Peter H Spitz

Chemical Advisory Partners

A combination of factors is bringing about a major change in world patterns of chemical trade, with negative consequences for the traditional chemical producers, who are facing stiff competition from newer producers in the Middle East and Asia. This comes at a time when there is a growing world sentiment to advance Sustainable Development (SD) issues. While some advances towards SD will, in fact, help traditional producers become somewhat more competitive, their drive to achieve the lowest possible manufacturing costs in general runs counter to an SD-favorable move to renewable materials as feedstocks, even if technologies for such processes become available. Historically, the often multistage fermentation-type technologies employed to make chemicals from biomass are substantially more expensive than processes using hydrocarbon feedstocks.

Chemical producers in the United States and, to a greater or lesser extent, in the other OECD countries are facing a rapidly changing dynamic with respect to their traditional favorable balance of trade with Asia, as will be explained in more detail below. This situation will in some respects make it less attractive for these producers to implement certain aspects of sustainable development, although other aspects will continue to make economic sense. The fast rising production of petrochemicals from inexpensive natural gas in the Middle East and elsewhere can be considered as favorable to SD in one respect in that natural gas is considered a more plentiful worldwide resource than crude oil, the currently more widely used petrochemical feedstock. Conversion of so-called "stranded gas" in remote locations is another case where natural gas is replacing crude oil in the manufacture of products such as diesel fuel and kerosene, among others. On the other hand, while some firms in the United States and elsewhere are working on technologies to produce chemicals from renewable, natural (i.e., biomass) feedstocks in an effort to reduce the use of (scarcer) hydrocarbon feedstocks, their efforts, even if successful, will be more than counterbalanced by the increasing amount of petrochemicals (still) made from cheap natural gas in the Middle East and parts of Asia, which will satisfy much of the normal global growth expected for these materials. (Figure 3.2).

Regional % Share of Incremental Capacity Gains of Top 97 Petrochemicals, 1975-2010

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1974/1980 1980/1990 1990/2000 2000/2010

□ North America ■ Latin America □ Western Europe

■ Central & Eastern Europe □ Africa & Middle East ■ Asia-Pacific

1974/1980 1980/1990 1990/2000 2000/2010

□ North America ■ Latin America □ Western Europe

■ Central & Eastern Europe □ Africa & Middle East ■ Asia-Pacific

Source: SRI Consulting

Figure 3.2. The growing importance of Asia and Latin America in petrochemicals. (Source: Kevin Swift, American Chemistry Council, presentation to CDMA meeting 28 April 2003.)

This section chapter will mainly concentrate only on the effect of changes in manufacturing economics with the attainment of progress (or lack thereof) toward sustainable development.

The unfavorable balance of trade in chemicals, notably as experienced in the United States (Figure 3.3) has come about not only because certain commodity petrochemicals produced there are now less competitive globally as a result of higher natural gas costs, but also because such Asian countries as China and India have now become substantial, reliable exporters of specialty chemicals and pharma intermediates. The latter development probably does not have important SD consequences, but is a sobering fact for North American, European, and Japanese chemical firms. The more serious problem for U.S. Gulf Coast producers is the fact that exports of certain natural gas derivatives are now in serious jeopardy due to their relatively high manufacturing cost and can no longer be used to keep plants at high operating rates, as was the case in the past. U.S. companies have historically exported large amounts of ethylene derivatives to Asia and elsewhere. These exports have now declined substantially and, in fact, there are growing imports of these materials, both as chemicals and polymers as well as in the form of fabricated products (e.g., plastic shopping and garbage bags). Ethylene production costs in the Middle East are far lower than those in other important producing areas, and this advantage is transformed into low-cost polyethylene (Figure 3.4). Comparing Asian versus U.S. prices for polyethylene resin shows a typical 10-15 cents per pound disadvantage for U.S. producers for certain commodity grades (Copley et al., 2002).

There is almost no production of ammonia and methanol in the United States any more, with such countries as Trinidad, Chile, and Saudi Arabia having become key suppliers. With natural gas expected, in the future, to stay in the range of $4-5 per million BTU versus 50-75 cents per million BTU in countries with plentiful gas and less internal use, ammonia and methanol will largely be produced abroad, having become global commodities with substantial quantities imported into the United

C^l Trade Balance (right axis) — Exports (left axis) — Imports (left axis)

Figure 3.3. U.S. balance of trade in chemicals (1989-2004). (Source: Kevin Swift, American Chemistry Council, presentation to CDMA meeting 28 April 2003.)

C^l Trade Balance (right axis) — Exports (left axis) — Imports (left axis)

Figure 3.3. U.S. balance of trade in chemicals (1989-2004). (Source: Kevin Swift, American Chemistry Council, presentation to CDMA meeting 28 April 2003.)

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USGC Europe Mid East S Korea

Figure 3.4. The Middle East has a major comparative advantage in the production of ethylene and polyethylene. (Source: Philpot, 2003.)

States. Canada, which for a long time enjoyed very low natural gas prices, is now such a large gas supplier to U.S. utilities, industrial users, and residential/commercial users, that Canadian gas prices now are not much lower than those below the border. Thus, Canada is no longer competitive with the above countries as a producer of ammonia and methanol.

The situation is different with respect to chemicals made from propylene and from benzene-toluene-xylene (BTX) aromatics. The crackers making ethylene in the Middle East and Asia from natural gas liquids produce much less propylene than ethylene, with additional propylene to some extent made via a relatively costly process involving dehydrogenation of propane. These two facts make propy-lene relatively less plentiful and more expensive in Asia, a favorable situation for U.S. Gulf Coast producers of propylene derivatives. The BTX derivatives are largely based on crude oil-derived naphtha, which is subject to global pricing. Thus, U.S. and European producers of styrene and other such aromatics derivatives are on a more level worldwide playing field.

Steps that U.S. and other OECD producers can take to deal with the competitiveness issue related to natural gas pricing are not strongly relevant to SD, although improving energy efficiency and closing uncompetitive, smaller plants are steps in the right direction. Clearly, improving the energy efficiency of plants that are based on now more costly natural gas becomes even more important in terms of reducing production costs, while at the same time implementing an important principle of SD. And certain uncompetitive plants subject to closure often have lower energy efficiencies, meaning a more wasteful use of raw materials and energy sources than more modern plants.

Improving plantwide energy efficiency can take many forms. As an example, BASF's Verbund structure has resulted in schemes to link units that produce energy (e.g., in the form of byproduct high-pressure steam) with units that consume steam, resulting in maximum energy efficiency (Spitz, 2003).

The chemical industry is a very large consumer of energy and much is needed to be done to reduce consumption (see Section 3.6 for additional energy reduction statistics). The largest consumers of energy in the chemical industry are represented by six "chemical chains," namely agricultural fertilizers, ethylene, benzene/toluene/ xylene, chlor-alkali, propylene, and butadiene. Together, they consume 1646 trillion

BTU per year, representing 54.3 percent of total energy use by the process industry (Johnson, 2000). The US DOE Office of Industrial Technologies (OIT) has given 50-50 matching grants totalling $170 million per year to companies that conduct pilot projects to reduce energy consumption. A report "Energy & Environmental Profile" of the U.S. chemical industry was produced by OIT to guide decision-makers as to which pilot projects should be funded.

The use of coal as a petrochemical feedstock needs to be examined in the context of a world where producers consider steps toward SD. The advantage of using coal resides in the fact that these resources are vast and less subject to depletion in the long run than hydrocarbons (i.e., crude oil and natural gas). Two problems, however, arise. First, while researchers have developed technologies to make "petrochemicals" from coal, the economics are relatively unfavorable, except where coal is extremely cheap and subsidies are available (mainly South Africa). Crude oil prices need to rise to $50-75 per barrel before coal-based ethylene derivatives, for example, make economic sense. Sustained prices in the $50-75/barrel range and predictions of continuing supply-demand pressures yielding such high prices will be required for firms to consider such plants. Another problem is that coal liquefaction or gasification, both proposed for chemicals production, tends to be more highly polluting than processes based on hydrocarbons and give rise to high amounts of greenhouse gases, contributing to global warming. Many countries are committed to reducing emission of greenhouse gases. For these two reasons, it is doubtful that coal-based processes will be adopted for some time to come. China, which has very large coal reserves and very few hydrocarbons, is slated to become the second largest global consumer of crude oil for its vast industrialization program.

It is important to reflect that a number of chemicals now produced from hydrocarbon feedstocks were, in fact, at one time made from methanol and ethanol derived from such feedstocks as corn and other grains, as well as wood. Others were derived from coal liquids, as a byproduct of coke ovens employed for iron and steel production. Coal was also used to make acetylene using a high voltage arc. The advent of "petrochemicals," that is, chemicals made from hydrocarbons, rapidly phased out these earlier production methods, which were less efficient, less economical, or both. This has left fermentation technology as essentially the only commercial route to a few commercially produced chemicals, with citric acid, high fructose corn syrup, and corn-based ethanol as the main examples of natural materials-derived chemicals. But this situation will start to change to some extent as chemical firms develop new technologies to expand the use of natural materials. A notable example is the joint venture between Dow Chemical and Cargill to make a biopolymer based on corn-based starch converted to polylactic acid. A $300 million plant was announced for this venture (Westervelt, 2000). The product, expected to cost around 50 cents per pound, will seek markets in packaging and fiber applications. Cargill is also a large producer of soy-based polyols for producing polyurethane foams (McCoy, 2003).

Dupont has also been active in developing chemical intermediates based on natural materials. The most prominent example is glucose-derived 1,3-propanediol, a raw material for polymethylene terephthalate, a polyester with promising applications as a carpet fiber material, which is under development by Shell Chemical (Spitz, 2003: 79). Dupont's sustainable development goals for 2010 include holding energy use to 1990 levels, sourcing ten percent of its energy from renewable sources and generating 25 percent of total revenues from nondepletable sources (Holliday, 2001).

A number of other companies, including Dow, BP, and Shell have taken steps in promoting SD initiatives within their firms. This has included developing business cases for the integration of SD into business strategy (Challener, 2001). See Section 8 for the business case presented by several chemical companies.

The use of "greener" syntheses has also received considerable attention. A good example of this is the work to eliminate the use of organic solvents as used in current reactions. Examples of potential replacement solvents under study include supercritical carbon dioxide and so-called ionic liquids (nitrogen- or phosphorus-containing cations coupled with inorganic anions). Processes that might be so transformed include those for terephthalic acid, adipic acid, and others (Ritter, 2001). Elimination or reduction of use of solvents is an important goal in SD. 3M claims to have saved $827 million in finding friendlier alternatives to solvents (Thomas, 2001).

Another issue relative to use (or reuse) of natural materials is the question of whether some natural or, more broadly speaking, traditional material applications, now replaced by plastics, will again make their appearance as the price of hydrocarbon-derived polymers rises. Paper, cardboard, wood, glass, metal, and natural rubber continue to compete with plastics in some applications and their importance could again grow. Even at this time, paper cups compete with foamed polystyrene, paper bags with polyethylene shopping bags, and so on. It is not difficult to visualize the resurgence of traditional materials as crude oil and natural gas prices keep escalating. This would be a real win for SD, although some studies have shown that petrochemical polymer production is more energy-efficient than that used for natural materials (Spitz, 2003: 17). In some cases, hybrid (i.e., part natural/part synthetic polymer) applications may develop.

In summary:

• Chemical producers are facing a major change in the patterns of trade, globally.

• Chemical producers in the United States and other OECD countries are facing stiffer competition from newer producers in the Middle East and Asia.

• The imbalance of trade in chemicals has come about not only because certain commodity petrochemicals produced in the United States are now less competitive globally, as a result of higher natural gas costs, but also because such Asian countries as China and India have now become substantial, reliable exporters of specialty chemicals and pharma intermediates.

• Steps that companies can take to remain competitive include improving energy efficiency and exploring new technologies and alternative feedstocks.

• As crude oil and natural gas prices continue to escalate, it is not difficult to visualize the resurgence in use of more traditional materials.

• While some companies are taking steps in this direction, as shown by the few examples in this brief analysis, the move from hydrocarbon to renewable feedstocks is a long way off.

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