Uncertain times

19 November 2001 00:00  [Source: ACN]

European markets are seeing lower prices, weaker demand and a buildup of inventory. But there are more challenges to be faced in 2002, reports Martin Todd of ECN

A cloud of uncertainty hangs over the European petrochemical markets as players await greater clarity on the depth of the current economic downturn, which has been exacerbated by the terrorist attacks in the US.

In H1 2001, the European chemical industry was congratulating itself on largely avoiding the downturn evident in Asia and the US. However, starting from Q3, the impact of the global economic slowdown has been much more evident.

Currently, the downturn is being felt across all sectors of the chemical industry, with markets seeing lower prices, weaker demand and a buildup of inventories.

This situation is likely to worsen as industry players look to minimise year-end inventories and working capital.

In such a climate, discounted pricing is likely to emerge as sellers rush to conclude deals.

The European chemical industry has seen a spate of lower earnings and profit expectation announcements in recent months.

While conceding that BASF would not be able to meet its current three-year profit target, chairman Jurgen Strube noted that the company is operating in a 'very difficult economic environment' due to a severe decline in consumer confidence in the US and Europe. This has led to a 'significant reduction in the level of orders accompanied by high pressure on margins and unsatisfactory prices'.

The most optimistic market observers see no improvement in market conditions until mid-2002. And there are many who do not envisage an upturn until well into H2 2002 at the earliest.

The general expectation is that conditions will worsen before they get better.

Activities in the European polymer sector give clear indications of the shift in market conditions and expectations. Right until early October, European polymer producers were posting price increases. Since then, it has become evident that price increases will be difficult to implement.

In fact, European PE and PP prices fell by 2-5 pfg/kg last month. Producers have now adopted a defensive position and will be lucky to avoid further decreases before the end of this year.

In September, market leader Basell announced it will close a total of 330 000 tonne/year of PP capacity. A 180 000 tonne/ year of PP capacity at Wilton, UK, will be mothballed. A 90 000 tonne/year PP plant in Tarragona, Spain, has already been closed. A 60 000 tonne/year PP plant at the same site was also mothballed.

BP has brought forward the closure of its 100 000 tonne/year ldPE unit at Wilton. The closure marks the end of almost 50 years of PE production by BP at its Wilton site.

The shutdowns are a response to current market conditions of poor prices and weak margins. They also reflect the fact that European producers are examining the cost-effectiveness of their European polymer plants in relation to plant size, age and feedstock positions.

European olefin producers face a number of other challenges in 2002. Absorbing new capacities is one of them.

Dow Chemical will commission 600 000 tonne/year of ethylene capacity at Ternuzen, the Netherlands, in Q1 2002, bringing ethylene capacity at the site to 1.7m tonne/year.

BP will start up a new 270 000 ethylene unit at Grangemouth, UK, bringing capacity at the site to over 1m tonne/year.

Although the European market can absorb the new material, the additional volumes could prove problematic in the short term.

Ethylene has become increasingly long in Europe during H2 2001, reflecting the weakness in derivative markets particularly in the polyolefins sector.

This has been evident in the downward shift in contract and spot prices. The contract price in Q1 2001 was agreed at Euro640/tonne. By Q4, the contract number had fallen to Euro553/tonne.

Likewise, spot ethylene cargoes were selling at US$610/tonne cif NWE in April, but November material is being offered at US$365/tonne cif NWE.

European cracker margins have been under pressure since Q2. And operating rates have begun to decline in recent weeks. Olefin producers admit to running units at 85-90% of capacity, although market observers believe some units are running at even lower rates.

The direction of and the degree of volatility in crude oil and naphtha markets will be of vital interest to European petrochemical players next year. The majority of European crackers use naphtha as feedstock, the price of which is intrinsically linked to crude-oil prices.

There is growing scepticism over whether Opec (Organisation of Petroleum-Export-ing Countries) can maintain crude-oil prices within US$22-28/bbl despite indications that it will not hesitate to further reduce production.

The current instability in the markets is not just a European phenomena but can be seen in other regional markets.

As a result of the high degree of uncertainty, market observers are reluctant to make detailed predictions on when conditions will improve or when there will be a light at the end of the tunnel.

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