A robust U.S. economy should keep ethylene in short supply for the next two years as U.S. petrochemical plants, now running at full capacity, struggle to satisfy rising demand, industry analysts say.
"The plants are running so hard that they're breaking," said Leslie Ravitz, an analyst with Salomon Brothers Inc. "The industry is sold out (of ethylene)."The U.S. price of ethylene has more than doubled this year to about 30 cents a pound.
Ethylene, a chemical derived from petroleum liquids and gases, is used to make a wide range of consumer products including automobile antifreeze, garbage bags and toothbrush handles.
During periods of U.S. economic growth, as in the past six years, demand for products made with plastic or derivatives tends to increase.
"It's the most important chemical in the industry because it's the largest chemical building block," said Andrew Cash, a petrochemical analyst with Oppenheimer and Co. "Right now the squeeze (in supplies) is on."
Ethylene demand is now twice what it was ten years ago, said Jerry Lockett, director of strategic planning at Union Carbide Corp. It has been rising by around 3 percent annually, or roughly in step with the U.S. economy's recent growth, petrochemical analysts say. The increase represents an additional 1.5 billion pounds per year.
To meet the rapidly-rising demand, U.S. companies will spend about $4 billion to add about 11 billion pounds per year of additional capacity by 1992, Cash said.
However, a new survey by Houston consulting firm Bonner and Moore cautioned the industry not to repeat the mistake it made in the 1970s when U.S. plant capacity outstripped demand.
An economic recession during the next three years could depress prices, dropping demand by as much as 10 percent, and U.S. companies could again have excess capacity on their hands by 1993, the consultants found.
"The industry could overdo it again, but we're bullish on the industry in the short run. The question marks start coming in the 1990s," said Bill Urquhart, manager of chemical planning for Bonner and Moore.
In the late 1970s, the U.S. petrochemical industry found itself overbuilt when a recession and rapidly-rising crude oil prices slowed demand. Later, when demand increased, the industry was reluctant to increase its plant capacity to produce more ethylene, said Jack Howe, vice president for chemicals at Phillips Petroleum Co.
Excess supplies were gradually used up, however, and world ethylene plants are now running at about 95 percent of capacity, up from 73 percent in 1980.
Aggravating the tight supply situation this year were problems at key U.S. plants that temporarily reduced output. A May explosion at Royal Dutch/Shell Group's Norco, La., refinery forced the plant to service only 40 percent of its customers' normal purchases.
Texaco Inc. experienced similar problems at its Port Arthur, Texas, refinery in June. The problems at both the Texaco and Shell plants have since been resolved.
Global ethylene production capacity is currently about 120.4 billion pounds per year, or about 13 billion pounds short of what is considered a balance between supply and demand, Cash said.
Several U.S. companies are planning to expand capacity to meet the demand. Dow Chemical Inc. is designing a new ethylene plant in Freeport, Texas, to produce 1.5 billion pounds a year. Phillips said it will expand its ethylene production capacity by 1.5 billion pounds a year with a $300 million expansion project.
Union Carbide will restart an ethylene plant at Taft, La., that was shut down in 1979, adding some 450 million pounds of capacity per year.