Tire Raw-Material Shortage Triggers Race for Answer

The shale boom that has boosted U.S. natural gas supplies is causing an unintended shortage of a key petrochemical used to make synthetic rubber for tires.

Manufacturing giants Honeywell International Inc. (HON) and BASF SE are touting rival solutions.

Butadiene, which the U.S. discovered could be turned into a rubber substitute during World War II after Asian supplies were cut off, is a byproduct of making plastics from oil-based naphtha. Shortages loom as plastics manufacturers switch their feedstock to less expensive ethane, a natural gas liquid which yields little butadiene.

That could lead to higher prices for motorists as tire makers pass along cost increases. The shale boom responsible for the problem may also provide the solution as Honeywell, in partnership with TPC Group Inc., and BASF working with Linde AG race to develop technology to produce butadiene from butane, a now plentiful natural gas liquid.

“Whenever there is a gap that opens up in the petrochemical world, people are going to throw capital and technology at it until they solve it,” John Roberts, a New York-based chemical industry analyst at UBS Securities LL, said in an interview.

The butadiene shortfall may be as little as 7 percent over the next decade if the industry shift to gas feedstocks is limited to North America, or as much as 27 percent if Europe and Asia embrace the trend, according to Honeywell.

Significant Shortages

Houston-based TPC Group, which plans to build a plant in 2017 or 2018 to produce butadiene by on-purpose production instead of capturing it as a byproduct, brought on Honeywell to update technology it hasn’t used since the 1980s, according to Chief Financial Officer Miguel Desdin. The company was acquired in 2012 by a consortium led by SK Capital Partners LP.

“In the medium and longer term, if demand picks up there’s going to be a significant shortage of butadiene because the supply has tightened,” Desdin said in an interview.

When butadiene doubled in 2011, tire makers tried to recoup lost margins by raising prices. Higher raw material costs eroded earnings at tire maker Michelin & Cie (ML) by an estimated 1.8 billion euros ($2.44 billion) that year and 500 million euros in 2012. Michelin in November said it’s researching butadiene production from plant materials in anticipation that shortages will return.

Honeywell and TPC plan to have technology for on-purpose production of butadiene ready by year end and are already talking with potential licensees, Jim Rekoske, petrochemical global business director for Honeywell’s UOP unit, said in a telephone interview. Demand could require as many as 20 to 30 plants worldwide, the companies said.

Honeywell’s UOP unit is the exclusive licensor of the technology, called OXO-D, the Morris Township, New Jersey-based company said in a statement today. The process can also convert excess butenes from oil refineries into butadiene.

Shale Boom

Gas has become cheaper as hydraulic fracturing or fracking boosts production from shale formations. The shale boom has spurred plans for a record $113 billion in chemical manufacturing investments, according to the American Chemistry Council.

BASF and companies such as Dow Chemical Co. (DOW) and Westlake Chemical Corp. (WLK) are converting U.S. factories that make chemicals from naphtha into ones that use lighter feedstock such as ethane. New factories planned by Dow and other companies will use ethane, constraining butadiene supplies.

While ethane and naphtha both yield ethylene, the most common petrochemical, ethane yields only about 14 percent of the butadiene that comes from naphtha processing. Ethane also yields less propylene and benzene.

Petrologistics LP is producing propylene, used to make paints, carpets and plastic bottle caps, from propane at its plant in Houston. At least six more plants are planned by Dow Chemical, Enterprise Products Partners Inc. and others. BASF plans to make propylene from methane.

Explosive Growth

Honeywell’s UOP unit has seen explosive growth in demand for propylene. It has licensed its technology for 22 propylene plants since 2011 after winning only 13 in the previous two decades, Rekoske said.

Honeywell UOP and TPC are ahead of their chief rivals, BASF and Linde, in bringing on-purpose butadiene to market. The German companies announced on June 3 that they will develop their process in a pilot plant in Ludwigshafen, Germany. They also plan to license their technology, though it’s too early to say when it will be commercially available, according to Silvia Mueller, a BASF spokeswoman.

“We are optimistic that we can offer a new best-in-class technology for the manufacturing of on-purpose butadiene to help producers meet the increasing global demand,” Mueller said.

High-Grip Tires

Butadiene prices climbed to $1,499 per metric ton in April from $1,190 in December, according to Nexant Inc. data compiled by Bloomberg. Butadiene has fluctuated in recent years, rising to $3,858 in August 2011 and falling as low as $610 in June 2009.

About 60 percent of the rubber used in the tire industry is synthetic, Clermont Ferrand, France-based Michelin said on its website. Synthetic rubber is best for high-grip tires, improves longevity and decreases rolling resistance, according to Michelin.

Several Chinese plants are being built for on-purpose butadiene production, two of which are expected to begin operations this year, Rekoske said. Those plants are using technology that hasn’t been proven, he added.

“We feel very confident that our technology is economically superior,” Rekoske said.

To contact the reporters on this story: Thomas Black in Dallas at tblack@bloomberg.net; Jack Kaskey in Houston at jkaskey@bloomberg.net

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net Jim Efstathiou Jr.

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