U.K. Government Backs Huntsman's Trend-Bucking 400,000 Ton Plant with $30 Million Grant as Polys Market at Price Crossroads

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Researched by Industrialinfo.com (Industrial Information Resources, Incorporated; Houston, Texas). The early September announcement by Huntsman (Salt Lake City, Utah) that it is investing over $360 million to build the world's largest low density polyethylene (LDPE) plant at Teeside in the northeast UK seems to catch many industry watchers by surprise.

European industry has seen downsizing. Plant closures, as well as sector leaders, BP (LSE:BP) (London, UK) and Shell (LSE:SHL) (London, UK) both indicated that they were going to cut loose major sections of their bulk chemicals operations in the present environment of low profits.

The capacity of the new 400,000-ton-per-year Huntsman plant represents 80% of the current UK production capacity of LDPE and will reduce the UK's need to import LDPE. It will also make a major impact on the European market, which is estimated at about five million tons per annum. Injection of this new capacity into the market is seen as a potential trigger for a price war among European producers. The plant will reverse the UK's current trade deficit in the material.

In June, consultant Nexant ChemSystems, reported that the LDPE sector in Europe was under performing, but the linear low density polyethylene (LLDPE) sector continued to grow. In 2003, western European consumption of LDPE fell by 2.2%, but LLDPE rose by 4.6%, with some 'modest' substitution from LDPE to LLDPE taking place. In 2003, the region imported about 320,000 tons of LLDPE, mostly from the Middle East. The consultancy predicted a five-year growth for LLDPE of 7%, and for LDPE of 1%.

The new plant meets the challenge posed to the established Huntsman ethylene cracker plant at Wilton, which supplied the BP plant. The new project will be four times the size of the BP plant and will create 117 new jobs. It will also help to underpin the future of the cracker employees and sustain a further 747 Huntsman and contractor jobs at the company’s aromatics business at North Tees and Wilton. Subject to the signing of a technology license agreement, construction is expected to start in 2005, with commercial operation beginning in the third quarter of 2007. Product from the plant will be used primarily in packaging applications.

A key catalyst in Huntsman's decision to go ahead with the project was a $30 million UK government grant made under the Regional Service Assistance scheme through the department of Trade and Industry.

Huntsman President and Chief Executive Officer, Peter R Huntsman, said, "Teeside is one of the most important of our global locations, and we are delighted that we will now enhance our presence here with this large, world clad polyethylene facility." He went on to thank UK Secretary of State for Trade and Industry, Patricia Hewitt, and local and regional leaders for their efforts to bring the project to fruition. Teeside is a long-established major center of the chemical industry and this new project is seen as a re-confirmation of its regeneration.

In mid-August, Sabic's (Saudi Industry) business director, Huub Meessen, said that polyethylene prices were poised to break the psychological Euro 1,000 ($1,220)-per-ton barrier. "Due to structurally higher oil prices, the new upper barrier will be closer to E1200/ton ($1460). Saying that European buyers face growing competition from Asian consumers, Meesen said, "The Asian market is particularly strong, and even for a European producer, prices for deliveries to Asia are substantially more attractive than the current European level." He warned that, with current oil prices, PE was at the bottom of the cycle, and more increases could come to bring margins back to an acceptable level, reported Plastics and Rubber Weekly.

This price pressure and demand pull-away from Europe could see Huntsman's timing for the new UK plant justified. The company has history of making big moves ahead of market concensus thinking.

Remarks by Peter Davis, Director General of the British Plastics Federation, made within days of the Huntsman announcement, could also point to the contrary/positive nature of Huntsman’s strategy (which includes government support). "Anecdotal evidence from BPF members shows no great recovery in our plastics industry, which supplies all parts of the UK economy. There is, however, greater optimism about the future. But this can easily disappear with escalating raw material costs, higher energy costs (with increases of 40%), increasing interest rates, and higher insurance and pension costs," said Davis. He called for government regulators to investigate the 'unacceptable' increase in energy prices for industry.

Huntsman Group companies constitute the world's largest privately-held chemical company, with 15,000 employees in 30 countries and annual revenues of $9.5 billion.

(Applications: LLDPE - Linear Low Density Polyethylene - films, pipes, rotational moldings, wire and cable installations. LDPE - Low Density Polyethylene - bags, films and sheets, housewares, pipes and conduits, rotational moldings, toys, wire and cable insulations)