Canada Petrochemicals Report 2010

The Canadian petrochemicals industry is struggling with declining operating rates and the mothballing and closure of capacity due to high maintenance and feedstock costs as well as declining demand, increased competition on export markets and the strength of the Canadian dollar, according to our latest Canada Petrochemicals Report.

In 2009, Canada had olefins production capacities totalling 5.05mn tonnes per annum (tpa) ethylene, 1.1mn tpa propylene and 100,000tpa butadiene. Intermediate and aromatics capacities included 1.06mn tpa benzene, 665,000tpa ethylbenzene, 1.13mn tpa ethylene oxide, 1.52mn tpa ethylene glycol, 905,000tpa styrene and 350,000tpa paraxylene. Polymer capacities include 3.24mn tpa low density polyethylene, 230,000tpa high density polyethylene, 155,000tpa low density polyethylene and 260,000tpa polyvinyl chloride.

The Canadian petrochemical industry was not immune from the effects of the recession in North America in 2009. According to a year-end survey by the Canadian Chemical Producers Association (CCPA), sales of basic chemicals and resins plummeted 35% year-on-year (y-o-y) in value to US$16.6bn. The decline in demand was seen across the petrochemicals market, including the automotive and construction sectors. The industry experienced a 47% decline in sales from the domestic market, while exports were down 31% to US$12.7bn. Sales to the US market, which contributed 75% of the industry’s exports, fell 29%. Despite the fall in demand, a concurrent drop in the price of natural gas ensured that operating profits before interest, taxes and special write-offs were US$1.4bn, unchanged from 2008. This cost advantage resulted in many Canadian plants remaining open while others around the world closed.

Respondents to the CCPA’s survey, forecast a 2% increase in sales value for 2010, with volumes forecast to remain unchanged. Sales to customers in Canada are expected to increase by 22% in 2010, but CCPA’s forecasts rely on the very tepid recovery holding and gathering pace. We anticipate real GDP growth of 2.5% in 2010 with the Canadian economy rebounding stronger than the US. However, a weak US market will mean a slower recovery in exports compared to domestic sales, although this should be mitigated by a modest depreciation of the Canadian dollar against the US dollar. At the same time, an expected rise in gas prices will undermine operating profits, which we anticipate will decline by up to 40%.

Feedstock constraints call into question the viability of Keltic Petrochemicals’ planned complex in Goldboro, Nova Scotia. The complex, which was to come online in 2011, will include capacities of 1.5mn tpa ethylene, 200,000tpa propylene, 500,000tpa HDPE, 450,000tpa LDPE, 500,000tpa LLDPE and 200,000tpa polypropylene. With little progress on construction achieved by end-2009, on the basis that such world-scale complexes typically take 36 months to complete, we believe that it is unlikely to be completed before 2013. However, it is likely that the project will not go ahead. The project is based on a 10-year-old assumption of offshore gas reserves, which have subsequently been found to be smaller than previously estimated. Moreover, the price of gas from these sources is higher than competitors’ feedstock prices in the Middle East. While the project remains on the drawing board, we have built in Keltic capacities into our forecasts, but caution that the project may be scaled back or cancelled altogether.

Canada is in second place behind the US in our Petrochemical Business Environment Rankings for the Americas. With 81.0 points, Canada lies 8.5 points behind the US and 16.9 points ahead of Brazil. We expect the score to deteriorate over the forecast period, with Brazil’s drive towards increased capacity likely to see it catch up with Canada.