In the third quarter of 1994, the European petrochemical industry emerged from the recession. Demand soared, outstripping capacity and producing a supply-constrained market with double-digit price increases. Clearly, a downturn will eventually happen again. But there are signs that, with reduced demand and structural overcapacity, the next downturn may not be followed by a further upturn.

Short-term outlook

Capacity utilization—and prices—are expected to remain high well into 1996, for a number of reasons. Demand will continue to grow, driven by GDP growth and the fact that plastics are still priced competitively in relation to other materials. Current material shortages indicate that capacity utilization at the bottom of the cycle was higher than reported. Many polyethylene plants are old, their expansion potential has been exhausted, and little of the new capacity announced recently will come on stream in the next 12 to 18 months. Moreover, the impact of recycling is likely to be limited in the short term.

Tough new climate

The long-term forecast, however, looks more like a change in the climate than a change in the weather. External forces and industry reactions are conspiring to create overcapacity. As growth in demand slows and demand declines for some products,...