Exxon's Chemicals Business Thrives

June 1, 2011
Demand for plastics in Asia drives record earnings.

Exxon Mobil Corp. is more than an oil company. That may come as a surprise to the general public who typically associate the Irving, Texas-based giant's earnings with gas prices.

While fuel prices undoubtedly play a major role in Exxon's profits, the company's chemicals business is playing an increasing part in its growth strategy and financial performance. Exxon is building off of increasing global demand for plastics as a product substitute and for use in high-performance packaging films, says Neil Chapman, a senior vice president in Exxon's chemicals business.

When Exxon announced its first-quarter results, the company partly attributed its strong performance to high chemicals margins. The company reported record chemical earnings of $1.52 billion.

On average global demand for plastics has risen to 2% above the gross domestic product, Chapman says. The greatest growth is occurring in Asia where Exxon has embarked on several expansion projects. The company expects to complete a petrochemical plant expansion project in Singapore this year, which will double the size of the plant and be the company's largest integrated chemical and refining complex.

Much of the growth in Asia is being driven by China's emerging middle class, Chapman says.

"In China people will buy packaged products more as their wealth per head increases," Chapman says. "The standard of living in China continues to grow at a very fast rate."

China has a middle class of approximately 180 million people, and that figure is expected to grow to more than 400 million in the next 10 years, Chapman says. China will represent more than one-third of global petrochemical demand growth through 2020, said David Rosenthal, Exxon's vice president of investor relations, during an April 28 earnings call with investors.

The type of chemicals-based products Exxon is focusing on in Asia includes packaging films used to package food and nonwoven materials for consumer products such as diapers.

The newly expanded Singapore facility will produce what Chapman describes as "new differentiated" plastic and elastomer products. For instance, in the polyethylene business the company is utilizing a catalyst called metallocene to produce a plastic that is stronger, clearer and thinner, Chapman says.

The Singapore plant is fully integrated with Exxon's refinery on Jurong Island. The unique arrangement provides Exxon with an advantage over competitors says, Philip Weiss, a senior energy analyst with Argus Research Group.

"Because of its integrated structure, Exxon has been able to take advantage of these lower-priced feedstocks," Weiss says.

Further technology developments will take place in China. In March, Exxon's chemicals business opened its Shanghai Technology Center. The $90 million facility will support growth in Asia by providing Exxon's customers with product and processing solutions.

The facility contains advanced analytical and testing laboratory equipment and commercial-scale product processing equipment, including blown and cast film extrusion, injection molding, compounding and packaging. The facility is Exxon's third-largest technology center in the world.

Over the long term, Weiss says he doesn't foresee Exxon's chemicals returns to outperform exploration and production or refining, but chemicals will continue to have some advantages over the upstream businesses.

The refining business isn't a growth area for the company in the current environment and exploration and production faces limited access to resources, Weiss says.

"Chemicals has some advantages because it doesn't face some of the same obstacles that the upstream business has in terms of gaining access to resources," Weiss says. "So the returns may not be as great as they are from upstream, but they're still above Exxon's cost of capital so they still add value."

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