by higher construction costs,capital costs, and labor costs at the Alberta location;however, Canada's modern infrastructure and technologicalexpertise shows that the country has the resources to continueexpanding the industry.

Outlook.

Development of large new petrochemical ventures in the MiddleEast and Asia,with the accompanying increased competition inCanada's traditional world export markets, have caused Canadato scale back its petrochemicals investment timetable. Inspite of the investment slowdown, Canada will continue to havesignificant volumes of petrochemicals aimed at the export

-66 -

market during the balance of the decade. An additional point.which bears on the U.S. ability to absorb additional exportsfrom Canada, is the generally accepted fact that the UnitedStates will have to absorb some of Saudi Arabia's petrochemicalproduction during the balance of the decade. The amount to beabsorbed by the United States will depend on the extent towhich Saudi Arabia expands its production and domesticconsumption of these petrochemicals during the period understudy .. Additional petrochemical imports from Saudi Arabia aswell as from Canada would require extensive realignment of theU.S. petrochemical industry if a major price disruption is tobe avoided.

Saudi ArabiaSummary

Petrochemicals trade between the United States and Saudi Arabiahas historically been only one way, - from the United States toS~udi Arabia. In 1975, the United States shipped less than $4million of total chemicalprod~cts to Saudi Arabia. Thisvolume increased to $197 million in 1985.

With the commissioning of the two petrochemical complexes,Saudi Arabia ceased to import ethylene derivative products, andits traditional balance of trade deficit with the United Statesshould now stabilize and slowly reverse itself over time.

Saudi Arabia Petrochemical Ca acity000 Metric Tons Per Year

Plant/Location

AI-JubailSadaf

KemyaAr RaziIbn Sina

PetrokemyaSharQ

SMSD

YanbuYanpet

Partner

She 11 .

. ExxonJapaneseCelanese/Texas EasternNoneJapaneseConsort tumTaiwan Fert.

Mobil

Products

EthyleneEDCStyrene

. EthanolCaustic SodaLLDPEMethanolMethanol

EthyleneLLDPEE.G.Urea

EthyleneLLDPEHDPEE.G

Capacity

656454295281377270600650

500130300500

450200

91220

Source: Oil and Gas Journal. March 25, 1985

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Background

Saudi Arabia began developing its petrochemical industry in themid-1970's to utilize low cost ethane, from the flared naturalgas, as feedstock to produce ethylene {and ethylenederivatives) for export purposes. These plans resulted in theconstruction of two petrochemic~l complexes, at Al Jubail onthe east coast, and at Yanbu on the West Coast. Together thesetwo petrochemical complexes have the capacity to produce 1.6million metric tons of ethylene and a range of derivativesincluding LLDPE, HDPE, EO/EG, and EDC/VCM/PVC.

u.S. trade with Saudi Arabia in ethylene derivatives showed a$12 million surplus through 1984. In 1985, however a rapidincrease in imports from Saudi Arabia resulted in a U.S tradedeficit of $15 million.

LiKe Canada, Saudi Arabia's petrochemical industry is driven bythe country's large reserves of associated natural gas and theKingdom's policy of pricing the gas at near recovery ·cost(currently $0.50 per thousand cubic feet). Although thisfeedstocks cost advantage has been partially offest by higherconstruction costs, capital costs, utilities, and labor coststhan at a comparable U.S. Gulf Coast facility, the SaudiArabian plants have a production cost advantage over U.S.plants ~hen oil prices are high. Now that crude oil priceshave declined to less than half of the 1985 levels, U.S. plantsthat use heavy feedstocks have a.production cost advantage.

Outlook

The combination of ethylene plant closings in the United·States, Western Europe and Japan in the early 1980's, withincreasing ethylene demand as a result of lower oil prices, hasresulted in the almost total absorption of the 1.6 millionmetric tons of the Saudi Arabia ethylene capacity, without anymajor price disruption. There are no indications' that theUnited States markets will be inundated with large volumes oflow-priced ethylene derivatives from Saudi Arabia at presentdemand levels. The establishing of a U.S. sales office bySABIC, however, means that some product will be shipped to theUnited States in addition to that marketed by the joint venturepartners.

The future pattern of ethylene .derivatives international tradewill hinge on a number of unsettled factors.

-68 -

A. The relative strength of the U.S. dollar

Durini the early part of the 1980's the U.S. dollarstrengthened considerably against the currencies of our majortrading partners. This had the effect of encouraging imp6rtsof ethylene derivatives, while at the same time ~aking U.S.exports less competitive in.~orld export markets .. The neteffect on U.S. trade, was to cause the U.S. net balance oftrade in ethylene deiivatives to fall sharply from 1.7 millionmetric tons of ethylene equivalent in 1980 to 1.1 mitlionmetric tons in 1985.

Recently, the United States has instituted a series of policiesaim~d at moderating the strengihof the U.S. dollar. These.actionshave been generally taken'in cooperation with o.urmajortrading partners, the European Community and Japan, and havebeen designed to increase economic expansion and r.educe theattractiveness of imports into the United States andencouraging U.S. exports into overseas markets. While thedollar has demonstrated a sharp decline in its exchange ratesagainst the major WesiernEuropean currencies and also againstthe yen, it is too soon to measure the precise impact thatthese actions will have on the U.S. international tradeposition.

B. Competition from New Suppliers

As the following table shows, there is a large volume of newethylene derivatives capacity announced for the period1985-1990.

Table XXIX

New Ethylene Derivatives Ca acity Announced 1985-1990thousand metric tons ethylene equivalent

Capacities

EDC/VCM EB/StyreneRegion PE PVC EO/EG PS Other Total

Mexico 80 80Car & S. Amer. 220 45 10 5 280W. Europe 145 145Pacific Basin 500 170 210 120 150 1150Afr/Mid East 80 200 50 330

Total 1025 415 210 180 155 1985

Source: Oil and Gas Journal, September 1, 1986

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Even allowing that some is replacement capacity and .that someprojects will be postponed, cancelled, or 'stretched out',there will be nearly an additional 2.0 million metric tons ofethylene derivative (ethylene equivalent) capacity on stream bythe end of the decade or early 1990's. Of the total, more thanhalf will be new polyethylene capacity' and much of this willoccur in countries with low hydrocarbon costs, such as SaudiArabia and other Middle East countries. Thus, U.S. producerswill have to compete in the future at an apparent pricingdisadvantage in the export market. .

C. Growth of Ethylene Derivative Demand in the Third World

World growth in demand in developing countries will be criticalto future U.S. exports. As the following table shows, about 57percent of u.S. ethylene derivative exports went to third worldcountries in 1975 and 65 percent in 1985.

Table XXX

u.S. Exports of Ethylene and Ethylene Derivativesby Destination 1975 and 1985

(thousand metric tons of ethylene equivalent)

1975 1985Region Vol. % Vol. %

Canada 92 17.3 107 5.4Mexico 40 7.5 206 10.3S. Am. (1) 147 27.6 179 9.0w. Europe 132 24.7 392 19.7Japan 5 1.0 199 10.0Pacific Basin 104 19.7 689 34.4Ot her 18 2.2 223 11. 2Total 538 100.0 1995 100.0

(1) includes Caribbean

During the latter part of the 1970's, these developing nationswere experiencing "double-digit'· growth rates for many of theethylene derivatives. The second energy crisis followed by theworld recession, reduced these growth rates to the low singledigit levels, and there is only a low probability that thesehistorically high growth rates will recur in the near future.

Reasons for this projected low demand growth stems from thefinancial state of many developing nations. Many third worldcountries have become burdened with heavy external debt, and

-70 -

have instituted "austerity" programs, either voluntarily orunder pressure from the International Monetary Fund and otherlending institutions. These programs are generally aimed atbalancing trade, through reduced imports, and at reducinggovernment expenditures, - often resulting in slowed economicgrowth. The combination of these actions will reduce thedemand for ethylene derivatives, - especially from importedproducts.

In those countries less affected by "austerity" programs, (suchas in some Pacific Basin countries) demand growth will begreater than the industrialized world, but world demand is notexpected to approach the level of the late 1970's. Overall,these factors will serve to depress U.S. export opportunitiesin the future for most ethylene derivatives.

D. Political Considerations

Political actions are the most difficult to predict, and yet,often have the most potential impact on international trade.The rise in protectionism in recent years has reduced the freemovement of many chemicals across international boundaries, andmany nations are moving to protect domestic industries byreducing imports. Examples of recent actions include theintroduction of the Omnibus Trade Bill (HR 4800) before theU.S. Congress, the "triggering" of tariffs by the EuropeanCommunity against imports of ethylene derivatives from SaudiArabia, and the wide range of "non-tariff" barriers imposed bymany countries, designed to make it difficult, if notimpossible, for foreign producers to export goods into thatcountry. Looking to the future, while the issue of nontariffbarriers will certainly play an important role in the upcominground of Multilateral Trade Negotiations (MTN), it is unlikelythat a country's nontariff barriers will be changed oreliminated if by so doing, the domestic industry is pl~ced atan economic and market disadvantage.

E. Feedstock Pricing Options

The importance of feedstock costs depends on the product made,the process employed in its manufacture, and the "portability"of the raw materials. As an example, heavy feedstock costsaround the world are generally similar because oil and oilproducts are readily transportable. As a result, the salesprice of (e.g.) benzene, toluene and xylene do not varysignificantly from one country to another.

-71 -

Ethylene, however, can be manufactured from a variety offeedstocks, some of which, such as naphtha or gas-oil, arereadily transported, while others (such as ethane) are costlyand difficult to transport. Thus, while ethylene productioncosts from naphtha and gas-oil show little variability fromcountry to country, ethylene costs based on ethane can varywidely depending on the alternate uses for ethane in apartiCUlar locatio~.

Ethylene Plant Economics

The principal elements of manufacturing economics are rawmaterials, labor, energy and other operating costs, workingcapital, administrative, marketing, and other overhead costs,depreciation (cost recovery) on the capital invested, and a'profit' on the entire venture at least equal to the bestalternate investment of the capital invested. Whiie all ofthese elements are essential for the profitable operation of aplant, the realities of market place prices frequently dictatethat plant revenues might cover only "variable costs" (rawmaterials, labor, energy and other operating costs only) or"cash costs" (all manufacturing costs ex.cept depreciation, debtservice, and return on investment).

As r e c e nt 1Y as I 983 ,. t he Un i ted Stat e s , We s t ern Europe andJapan accounted for over 85 percent of world ethylene capacityand at least 90 percent of global trade in ethylene andethylene derivatives. As a result, the internationalcompetitiveness of the U.S. ethylene industry was readilymeasured by comparing costs of production between the UnitedStates and its two major competitors.

This 'situation changed in 1984 and 1985, when three world scaleethylene plants were commissioned in Saudi Arabia. Designedaround low-cost (associated) natural gas, the ethane-basedplants were designed to produce ethylene (in the form ofethylene derivatives) primarily for the export market. Whilethese new plants t~gether accounted for only about a 2-3percent addition to world ethylene capacity, they accounted fora 15-20 percent increase in the supply of ethylene equivalentsbeing traded across international borders.

The following table details 1985 and 1990 "variable costs" and"cash costs!' for selected ethylene plants in the major regionsof t he world.

-72 -

Table XXXI

Ethylene Plant Costs(1985 U.S. Dollars per ton)

Variable Cost

19851990

Total Cash Cost

19851990

USA

185134

312267

W. Europe

350261

362320

Hid East

5748

274223

Sourc~: Chem Systems International, London

The data presented are representative of worldscale ethyleneplants using a naphtha feedstock in the United States andWestern Europe, and using an ethane feedstock in the MiddleEast.

The 1985 data is based on crude oil prices in the range$195-205 per metric ton, While the 1990 data assumes a ~rude

oil price in the range $167-174 per metric ton (constant 1985dollars). While not calculated separatelY, industry estimatestotal cash costs for ethylene piants in the United States andWestern Europe in 1986 to be in the $220-260 per metric tonrange (based on $110 per metric .ton crude oil).

The decline in crude oil prices in 1986,. resulted in mostethylene plants operating profitably during the first quarterof 1986. However, decreasing product prices during the secondQuarter of 1986 caused ethylene producers to again revert tolower profitability. .

As expected, changes in crude oil prices have the greatesteffect on ethylene costs in the United States and WesternEurope. as lower. crude oil prices translate directly into lowernaphtha/gas-oil feedstock prices and thus lower ethylene costs.

While natural gas prices in the United States generally trackthe price of crude oil, Middle East natural gas costs pei tonof ethylene produced are not infltienced by changes in crude oilcosts. As a result, lower crude 6il prices improve theeconomics of U.S., Western Europe and Japanese plants, whileproduction costs in M.iddle East ethylene plants are unaffected.

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Looking to the future price of crude oil and its implicationsfor the chemical industry, there are two general scenarios:(1) crude oil prices will gradually increase, reaching 1985levels after 1990, or (2) crude oil prices will continue in the$15-18 per barrel range through the early 1990's.

If future world crude oil prices gradually revert to ~985

levels, so the production economics will again favor'MiddleEast ethane-based plants over the naphtha and gas-oil basedplants in the developed countries. If this happens, exports ofMiddle East ethylene derivatives will again have a competitiveedge in world markets. Even though the Middle East productioncost advantages are tempered by the addition of significantshipping charges to the derivatives prices, the landed cost ofethylene derivatives in the United States, Western Europe, andJapan from Middle East plants will be readily competitive withlocal production, (ignoring any tariff barriers to Middle Eastproducts). In addition, the United States is likely to importincreasing quantities of ethylene products from Canada, as someof Canada's traditional export markets are penetrated by lowcost ethylene derivatives from the Middle East. At the sametime, exports of ethylene derivatives are also expected toerode as our traditional export markets are similarlyaffected. Shipments of Middle East ethylene derivatives intothe United States could gradually increase as joint venturepartners, and SABIC marketing, activities, increase productshipments across the Atlantic.

On the other hand, the continuation of crude oil prices in the$15-18 per barrel range might help to spur additional economicgrowth, and ethylene derivative demand, in most oil-consumingnations. This increase in ethylene demand should mean thatworld capacity/demand in ethylene derivatives will likely to bein rough balance"by 1987-1988. This scenario of increasedeconomic growth, and a tighter supply/demand for ethylene,might be expected to create higher world derivative prices andincreased profitability for both naphtha/gas-oil andethane-based ethylene plants.

Overall, glohal "spheres of influence" are likely to changebetween the established exporters of ethylene derivatives fromdeveloped countries, and new producers in developing countriessuch as the Middle East. Whether the change will be an orderlyone will largely depend upon the marketing philosophy of thenew ~roducers; the future price of crude oil, world ethylenederivative demand, political <considerations, and the relativeeconomics of the world's ethylene plants~ Overall, the changeassumes that all 6il price increases are gradual and that worldethylene demand continues to increase. '

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The International ~1arketing of Ethylene

As detailed in previous chapters, ethylene is marketed almostexclusively in derivative form, with less than 5 percent ofworld ethylene demand marketed in monomer form. Most ethylenemonomer is traded between producers by pipeline, in 'swap'arrangements, while that portion of ethylene monomer which ismarketed in liquid form is sold under contract and shipped by'deep sea' cryogenic tanker.

The ethylene that is marketed in derivative form is generallymarketed on a 'commodity' basis. That is, most derivatives aresold on the basis of price with the 'market' price usuallybearing little relationship to the puhlished 'list' price.Product specifications are well established and little, if any,technical service to the customer by the producer is required,except in those areas where new grades or 'tailor-made'customer grades are manufactured for a large domesticconsumer. Internationally, 'commodity' marketing proceduresalso apply, with little, if any, attempt to supply 'specialty'or tailor-made grades. There is considerable movement ofproduct across international boundaries between parentcompanies and wholly-owned subsidiaries. In these instances,plants are usually 'designated' to produce a specific range ofproducts.

Most companies have their own international marketing,organizations and market directly to the consumer. 'Traders'or -'Brokers' are usually employed to sell product only when acountry's market size is too small to warrant a permanent, orsemi-permanent, marketing presence. Domestically, traders orbrokers are frequently used to sell product that is 'offspecifications', commanding prices below those charged forspecification product.

There are no indications that the pattern of marketing willchange significantly as Middle East producers enter themarket. Initially, Saudi Arabia marketed product throughtraders in Western Europe, however, as SABle's knowledge ofinternational marketing increases, it will i~creasingly turn toits own marketing organization.

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V. CONCLUSIONS AND OPTIONS

Summary, current and future U.S. competitiveness,

In 1980, worldwide expansion plans for new ethylene plantscalled for the addition of over 16 million tons of new capacity- a 30 percent increase over the existing capacity in place atthat time. As the western world plunged 'into an extendedrecession, most expansion plans were discarded or deferred, anda major rationalization of existing capacity took place. In1982, for the first time ~ince the first ethylene plant wasbuilt, world ,ethylene capacity fell by 500 thousand metric tons.

Although construction of some new facilities were completed,Western European capacity fell by over 1 million tons, theUnited States declined by about 800 thousand metric tons, andJapan reduced its capacity by nearly 350 tho~sand metri~ tonsper year. Reduction and rationalization of ethylene plantcapacity in these regions continued through 1984 and 1985 in amove, primarily, to accommodate the 1.6 million tons of newethylene capacity brought on stream at the Al-Jubail and Yanbupetrochemical complexes in Saudi Arabia. Most of the initialrationalization plans involved either the total shut down ofsma 11, une c on 0 mi c pia nt s, 0 r t he clos u r e (0 r I In 0t h ba IIi ng ,) 0 fsingle units at large integrated facilities. Although theseclosures effectively reduced ~he availability of theco-products of ethylene manufacture, it wasn't until closuresaccelerated in 1983 and later, were there any significantdeclines in co-product avaiiabili'ty

With world rationalization progra~s for ethylene plants nowessentially complete, future ethylene capacity is forecast toexpand only incrementally through 1990, as increasing worldethylene demand absorbs the existing Middle East capacity and atightening world supply/demand balance by 1987/1988 reQuiresselective de-bottlenecking. World eth~lene demand in developed(OECD) countries will generally grow in line with, or slightlyabove, economic growth in each country. In developingcountries (LDC's) ethylene demand will generally grow at a ratefaster than the prevailing economy, as synthetic productscontinue to replace naturally pccurring materials, and newend-use applications are created.

In the United States, derivatives demand will continue to beconcentrated in existing traditional end-uses with few if any,maj6r new applications. Inter, and intra, polymer competitionwill continue between ethylene-based polymers and other polymertypes, but this competition is not expected to significantlychange the overall ethylene projections. '

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L~eding Page Blank j

At the same timet the U.S. ethylene industry will continue tobe under heavy pressure from low-priced derivative imports tprimarily from those hydrocarbon rich countries with largereserves of natural gas for which there is no alternatevaluetsuch as Saudi Arabia t Canada and Mexico. The U.S.ethylene industry's ability to meet this import challenge willlargely hinge on the prevailing prices of crude oil and naturalgas at that time. Producers with large and efficientintegrated facilities will be in the most competitive position.

The future competitive position of the U.S. et.hylene industryiS t therefore t fairly clear. The exten~ive resources of lowcost natural gas available in many developing hydrocarbon-richcountries t will form the basis for much of the worlds newethylene capacity through t at least t 1990 and probably beyond.Construction of new ethylene plants (or reactivation andextensive modifications of existing 'mothballed' facilities) indeveloped (OECD) countries will be driven by the prevailingworld price of crude oil. With near term crude oil costs inthe $15-18 per barrel range t U.S. ethylene producers can expectto be competitive in international markets. Should oil pricesreturn soon to near historical high levels t U.S. ethyleneplants would revert to marginal economic operation. Underthis scenario t some small inefficient U.S. ethylene plantscould face shut down economics. The shut down of anysignificant portion of the U.S. ethylene industrYt however t isunlikely to occur.

Implications arising from the conclusions:

The possibility exists that some part of the U.S. ethyleneindustry could shut down as a result of increased imports oflow cost derivatives t high feedstock costs and further loss ofexport markets. A significant shut down could:

o Create a loss of capital. Although many of the plants arefully depreciated t some undepreciated capital would have tobe written off t thereby losing anticipated earnings on thatcapital. ;

a Cause additional jobs to be lost. Between 1980 and 1985 tthe total U.S. petrochemical industry lost about 50thousand jobs t - mostly from management and "white collar"positions t because of falling profits in a reducedcompetitive environment. Many of those positions were inthe ethylen~ and ethylene products industry.

o Create serious national security problems arising from theshut down of certain chemical operations such as plastics tand the incre~sed dependence on ethylene product imports tomeet U.S. military and essential civilian requirements.

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o Severely affect the U.S. trade deficit. It is estimatedthat, at a minimum, imports of ethylene-based productscould more than triple from the current $750 million peryear level.

o Have a major impact on the funding base for Superfund.Under current legislation, in addition to ethylene beingtaxed, any decline in ethylene production would have theaddltional effect of automatically reducing the productionof a wide range of ethylene coproducts which are alsosubject to a Superfund tax.

Overall, while the profitability of the U.S. ethylene industryis important, there is no mechanism that is acceptable to theU.S. producing industry for keeping feedstocks prices at ornear present levels. Restrictions on imports of ethylenederivatives, though attractive would be counter productive,since it would create a protectionist climate and inviteretaliation by our trading partners. On the other hand, anyevidence of feedstock subsidies by 'low cost' importers shouldbe cause for rapid investIgation and action.

In summary, the U.S. ethylene industry will face increasingcompetition in both the domestic and international marketsuntil late 1987 or 1988, when world ethylene supply/demand willbecome much tighter, product prices are expected to rise andindustry profitability will increase.

Policy Considerations

The following"policyactions could be considered in dealingwith low cost imports of ethylene derivatives. It isrecognized that not all of the proposals are economically orpolitically feasible.

A. Pursue and Speed Up the Deregulation of Natural Gas

Phased decontrol of U.S. natural gas wellhead prices has beenunderway since 1978. Approximately 50 percent of the gasflowing in U.S. pipelines was deregulated on January 1, 1985,however, little progress has been made since then with regardto the deregUlation of the remainder. Total deregulation ofnatural gas would give U.S. ethylene producers an extra marginof feedstock flexibility in the event world crude oil pricesreverted to 1985 levels.

B. Subsidize "Hothballed" U.S. Ethylene Capacity

There is a strong indication that U.S. (and World) ethylenecapacity/demand could tighten by as early as 1987/1988. There

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is, at present, approximately 1.1 million metric tons ofethylene capacity that is '~mothballed" awaiting more attractiveeconomics before re-commissioning. The recomissioning step isexpensive Cup to $25-35 million per plant) and can take up to9-18 months, depending on the length of time the plant has beenclosed. If there were available some financial incentives suchas tax credits to maintain current and future 'shutdown'capacity in an operating condition, the cost factor and timeelement for the recommissioning step could be sharply reduced.

C. Negotiate Tolling Arrangements with Mexico

Mexico's petrochemical development program~ have been largelypostponed because of the country's economic slowdown caused bylow oil prices. Its plans for major ethylene plants atHorelos, and Laguna del Osteon, have been postponed. ThusMexico must rely on its older, smaller, less efficient ethyleneplants for its ethylene needs.

In the near term only, and on a very selective basis wheresurplus capacity exists in the United States, it may bepossible to utilize this surplus capacity to produce ethylenefor Mexico using Mexico's low cost LPG. Toll conversion feescould be. negotiated through various well establishedarrangements.

D. Conduct a Targeting ~tudy

Section 625 of the Trade and Tariff Act of 1984 provides forthe U.S. to undertake such a study. The study would determineif the U.S. ethylene industry has been 'targeted' for exportsby foreign countries that have invested in 'export oriented'ethylene capacity. Countries that may f~ll into this categoryinclude Canada and Saudi Arabia.

Ethylene Feedstock Subsidies

Many countries with government - controlled ethylene productionprovide a subsidy fo~ tho§e petrole~m products intended for useas feedstock for ethylene production. The subsidy takes theform of 'adjusting' the refinery economics to place adisproportionate share of the refinery cost on the' fuelsproducts, to the behefit of the petrochemicals feedstocksproducts. .

The reason for the SUbsidy is to reduce the production cost andselling price of tbe ethylene and enhance the competitivenessof the derivatives and/or fabricated products in internationalmarkets.

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Such a practice obviously places U.S. ethylene producers at aeconomic disadvantage, both in the domestic and internationalmarkets. The petroleum feedstock cost advantages the U.S.industry had in the 1970's and early 1980's was removed withthe crude oil decontrol.

On balance, the U.'S. industry would not be in favor of thesubsidy proposal, however, the United States could ifnecessary, initiate a Section 301 study (Unfair Foreign TradePractices) as provided for in the Trade Act of 1974. TheSection 301 is'intended to eliminate "unjustifiable orunreasonable" foreign government practices which "burden orrestrict" U.S. Commerce, in domestic or foreign markets.

Other sections of the 1974 Trade Act which could be exp)oredinclude:

The Antidumping Duty Law (Section 321 of the Act)

The antidumping duty law is intended to provide relief fromcompetition from goods sold in the ,United States at less thanfair market value. Before relief can be provided, a findingthat the subject imports are causing injury to the U.S.industry is necessary. With this option no presidentialdiscretion is provided.

Countervailing Duty Laws (Section 331 of the Act)

The countervailing duty law is intended to provide relief fromunfair subsidization of goods exported to the United States.In CVD cases a finding that the sUbject imports are causinginjury to the U.S. industry is necessary before a remedy can beprovided. The remedy is imposition of a duty equal to theamount of the subsidy.

One of the difficulties in countervailing duty cases isQuantifying the amount of the subsidy, which often is somewhatintangible. If the country of origin is under the GATTAgreement, the petitioner will have to consider the likelihoodof proving material injury which historically has beendifficult.

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Bibliography

The following bibliography is a partial listing of the manyreferences consulted during the preparation of this report.

1. "The New Producers, can anyone compete with them?" ChernSystems International Ltd., London, England, CMRA/ECMRAmeeting San Antonio, Texas, March 11-14, 1985.

2. "For U.S. Ethylene Producers, great expectations", ­Chemical Week, December 11, 1985.

3. "Ethylene, a Case Study in Reality" - Chemical Business,December 1985.

4. "Development in Petrochemical Sector" - Resource SystemsInstitute, East-West Center, Honolulu, Hawaii (prepared forU.S. Department of Energy, OEA).

5. "Ethylene report" - Oil and Gas Journal, September issuesfor 1980 - 1986.

6. "Changing Eco'nomics of Petrochemical Production" ­Publication by C.E. Lummus, Combustion Engineering Inc.,Bloomfield N.J., October 1986.

7. "Synthetic Organic Chemicals" - Annual Report, 11.$.International Trade Commission, Washington, D.C. 1975-1985.

8. Modern Plastics, January issues 1976 and 1986.

9. "Ethylene report" Chemical Economics Handbook, SRIInternational, Menlo Park, CA., April 1984 plus updates.

10. "U.S. Chemical Industry Outlook." - paper by Dr. Paul Cook,Data Resources Inc., presented at the Energy BureauSymposium, 1983.

1,1. "Prospects for Olefins" - paper by A.B. Abshire and T.F.Killilea, presented at the Energy Bureau Symposium 1983

12. "Saudi Petrochemicals, Investing in Change" - paper byHisham Nazer, l1inister of Planning, Saudi Arabia, presentedto the CMA annual conference, October 1985.

13. "Impact of Saudi Petrochemicals capacity additions on wor'ldmarkets" - bulletin from Smith Barney, October 1985.

14. "Saudi Arabia's City of the Future l! - Hid-East Economic

Review, October 1985.

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15. "Ethylene Plants, - fortunes improving slowly" -ChemicalWeek, June 1985.

16. "Where the !Hddle ~1eetsthe Far East - Action" - FarEastern Ec~nomic Review, June 1985.

17. "Trade in the Chemicals Industry and GATT" - paper by SirJohn Harvey - Jones, Chairman of Imperial ChemicalIndustries and President of CEFIC, presented to the CMAannual conference, October 1985 ..

18. "Mid-East Petrochemicals build-up" - A comparison of theEEC, U.S. and Japanese GSP schemes, issued September 1984.

19. "Surplus Gas - is the bubble big enough?" - Chemical Week,September 1985

20. "Alberta, - call for flexible gas pricing" - EuropeanChemical News, August 1985.

21. "Tnird World Petrochemicals, Has much market clout?" ­Chemical Business, March 1985.

22. "Petrochemicals 1986, A painful, costly rethinking" ­Chemical Business, April 1986.

23. "For U.S. ethylene producers, great expectations" ­Chemical Week, December 1985.

24. "Further shakeout expected in Europe's Ethylene industry" ­Chemical and Engineering News, November 1985.

25. "Global shakeout in ethylene glycol" - Chemical andEngineering News, July 1985.

-26. "Arabs urged to coordinate petrochemicals production" ­European Chemical News, March 1986.

27. "Petrochemicals 1986" - Chemical l1arketing Reporter, April1986.

28. "West European Ethylene Industry" - Tecnon Seminar, 1982.

29. "Move Over:" - Forbes, April 1982.

30. "European Ethylene Producers Gamble on Rer:overy" - ChemicalBusiness, January 1982.

31. "Survey of Canadian Petrochemicals Industry" - Oilweek,June 1986.

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32. "Petrochemicals - Worldwide Construction" - Oil and GasJournal, April 1986.

33. "The Glycol Harket - snug yet roomy" - Chemical Week,Aug us t 1 985 .

34. "Falling Oil prices Cut Saudi Edge in Polyethylene"Modern Plastics International, March 1986.

tru,s, GOVERNMENT PRINTING OFFICE: 1987 - 181·076/60007

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