The value chain of the petrochemical industry is driven more by the end users-which are consumers-than by the feedstocks that go into making the products. Because of this, the industry has not yet seen decreases of the size that businesses in some other oil- and gas-dependent industries have seen, according to Mark Eramo, executive vice president of Olefins and Derivatives at CMAI Global.

That's partly because of the dynamics of the chain: Petrochemicals make up only 10% of the products that come from crude oil and only 25% of those that come from natural gas. Instead of being price drivers, "petrochemicals are energy price takers," he added.

Still, "at some point, we will start to feel it [price increases combined with inflation] in the downstream markets, and we've certainly seen it in the investment end," he said.

To follow the market, many in the industry focus on ethylene, which is growing at a rate of about 4% to 5% per year and was sitting at 115 million metric tons in 2007. Ethylene is used in products such as pipes, containers, polystyrene-the kinds of nondurable products most people relate to "plastics." Because of the need for these products: "Regardless of how the economy is doing, the market will do well as long as global needs increase," he explained.

Overall, the petrochemical industry is seeing a low to moderate slowdown brought on partly by the "paper vs. plastic" debate. The supply side, however, is seeing an aggressive rate cut, especially in North America. Capacity is "ample and expanding," but the industry is at the beginning of a cyclic downturn, Eramo said.

"We are at the end of a beneficial cycle for petrochemicals and now on the downhill curve," he said. "Producers are fighting a losing battle on healthy margins."

The key to long-term viability for the industry will be low cost production of the goods because most of the industry is based on market costs. The greatest challenge going forward will be energy costs because countries where prices are set by the government (Saudi Arabia, for example) have a built-in advantage. The Mideast and Asia dominate the current wave of new capacity with roughly half of new additions driven by incentives for industrial development, while North America and Europe have limited to no capacity, Eramo said.

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