28 September 2003 14:20 [Source: ICIS news]
For the petrochemical industry, in the run-up to the fourth quarter the focus has to be on feedstock cost volatility. As the European petrochemical industry gathers in Monte Carlo this weekend for its largest get-together of the year, it is clear there are deep concerns about its ability to generate decent margins in the face of fluctuating raw material prices.
Hopefully, the industry is finally emerging from the worst downturn in 20 years, yet while the sector may sense better times ahead managers are concerned that tightening supply demand balances won’t give them the lift they deserve. Feedstock costs have stayed high on both sides of the Atlantic putting even more pressure on firms to do something about their inherent knack of giving away margin from the cracker to the downstream market.
In the run-up to EPCA, the talk has not been so much about Europe’s or the world’s economy but largely on what companies can do – indeed have to do – to continue to keep a lid on costs and better manage industry volatility. That volatility has been highly damaging to strained balance sheets. Finding better ways of managing cost inputs lies at the top of the agenda.
This is the second year in succession that ethylene contracts have not been settled prior to EPCA and the end of the third quarter. (The three years before that, contract prices were settled promptly at the end of September.) Companies won’t like that because they prefer to take time at EPCA to talk about more strategic issues.
But Europe’s pricing environment has become vitally important to everyone and the battlefield of strategy. Producers know they have to manage more effectively their exposures to risk and feedstock cost volatility. They just have to be brave enough to find new ways of doing things. Monthly pricing may be the answer but is certainly not acceptable to all. In an uncertain world, the big producers want to find mechanisms in which they can be more nimble and hedge their own risk and exposures more effectively.
Europe has sweltered this summer in some of the highest temperatures yet recorded but petrochemicals has suffered rather than basked in the heat. Low water levels in the Rhine now add to producers problems as barge traffic becomes more difficult and logistics problems abound. Adding more costs in an already tough business environment hardly makes life easy.
Petrochemical companies want to see demand improve to bring a greater degree of certainty to what many perceive to be the first stirrings of the upturn. Reports this week of more confidence in the German economy are encouraging but probably only that. Petrochemicals should turn up faster than most businesses as economic growth resumes but it has been clear this year in Europe that the buying patterns of downstream users have reflected more the use and replenishment of stocks rather than anything like strong demand growth.
As EPCA begins, Europe’s producers look to problems at home but also to stronger growth and a more vibrant business in the Far East, particularly in China. This illustrates the fact that the petrochemicals scene is changing fast. Low cost producers in the Middle East and producers selling into high growth markets in the Far East are having most of the excitement. Europe remains the battlefield of ideas.
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