BusinessReport.com

With global demand for chemicals falling faster than it has in 20 years, 2009 is going to be a challenging year for the petrochemical industry.

Just how challenging depends on the answer to the one question everyone is asking: How long will the recession last? Forecasts vary from a short and shallow recession peaking in early 2009 to recessionary conditions lingering through the entire year into early 2010. The industry already is contending with major downturns from the financial crisis, including exports hurt by a slowly strengthening dollar.

Dan Borné, president of the Louisiana Chemical Association, says he doesn’t have figures yet, but growing inventories are likely with declines in housing and automotives, the industry’s key domestic markets. At least two area companies have reduced production, but Borné declined to name them.

So far, billions of dollars in plant expansions planned or under way in the Capital Region—among them Shintech’s $1.9 billion project, ExxonMobil’s $554 million project and Placid Refinery’s $300 million project—are still on track.

That could change, however, with a lingering recession. David Dismukes, associate director of LSU’s Center for Energy Studies, anticipates a sustained downturn for most of 2009 with at least three quarters of market contraction.

“I’m not convinced Louisiana will come out of this unscathed,” Dismukes says. “Depending on how deep and long the recession is, and the impact of imports, we could see layoffs like in 2001. We lost a lot of manufacturing jobs during that period, and that was a mild recession. I don’t think our economy is insulated from this recession at all.”

In 2001-02, the state entered its second recession in three decades, losing 22,100 jobs. Louisiana was initially buffered by having fewer durable goods industries [typically first hit in a recession] and sustained activity in oil and gas, but its worst recession year came in 2002.

The market isn’t as bad as Dismukes has seen it in the past, but the recession’s underlying theme of the financial crisis and its implications make for a difficult forecast. But both Borné and Dismukes agree the length of the recession will play a critical role in the industry’s direction.

“The industry globally has been able to pass along increased energy costs to a hungry market, especially in the developing world, but that can’t happen in a global market contraction,” Dismukes says. “The No. 1 hit is overall contraction in domestic and global growth, and it’s falling at a faster rate than a lot of their costs.”

Some companies have responded by moving or expanding operations to areas like the Middle East and Asia for cheaper materials and to be closer to faster growing markets. Costs [wages, capital and fuel] are a critical issue as global competition intensifies. For example, Borné says natural gas in the U.S. is around $6.50 per thousand cubic feet, but it’s $1.50 per thousand cubic feet in the Middle East.

Calling it “a massive footprint shift,” Dow Chemical CEO Andrew Liveris announced the company is likely to restructure operations worldwide to deal with steep market declines and the global recession.

At the same time, Michigan-based Dow, the nation’s largest chemical maker, is building new plants with state-owned companies in China, Saudi Arabia, Libya, Kuwait, Malaysia and Oman to access cheaper raw materials and high-growth markets. By the end of the year, Dow expects to complete the sale of a 50% stake in its basic plastics business to Kuwait’s Petrochemical Industry Co. for $9.5 billion.

In 2009, Liveris says plans are to cut spending, pull back expansions and possibly accelerate closing older and more costly facilities. Dow will close older facilities in Europe and the U.S., where costs are higher. How the restructuring might affect the company’s Louisiana facilities in Grand Bayou, Greensburg, Hahnville, Plaquemine and Sterlington has not been announced.

Liveris says the market is “as bad as we have ever seen it in our lifetimes,” and he’s never seen so many regions decline simultaneously in the world. “We could be looking at a couple years of tough and severe correction.”

Dismukes says that could pose serious problems for Louisiana petrochemical companies.

“With slower global demand, production will fall off,” he says. “And if that occurs, that raises a big competitive flag for the industry up and down the river here.”