Are petchem producers equipped to face the real challenges?

12 April 2002 16:59  [Source: ICIS news]

Will there be a shake-out in petrochemicals or will companies struggle on as usual in the hope that they can keep running underperforming plant and that better times are just around the corner?

In many respects, the sector should be set for another major round of restructuring but no-one should hold their breath. The worst operating conditions in 20 years have taken their toll, certainly, and all players have been squeezed hard. How many will shutter plant permanently or sell on, though, remains to be seen.

Just a week ago Shell’s Rein Willems put current operating conditions into perspective. For many cracker sites around the world, maintaining margins is simply not good enough, he said. "They must improve margins – and quickly – if they are to survive the next 12 months," Willems declared at the European petrochemical forum, in The Netherlands (on 9 April).

Everyone in petrochemicals knows that Willems, Shell Chemicals executive vice president for business units and procurement and president of EPCA (the European Petrochemical Association), is right. But history suggests that players will not react. His bleak warning, however, is underscored by the fact that more than 20% of cracker sites around the world have integrated cash margins below $100 (Euro114) a tonne of ethylene. The calculation is based on the most up-to-date petrochemical industry measurement model (PIMM) analysis prepared by the Association of Petrochemical Producers in Europe (APPE) (see

Integrated cracker margins have not been this low for years and there is not a great deal of evidence to suggest that they either have improved in the first quarter or are likely to improve by much in the second. Volume demand has risen in recent weeks and some prices have moved up but rising oil prices are the real worry now. The industry is being knocked back again just as it was expecting to see better times.

The PIMM report showed that five ethylene crackers in the US shut down during the fourth quarter of last year. Quite a few commentators believe that permanent plant closures are the solution to the problem of overcapacity and poor demand growth which besets the sector.

There is no indication that life is going to get any less volatile or more certain for producers. Growth above GDP (gross domestic product) can be expected across the board in the sector but some products are going to lose favour with customers fast – the rising tide of environmental control will see to that. At the same time, even global, long term scenarios from companies like Shell point to possible business and social frameworks which, although attractive, suggest a rocky road ahead. Willems talked in The Netherlands about petrochemicals demand growth in China which Shell says will be 40% between 1998 and the end of 2002. According to its long-term, global scenarios, it will be more than 80% to 2004 and almost 100% over the eight years to 2006.

That looks attractive but even under Shell’s optimistic ‘Business Class’ scenario a consumer boom in China is followed by what the company calls a ‘biting’ recession where radical reform without effective control creates a political vacuum filled by old hardliner leadership. Social volatility is a feature of the scenario which, as Willems says, hardly inspires confidence.

And what can the petrochemical producer expect to do or influence in the face of such volatility? To a great extent, the message is the same as before only players do probably have to act now with greater urgency. The rationalisation challenge still exists and any extension of the bottom of the cycle conditions will prompt more action.

In Europe, the industry still has a lot to do – and a lot of lobbying – to sort out its logistics problems. The European petrochemicals pipeline structure is highly fragmented but companies are in a position to do something about that. Europe’s rail network is fragmented too although proposals from the European Union (EU) may change the situation. By 2008 inter-state operability may be reality but the challenge for industry is to help make the changes work.

Closer to home, companies can do something about getting their plants in shape for the next upturn and, indeed, the next turn down in the cycle when they will really need efficient worldscale facilities. Capacity creep by debottlenecking has served the sector well for years and is likely to for many more.

But, Willems highlights a key challenge that is potentially damaging. The number of chemical engineers passing out from European universities is falling fast. The problem is a much lower intake to engineering and science degrees and courses. The lower intake is a direct result of the poor image of science and the chemical industry in the eyes of the young. The industry has to do something about that.

By: Nigel Davis
+44 20 8652 3214

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