Petrochemicals: the first signs of a shift 'downstream'

Petrochemicals are moving up by going downstream. This is the optimistic note being sounded up and down the Mississippi River's chemical corridor.

What is meant is that Louisiana chemical plants are beginning to move away from the production of bulk commodity chemicals, such as ammonia and chlorine, which can now be produced more cheaply abroad. The Bayou State's plants will shift instead to more sophisticated ''specialty chemicals,'' known as ''downstream'' products. These include engineered plastics, synthetic lubricants , pharmaceuticals, and chemicals used in the electronics industry.

Because they are harder to produce, specialty chemicals command higher prices. Their profit margins are higher and more stable.

''We're not leaving, we're changing,'' is how one industry source put it.

Overall, the current recession has left the state's petrochemical industry as depressed as it has ever been. A mainstay of the Louisiana economy since the war , the industry has taken advantage of abundant oil, gas, sulfur, salt, and water to produce almost 200 kinds of chemicals. But now these companies have been hit with a double blow of slack demand for their products (related to downturns in the automobile and housing industries) and a difficult natural gas pricing situation.

And long term, the handwriting seems to be on the wall for certain ''gas hog'' industries, as they are sometimes disparagingly referred to. In the future , these industries will locate plants abroad, notably in Saudi Arabia, Kuwait, Mexico, or Canada, as, in fact, they are already doing. In these places gas is cheap.

But although the silver-towered riverside plants here may shimmer like mirages in the sun, they represent $35 billion in investment that isn't just going to evaporate. These plants are continually being maintained and modernized to the tune of some $2 billion or more annually.

There is a considerable pool of human capital here, too, from PhDs in combustion technology to skilled plant operators. ''The people here are extremely talented individuals who know how to run chemical operations,'' one observer says.

And so what is projected here is a trend toward greater specialization.

Specifically, what's expected is for companies already having a commodity plant here to plunk down a new or relocated specialty division next door, or to convert a bulk plant for smaller-scale specialty chemical production.

The bigger the plant already in Louisiana, the more likely the home office in New Jersey or Michigan or wherever is to put in a specialty plant next door.

The trend is in its first stages.

Fred Loy, executive vice-president of the Louisiana Chemical Association, says that in recent months industrial siting teams ''have been down here sniffing.'' He expects one company actively negotiating with the state to announce a specialty chemicals plant, probably late this summer. It's a general sign of economic recovery. ''Some of the plans that have been on the shelf are coming down off the shelf.''

Al Rapp, manager of operations for the hydrocarbons division of Jacobs Engineering Group Inc. in Baton Rouge, sees ''definite'' signs of an upturn for chemicals here. His office designs, builds, modernizes, and maintains plants for the chemical and energy markets. He can monitor the industry's recovery by counting the number of calls he gets from prospective customers.

There was a significant increase in activity since the first of this year, he says, which then subsided, but it has been followed in recent weeks by a second wave of activity. ''It's a rocky road,'' he says, but ''definitely, the slope of that curve is up.''

The main differences between production of commodity chemicals and that of specialties, he says, are size and technology. Instead of millions of pounds, a specialty plant will deal in thousands, or tens of thousands.

But both kinds of plants use chemical reactors, distillation columns, and evaporators.

''If an operator has the skills to operate a chlorine plant, he has the skills to operate almost any chemical process with a minor amount of training,'' Mr. Rapp says.

One plant manager who declined to be identified sees the shift less as a long-term trend than as a response to the current recession.

In tougher times, some companies have switched to specialty chemicals with their higher and more stable profit margins - and then switched back to bulk chemicals when conditions improved, because higher volumes are possible with bulk chemicals, he says.

''It's an ebb and flow. But there are people that get burned in the commodity business, and they switch to specialty chemicals and stay there.''

Mr. Rapp says, ''Big expansions, the big billion-dollar projects, are going to be rare and far between. What the United States will be doing - what this industry will be doing - is becoming more competitive.

''That means we'll be doing less of the bulk chemicals, etc. We'll continue that as long as it's profitable and then convert those units to something else.''

Mr. Rapp says ''a good portion'' of these facilities can be converted, but in some cases a plant will have to be gutted. ''It's like remodeling your house,'' he says.

A veteran of a stint in Switzerland with a European chemicalmaker, Rapp suggests Europe as a model for the future of Louisiana's chemical industry.

''Look at what Europe does: They make bulk chemicals, but in small quantities , specialized for their local markets. You don't see great big chemical plants over there.''