MEGlobal: A Positive Outlook

ChemicalWeek, October 19th, 2009

Ethylene glycol markets have been tumultuous through the first five years for MEGlobal, a 50:50 ethylene-glycol (EG) venture between Dow and Petrochemical Industries Company (PIC) of Kuwait. Recent moves at Dow have shuffled management at the company. Dow Chemical completed the sale of its Optimal joint venture in Malaysia to partner Petronas for $660 million late last month. Two weeks before, Henry Roth, president and CEO of MEGlobal, was named to the newly created post of president/Dow Middle East. He will maintain oversight of MEGlobal and will remain in Dubai where the venture is based. Dow is shuttering glycol capacity in Europe as vast new capacity from other producers comes on stream around the Middle East. With management shifts at the top and production shifts out from underneath, it might seem that prospects at MEGlobal are uncertain for the next five years. Quite to the contrary. Roth is sanguine despite the impending glut, and enthusiastic about the long-term prospects for the market and MEGlobal. And industry analysts tend to agree.

“When I started I was given a lot of advice about how to manage the business through a glut of overcapacity in ethylene glycol,” Roth tells CW. “As it turned out, the anticipated huge capacity additions did not come on stream as expected, and the glycol business worldwide flourished. We had dynamic growth our first five years.” Demand for fiber and for polyethylene terephthalate grew at 6% or better worldwide through the first five years, led by China where demand grew as much as 15%/year. “We had supply shortages and prices got up to $1,500/m.t.,” Roth says. Current prices are around $770 /m.t. in the U.S. “Business kept on strong until the fourth quarter of 2008. and then we were hit hard.”

MEGlobal’s marketing volumes are a bit of a moving target as the partners adjust capacity and divest or rationalize assets. Officially, the company says it distributes about 1 million m.t./year from its own production in Alberta into North America, South America, and Asia. A plant at Fort Saskatchewan, AB is rated at 400,000 m.t./year, and two plants in nearby Prentiss, AB have capacities of 320,000 m.t./year and 280,000 m.t./year, respectively. From its two parent companies, MEGlobal sells an additional 1 million m.t./year of production out of Kuwait into Europe, the Mideast, and Asia, and 700,000 m.t./year of production from Dow in North America and Europe. Output from Optimal was sold only into the Asian market.

PCI Group (Guildford, UK) calculates that MEGlobal has marketing responsibility for 3.8 million m.t./year of capacity this year, which will tick down to 3.6 million next year and 2.7 million in 2011.

Market watchers say that MEGlobal is charting an ambitious but prudent course, emphasizing its marketing capabilities and effectiveness, while keeping a base of low-cost production in house. “At heart MEGlobal is a marketer,” says Doug Rightler, director of ethylene oxide and glycol for PCI, based in Glenmoore, PA. “That means securing the lowest-cost supply.”

For the time being, Rightler says, the assets in Canada still fit the bill, but the need for rail transport to the port of Vancouver is an added expense and complication. He says that with Dow also rationalizing its glycol production, MEGlobal will always be adjusting captive capacity against supply agreements and demand.

“Dow is the number one pure EO producer in the world, and they know that their strength is in non-glycol derivatives used in Dow’s performance businesses,” Rightler says. “For Dow itself, EG is secondary to EO. But MEGlobal is in a very good cross-position as a producer and a marketer. They can go where ethylene is cheap and can knock heads with anyone. They are going to be making good money in EG for a long time.”

That long-term outlook accepts the near-term pain. “The operating rate in glycol is going to be the lowest next year that it has been in the 36 years that I have been covering the business,” Rightler says. “The smart companies like MEGlobal are not waiting to the last minute. They are dealing with a nasty situation on their own terms. At present there is still a good margin on EG versus ethylene. MEGlobal will be a long-term player.”

Roth is also undeterred by the near-term prospects. “We have not seen a collapse yet, but we could have another bad fourth quarter. There are some dark clouds. There is margin compression. ”

Volatile margins and increasing competitions were hardly his only concern this year. MEGlobal’s two parent companies had a falling out over an ambitious joint-venture called K-Dow into which MEGlobal would have been merged. The collapse of the K-Dow venture “had no direct impact on MEGlobal,” Roth states. “We were going to be part of the ethylene and derivatives operations. We fell into a bit of a gap.”

“Both partners in MEGlobal are very happy with the business and with each other,” Roth says. “They are now working to pull together an investment plan. I will feel better when I know where my next supply growth is coming from and how they are going to support that. It is our intent to grow. Neither parent has said that because K-Dow was off that they are not going to support our business. That could take any form. We have not ruled out taking a financial interest or equity in other producers.”

That outlook enables Roth to be philosophical about Petronas ending the formal agreement under which MEGlobal sells the glycol from the Optimal plant. “We are in negotiations with Petronas for continued supply, but they have their own agenda. I am sure we will always have some spot opportunities from there. And we are very actively exploring ideas with other producers. We would hate to lose our marketing base in southeast Asia. That would really take a little luster out of the crown.”

For the longer run, Roth is optimistic. “EG is an old product. Its applications are essential and valuable,” he asserts. “The key applications are at the strong end of the global economy, and I am confident that demand growth rates will recover to 6%.”.