Heavy Demand, Full Capacity Leading To Fundamental Changes
Crude oil is not the only culprit as raw material costs continue
to rise. Distillate and commodity chemical costs are rocketing to new
highs. Distillates include solvents, heating oil, gasoline, and other
fuels. Commodity chemicals include resins, polymers, and synthetic
rubbers. Merrill Lynch chemical analyst Donald Carson writes, “The
upcoming peak is likely to be longer in duration, with supply likely
to be fundamentally tighter than previous peaks. Production operating
rates are currently just below the 92% threshold historically marking
a sold-out market, and are likely to be in the 94-95% range in
2006-2007.”
Demand
for commodity chemicals and distillates are strong in the U.S. and
globally due to increased industrial production – especially in China.
Supply limitations are also influencing price hikes. Since 1980 the
number of U.S. refineries has dropped over 50%, to 150 refineries
currently operating today.
Reduced
domestic refining capacity, increased industrial growth in Asia, and the
consolidation of the commodity chemical business is driving U.S. chemical
manufacturers to seek optimum utilizations of assets.
Outages in processing facilities are significant. Unscheduled downtime is
caused by plants being run at levels of sold-out capacity to meet strong
demand, following years of limited investment. Manufacturers are idling
unprofitable plants or limiting production of low margin products, causing
allocation of some raw material feedstocks, distillates and commodity
chemicals.
As a result, supply and demand is out of balance. Given current
projections, the situation is not expected to improve any earlier than
mid-2005. |