03 October 2003 16:34 [Source: ICIS news]
The trading update released by BP on Thursday demonstrated that fact. Without revealing details, BP said its third quarter petrochemicals margins are expected to be substantially lower than in the second quarter and below those reported for the first. The European business, particularly, had been hit by higher feedstock and energy costs, it said.
Many feel that this is the low point for petrochemicals but it is increasingly clear that recovery will be patchy, to say the least, over the coming months. An across the board improvement anytime soon can by no means be guaranteed. Conn noted the volatility in crude oil prices, high feedstock costs and sluggish demand.
Volatility dogs petrochemicals as never before and Conn believes strongly that new ways have be found to manage product pricing better to help stem its worst effects. Understandably, as Europe’s largest ethylene producer BP is advocating monthly ethylene pricing. Conn would also like to see a tidying up of the polyethylene (PE) market that could aid the move towards the use of more paper and other forward market mechanisms. Support for BP on this front is not widespread but there is support nonetheless and the company suggested that numerous players could benefit from more transparent price setting mechanisms.
Since 1998, BP has been dealt a good hand in petrochemicals. Now the third largest global petrochemicals producer, the company is working to focus on seven core products*. Speculation is rife as to what BP and its petrochemicals arm might do next to bolster this side of the business and what further rationalisation – beyond the announced intention to sell specialty intermediates – there might be. Conn, however, pointed to a statement he made earlier this year that the company intends to hold its capital employed in chemicals at the current level for the next three years.
Since 1998 and BP’s merger with Amoco, the company’s petrochemicals productive capacity has risen by 40% but the sale of (petrochemicals) assets worth $1.3bn has helped maintain the focus on productivity. BP has managed to stem the decline in gross margin per tonne in petrochemicals to around 3% over the period compared with an average decline in the sector of 6%. The seven core businesses currently account for about 70% of capital employed. The plan is to lift this to closer to 90% by 2006.
In petrochemicals, BP is focusing on China – with its big Secco complex joint venture near Shanghai – re-focusing the business in the US and trying to make the most of its significant position in Europe. At EPCA, Conn said BP would "act at scale" to make its European operations competitive in the long run and do so unflinchingly. He stressed that attention to costs had to be relentless and that there are always better operating cost benchmarks to pursue.
"We are not top quartile in everything we do," he said, while noting that the company will have to be innovative in its approach to cost control across the board from research to production and within the organisation.
Conn admits that the company has a lot to do to get the portfolio focused on the seven core products and to meet the improvement targets. Both will involve divestments and better margin capture, he says, but no major portfolio changes. Conn sees longer term opportunities linked to BP’s new Russian oil venture, TNK-BP, where chemicals is likely to take advantage of feedstock availability and intermediate flows from the refining business. Group chief executive, John Browne, is expected to discuss the impact of the venture on BP in a webcast scheduled for 16 October.
*The seven sectors identified by BP as central to its petrochemicals operations are: purified terephthalic acid (PTA), acrylonitrile (ACN), acetic acid, paraxylene (PX), ethylene, polypropylene (PP) and high-density polyethylene (hdPE). BP is the world's largest or second largest producer of almost all of these products.
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