Petrochemicals outlook is uncertain and patchy

02 May 2003 17:00  [Source: ICIS news]

The world’s big petrochemical producers may have benefited from significantly higher volumes and better prices in the first quarter but the sector is still pressured by uncertainty.

The big worry now has to be whether volumes will hold – there has been some indication of a slowdown in demand growth in Asia – and whether product price differentials with feedstock costs will be maintained.

Whichever way you look at it, a lot still has to change to bring margins back to anything like normal levels.

The battle with higher feedstock and energy costs has been a feature of the early part of 2003: Dow Chemical talked recently about the 70% rise in feedstock and energy costs in the first quarter compared with the similar period of last year. In dollar terms that translated into additional costs of $1.2bn (Euro1.1bn).

However, for Dow, much higher volumes in petrochemicals and plastics helped offset the burden. Upstream, Dow was also relatively successful at passing higher input costs on in product prices.

First quarter results from the big petrochemical makers have highlighted the volume upturns and the benefits of higher prices. Shell indicated on Friday (the company reported flat chemicals profits compared with Q1 2002 but a loss on writedowns and restructuring in catalysts) that the petrochemicals business is uncertain and patchy across different product groups and regions. (Shell also said today that it continues to keep an eye on the Basell joint venture, which is doing better but clearly still has a long way to go to produce satisfactory returns.)

Shell’s capacity utilisation (in the low 80s in percentage terms in the US, for instance) is higher but still not high enough to drive a real upturn in the business.

Shell’s cracker margins in Europe and North America were higher on a comparable basis in the first quarter but they were lower than in the final quarter of last year. Sales were significantly higher in the quarter but higher feedstock costs had a strong negative impact on margins.

The recent first quarter financial reports from the big petrochemical makers illustrate the swing up in volumes driven by feedstock and energy price worries further down the chain as much as anything else. Producers were also able to pass on some of higher feedstock costs in product prices but margins remained well below normal levels in many products.

Clearly it is too early to get carried away by the numbers. ExxonMobil reported sharply higher chemicals earnings yesterday but it benefited from the falling value of the US dollar (by as much as $120m) as well as better volumes and prices. Chemicals earnings of $287m were up $155m on the back of improved non-US margins and the exchange rate gain.

ExxonMobil said that product sales of 7m tonne were up by 280 000 tonne, reflecting higher demand in key commodity businesses across most regions. Volumes were higher in polyethylene (PE) and aromatics, the company said, as it benefited from recent capacity additions.

Shell will not be pleased with its chemicals performance, particularly since its heavy feed strategy in the US should have given it more of an advantage in the quarter.

But these are tough and uncertain times. Shell’s volume sales were higher globally but so were costs. Sales growth was particularly strong in Europe but the company suffered from strong margin pressure in the US. It said, however, that on a global basis total product unit margins were unchanged from a year ago. In the second quarter it will not be alone in having to run that much harder probably simply to stay still.

By: Nigel Davis
+44 20 8652 3214

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