Pressure for change fades

09 January 1994 00:00  [Source: ICB]

Last year, prospects for the European petrochemical industry looked bleak. Now, prices are rising and producers are making money, but structural problems. have still to be resolved.

By A Macdonald-Smith

THE YEAR 1994 started in the knowledge that efforts made within the Association of Petrochemicals Producers in Europe (APPE) to find a scheme to allow a substantial cut in olefins capacity had come to nought.

If the vast scale of the losses suffered by most petrochemical firms in 1993, along with the incentive of subsidies, could not bring players to take the decision to close older, smaller, less efficient plants, prospects for an improved performance this year looked bleak, despite the prevalent trend towards alliances.

Yet since that time, such changes have occurred that although only around 0.5m tonne/year of the then estimated surplus of 1.5m tonne/year of European ethylene capacity has gone, the pressure to close further units has at least for the time being, dwindled away. Average producers even of the more hard-pressed derivatives are once again making money, as increases in selling prices are being pushed through even over the traditionally stagnant summer months.

In olefins, BP Chemicals appeared to lead the way, with its announcement of the closure of the 335 000 tonne/year cracker at Baglan Bay at the end of March, involving an exceptional charge of some £200m ($350m). But in essence this only went to compensate for the 350 000 tonne/year capacity expansion brought up last year at Mossmorran, and was hardly instigated by the APPE initiative.

'We are seeking and would like to get extremely competitive capacity in place and take out the rest', said BP Chemicals' deputy ceo and APPE representative John Buchanan. 'All our crackers are now in the top quartile. In polyethylene too, we are working on this', he noted.

Enichem, meanwhile, took out 100 000 tonne/year late in 1993 with the mothballing of one line at Gela, while the 90 000 tonne/year ethylene unit at Leuna is also generally accepted as being shut.

But BASF's 160 000 tonne/year Ludwigshafen I cracker, which had been widely regarded as the next on the closure list, now looks almost certain to live on for the time being despite its more intensive cost structure.

'On the one hand, our No. 1 cracker admittedly does not range under the best low-cost plants in Europe and we do not have sufficient captive use for ethylene for this source,' Rolf Niess, head of BASF's basic chemicals operating division admitted. 'But on the other hand, we are very glad to rely on a second plant in case of a temporary shutdown of our No. 2 cracker. Not to mention that we are still large net buyers of propylene and benzene even after startup of our new Antwerp cracker.'

'For Ludwigshafen, a landlocked site, we have to secure a long-term safe and favourable supply with these byproducts. So the decision has not yet been made whether to shut down our smaller plant permanently or not. We still look for opportunities which could tip the scales to one side or the other', Niess said in a statement.

In derivatives, streamlining moves have been even scarcer, despite various alliances resulting in significant consolidation of the market. Current plans for Borealis, Montell Polyolefins, and initially also for the recently proposed Union Carbide/Enichem PE jv, state no intention of closures, although such moves obviously clear the way for such action to be taken in the future.

BP's Buchanan believes the consequences of such jvs will be crucial to the rate at which the European petrochemical sector moves to a position of strength. 'How fast we move to this is difficult to judge or estimate over the next years. The consequences of joint ventures will be very important in this context'.

Despite the relative inaction so far, external factors have stepped in to at least temporarily relieve the crisis in the olefins sector, Philip Leighton of London-based consultancy Trichem emphasised. The dominant effect came from the US, where several factors combined to influence the whole world market.

The extremely cold Q1 led to a tighter propylene market as supplies were diverted to LPG, while the startup of the Formosa cracker was delayed. In addition, announced price increases together with the knowledge of scheduled major plant outages in Q3 and Q4 prompted stockbuilding, leading to 'absolutely-staggeringly large' sales in March in-particular of all polymers, drying up the usual substantial exports of US derivatives.

Alongside this, 'the Far East engine has continued to run in high gear', adds Leighton, with Europe left to act as the swing supplier. Most recently, the major disruption at Exxon's 825 000 tonne/year cracker at Baton Rouge, Louisiana, as well as disruptions at Shell's cracker at Norco, Louisiana, and Enichem's at Priolo, Italy, have only tightened the market further, making further price rises targeted for September seem achievable.

Trichem now estimates that the whole olefins market will remain tight until mid-1995, with operating rates only dropping back from around 92% for the year - compared with 84% last year - in the second half of 1995 as the US, back in balance, readopts its exporting role.

Despite these factors, the recovery in Europe has been sluggish, and Leighton emphasised that although the sector's cyclical crisis may be resolved, the structural problems persist. 'The patient is out of intensive care but is not exactly about to enter the Olympics', he commented.

Chem Systems' David Glass echoed this, pointing out that the recovery must be seen against the background of 1993, which saw one of the worst performances of industry since 1981. The improvement in profitability is hardly commensurate with 1988, when profit levels were five or six times their current levels, he noted.

Indeed, 'you could get better returns from a building society', commented one consultant, criticising the remarkably' little action taken since the downturn started in 1990 and became progressively more painful until the nadir in 1993. In PP at least, many of the very small, uncompetitive plants have gone, but not so in other sectors, where high closure costs and socio-political pressures have tempted players to hang on for better times.

'Industry missed a big chance to restructure - laggards for competitive reasons should have disappeared from the market', said BASF's Niess.

Although in olefins themselves, the supply/demand situation would currently suggest an absence of cyclical overcapacity, there is substantial spare capacity in derivatives which has not yet been taken up by an improvement in demand, points out one key petrochemicals industry observer.

Dr Albrecht Eckell, BASF's board member responsible for fibres and polymers, while emphasising the need for improved selling prices, also took this theme up in an August press conference: 'The [overcapacity] problem is likely to become worse as a result of the highspeed expansion in Southeast Asia. New suppliers from Southeast Asia, the producing states and eastern Europe are looking beyond their home markets aiming to gain market shares worldwide at the expense of established competitors. Old inefficient plants should be discontinued to achieve a balance of supply and demand.'

The structural overcapacity persists even in olefins, with the continued operation of plants which are regarded as too small, too isolated, too old or lacking integration. 'Although there are no announcements of new plant or major debottleneckings in the immediate short-term, we must assume the industry has the capability to debottleneck existing plant. This will happen over the next few years, and so the need to take out old plant remains,' one observer said.

Certainly, the APPE talks focused the minds of top executives on the nature and scale of the problem, and prompted good debate within the industry. 'The level of awareness of the situation at the top of companies was not as good as it should have been,' BP Chemicals' Buchanan commented.

Europe's new-look polyolefins rankings
PE	Capacity (000 tonne/year)
Borealis	1470
Enichem	1400
BP/Erdölchemie	1050
Dow	1000
DSM	905
PP	Capacity (000 tonne/year)
Montell	1400
Borealis	650
BASF/ROW	600
Hoechst	530
PCD	390
Source: Companies' own figures

The discussions - much of which had been going on for some time - culminated in several major restructuring moves, some of which were sealed or concluded in the first half of 1994.

Shell and Montedison finally gave the go-ahead for Montell Polyolefins, which with 3.3m tonne of PP capacity worldwide and around 700 000 tonne/year of PE capacity, as well as Shell's cracker at Berre, will create a polymers giant. While the European Commission gave its approval only under the proviso that the PP technology Spheripol was kept apart from the venture in a separate firm owned entirely by Montedison, the partners are still nervously awaiting the final verdict from the FTC in the US, where concerns over technology concentration loom large.

The Neste/Statoil merged petrochemicals and polyolefins firm Borealis, meanwhile, came into operation in March, but no capacity streamlining is immediately in sight, according to chairman and ceo Juha Rantanen.

The sale of ICI's PP business to BASF also finally went through, boosting it to number three slot worldwide, with 3.6% of the global market, compared to Montell's 18%.

'By increasing its polypropylene capacity to 600 000 tonne/year, BASF has closed the gap to large European suppliers, following a significant change in the supplier structure with the formation of Montell and Borealis,' said Eckell.

The year to date also saw some fresh restructuring initiatives, the most notable involving Union Carbide making a strong re-entry into the European market where it will also contribute to improving the technology base. The US firm's announcement of a speciality PE jv with Elf Atochem, which focuses around Elf Atochem's 240 000 tonne/year capacity at Gonfreville, was quickly followed by news of a proposed jv with Enichem, to create 'a formidable force in European polyethylene markets'.

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While current plans call for the construction of a new 400 000 tonne/year Unipol PE facility at Brindisi as well as further plants in Europe, the firms remain vague on closure plans saying only that the venture's total capacity once the new unit is fully operational in Q4 of 1996, will not exceed the PE capacity that Enichem operated in the past.

Other talks are still ongoing, indicating the possibility of further restructuring moves, despite the incentives of the improved demand situation and the extreme difficulty of agreeing the valuation of assets in a rising market. ÖMV, for example, clearly regards an alliance as the way forward for its polyolefins business, and has been in negotiations with Repsol, Quimica, which has replaced Hüls as its preferred partner. And Hoechst's board member responsible for polymers, Dr Günter Metz, declares he is still 'open' to an alliance in hdPE and PP.

In addition, a handful of European and US firms have expressed an interest in taking equity stakes in the polymers firm to be made up of Buna, parts of Leuna and feedstock supplier SOW at Böhlen, eastern Germany. Plans call for investment in the 350 000 tonne/year SOW cracker, as well as new PE and PS plants.

Apart from these moves, companies all made some effort to cut costs and improve the productivity and efficiency of their operations, sometimes reducing fixed costs by as much as 40%, although by necessity less at the plant level, comments Chem Systems' Glass.

'But no amount of sharpening of pencils will suddenly make the European petrochemical industry competitive in world terms', commented Peter Jordan of DeWitt. 'There is no way Europe can be competitive with some other regions ...Some plants will always be expensive.'

Indeed, the ethylene cost in the Middle East, using naphtha feedstocks, is around $237/tonne, compared to around $427/tonne on average in Europe, Chem Systems' David Oxley noted.

An improvement in the supply/demand situation alone cannot compensate for Europe's deep-rooted problems of the lack of feedstock pipeline systems and the heavy dependence on relatively expensive naphtha feedstocks.

These problems are not being ignored. 'I fervently hope that a return to better times will not decrease the determination of the industry to find ways of resolving the difficult structural problems which the industry faces,' commented APPE president Jukka Viinanen, in the APPE 1993-94 activity report.

The association itself has set up a task force to study the potential for improving the olefin pipeline infrastructure in western Europe. Discussions may also include the use of feedstock pipelines, which are becoming available from organisations such as NATO, said Viinanen. Although this would clearly improve flexibility and allow further closure decisions to be taken, many believe, that additions to Europe's olefins pipeline infrastructure -the most obvious being an extension of the ARG network from Ludwigshafen to Carling - are not realistic, given the costs and the period of time involved.

Competition issues may also arise. Elf Atochem is already having difficulties with the European Commission over the Donges-Melun-Metz pipeline jv through which it plans to substantially improve the competitiveness of the Carling site.

The APPE is also negotiating with Peter Manning Associates for the use of the consultancy's model for measuring relative competitiveness. Called PIMM, it will monitor quarterly movements in competitiveness within Europe compared with data for North America, the Far East and the Middle East/North Africa.

The purpose of the model is to gain an industry perspective to provide information which will highlight better the complexity of the European situation in comparison with other regions, not to compare individual complexes within Europe with each other, said Viinanen.

It has however come into criticism from some consultants, who believe this approach confuses the real issue. 'It is more important to look at particular sectors and get laggard plants to close,' commented one.

This is what the industry is slowly doing, but it may feel it will be rescued from further action by the current recovery. The rescue may be short-lived. Certainly if no improvements are made in the structural deficits within the current cycle, the European petchems sector runs the risk of finding itself in a worse position in the next downturn than before.

By: Angela Macdonald-Smith
+44 208 652 3214

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