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Chapter 1
Global Polyethylene Business Overview
1.1 Introduction
Over the past 80 years the organic material designated as polyethylene has evolved from a laboratory curiosity into a global polyethylene business with a global demand in 2010 of more than 68 million metric tons (150 billion pounds), accounting for the creation of a large number of worldwide jobs involving the manufacture, fabrication and distribution of polyethylene and end-use products. These products involve the transformation of the polymeric material into thousands of necessary applications that have improved the standard of living of people around the globe.
The purpose of this chapter is to summarize the status of the global polyethylene business as of 2012 and to briefly discuss some historical aspects of this business which demonstrate how the technology of this seemingly simple material has continually improved over the course of eight decades as the result of the efforts of thousands of scientists and engineers worldwide. Other chapters in this book will discuss the technical development of the polyethylene business in more detail.
1.2 The Business of Polyethylene
The manufacture of polyethylene is a capital-intensive, complex business involving three distinct business categories:
1. Utilization of hydrocarbon-based feedstock such as naphtha or ethane to manufacture ethylene.
2. Polymerization of ethylene into an intermediate polyethylene material designated as low-density polyethylene with a material density very broadly defined from about 0.89 g/cc to 0.93 g/cc, or high-density polyethylene also very broadly defined with a density from about 0.93 g/cc to 0.97 g/cc. Each of these two product types are manufactured over a wide range of molecular weights and range of molecular weight distributions from very narrow to very broad.
3. Fabrication of polyethylene into a commercial item. This is achieved by melting a specific grade of polyethylene, allowing the molten polyethylene to form the desired shape and then cooling the polyethylene to form the solid material into the desired shape. Because the polyethylene molecular structure is not changed during the fabrication process, commercial items based on polyethylene are easily recycled into new products
1.3 Cyclical Nature of the Polyethylene Business
Each of these three business segments are considered capital intensive businesses where the cost of equipment is relatively very large compared to the fixed cost of labor to operate each business. Therefore, annual revenue per employee is relatively large. For example, a polyethylene plant with an annual production of 1–2 billion pounds of polyethylene requires a few hundred employees so that annual revenue per employee is about 2–4 million US dollars.
For the polyethylene industry, companies involved in the production of ethylene and polyethylene usually target an average annual return on capital (ROC) of about 15%, which is usually based on the performance of a particular segment of this industry over a 5–10 year time period due to the cyclical nature of these businesses on a year-over-year basis. Over the course of the past 80 years, there have been years in which the profitability of these two separate businesses (ethylene and polyethylene) has been remarkably different. For example, there have been periods in which the manufacture of ethylene has experienced a very high (> 20%) ROC (usually due to a low feedstock cost and/or a high ethylene demand); while during this same period, the manufacture of polyethylene has performed relatively poorly (< 5%) due to a relatively high ethylene cost and/or overcapacity of available polyethylene in the marketplace. Consequently, the trend in the petrochemicals industry over the past several decades (since about 1980) has been for companies to integrate the manufacture of both ethylene and polyethylene into a single business and to build petrochemical facilities at the same location that provide both the manufacture of ethylene and polyethylene. This has been especially true in the Middle East where ethylene and polyethylene capacity is always located at the same facility because the infrastructure to transport ethylene across the region is not available. In the early 1980s both Mobil Oil Corporation and Exxon Corporation built large petrochemical facilities in Saudi Arabia in joint ventures with SABIC (Saudi Arabia Basic Industries Corporation). Mobil’s facility was located in Yanbu on the Red Sea, while Exxon’s facility was located on the Persian Sea near Jubail, Saudi Arabia. Therefore, companies in the polyethylene business are also involved in the manufacture of ethylene and the financial results of these two businesses are usually combined to provide a ROC for both businesses.
In addition, the ROC of the ethylene and polyethylene businesses has varied over a wide range depending on (1) the global location of the petrochemical complex (i.e., the Middle East vs North America or Europe) and (2) the variations in economic growth as measured by annual changes in gross domestic product (GDP). Consequently, there have been times in which the business environment was extremely difficult in some global regions and therefore the ROC for the integrated businesses has been very poor (ca. negative or low single-digit returns), while at the same time in another global region such as the Middle East, the business environment has been relatively better and ROC was high, i.e., in the range of 15–25% or even greater.
1.3.1 Global Feedstock Cost Variations
One aspect of the ethylene/polyethylene business that has been extremely important since the 1970s has been the enormous variation in feedstock costs around the world. In the early years of the polyethylene business, from about 1940–1970, feedstock costs did not vary a great deal around the world due to low-cost crude oil in which crude oil demand did not exceed crude oil supply. This situation changed dramatically in the 1970s with the creation of OPEC due to the continued growth in the demand for crude oil in the developed regions such as North America and Europe that could not be matched with continued increase in the supply of crude oil in these developed regions. For example, crude oil production in the United States peaked in 1970 at about 11 million barrels per day, while crude oil demand in the United States continued to grow beyond this production limit. This regional demand/supply imbalance led to the creation of the crude-oil cartel—Organization of Petroleum Exporting Countries (OPEC)—and the increase in crude-oil price by a factor of about 10 (i.e., crude oil cost increased from about $3/barrel to over $30/barrel). Hence, feedstock costs needed to produce ethylene became the dominant business concern for the manufacture of polyethylene.
Since about 1970 through 2010, the low-cost feedstock advantage found in the Middle East resulted in the investment of enormous amounts of capital in the Middle East for the construction of ethylene/polyethylene petrochemical complexes in this region for export to other regions. The high levels of return on capital resulting from the very low ethylene manufacturing costs for the manufacture of polyethylene in the Middle East could not be matched anywhere else in the world.
1.3.2 Change in Middle East Feedstock Cost Advantage
Since about 2010, the feedstock cost advantage in the Middle East has begun to erode. The two primary reasons for this change in feedstock cost advantage are: (1) the shortage of ethane in Saudi Arabia and (2) the discovery of enormous amounts of natural gas and crude oil in North America, which has been designated as the “shale gas revolution.”
A report by John Richardson in 2010 titled “Saudi Feedstock Problems Worsen,” [1] discussed the complex issues that have at the very least led to a shortage of ethane availability in Saudi Arabia. This ethane shortage was due to several factors such as: (a) lower crude oil production, (b) lower levels of ethane (dry crude) in the crude oil produced, and (c) the relatively high cost of replacing the ethane-based crude oil with ethane-based natural gas production. In addition, as Richardson noted, these ethane production problems in Saudi Arabia also coincide with the shale gas revolution in North America. This ethane shortage in Saudi Arabia has led to an ethylene cost of $150/ton and could rise to $300–350/ton on limited supply of ethane. On the other hand, due to the increase in ethane availability in North America, ethylene costs have been reduced from $700/ton in about 2008 to $400–450/ton in 2012, which eliminates most of the feedstock cost advantage in Saudi Arabia. This would have been viewed as almost impossible only a decade-ago.
Therefore, since this recent development of new sources of natural gas and oil in North America, the significant reduction or elimination in the fee...
