INSIGHT: Cracker margins slump but sector firm

01 February 2008 16:50  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Petrochemical industry fourth quarter results are mixed but there is no doubt that the sector is chasing the sharp rise in feedstock costs. That begs the question of where supply and all important demand are headed.

There is some encouragement to be had from the fact that producers have been able to push up prices in the first few weeks of 2008. But margin has already been lost and customers are keener to keep on challenging further price increases. The expected supply driven downturn and deep concerns about the US economy hang over the business.

Shell on Thursday shed some light on the state of the market in the fourth quarter when it said that industry cracker margins had fallen 14% in the US to $356/tonne, plunged 48% in Europe, to $331/tonne and all but disappeared in Asia compared to the year before period, to a mere $10/tonne, as feedstock costs rose ever higher.

Even these numbers have caused some surprise – Shell stresses that they are their estimates of industry averages and do not represent its own. Other market players suggest, particularly, that the Europe number is high. The ICIS pricing average cracker margin for Europe in the quarter was $267/tonne.

It is, however, not so much the absolute numbers that are important – there is such a high spread in profitability between different plants in different locations – but the direction margins are taking and the shape of the curve they follow.

Petrochemical and polymer industry prices continue to rise but feedstock costs have overtaken most if not all players. Dow said earlier this week that its feedstock and energy costs were 31% or $1.7bn higher in the fourth quarter of 2007 than in the year earlier period. Its total energy and feedstocks bill last year was $24.6bn, three times that paid in 2002.

Shell’s chemicals output volumes were higher in the quarter and it was able to operate its crackers and other plants much more effectively – it suffered capacity outages in the fourth quarter of 2006. Its quarterly chemicals results were up.

ExxonMobil, on the other hand reported somewhat lower chemicals earnings – down 10% overall and down 34% in the US; and static sales volumes in the US although an 6% volume increase in the rest of the world.

It will be overseas growth particularly that drives North American producers in 2008. So long as China demand continues strong and regions such as central and eastern Europe and South America remain on a healthy growth track, the sector should be fairly well set.

Nova Chemicals CEO Jeff Lipton was characteristically upbeat this week when he commented on Nova’s prospects. The integrated polyethylene producer is advantaged in the feedstock chain given its ability to tap into lower cost ethane from Alberta in Canada. As oil and most global feedstock prices moved up that advantage expanded sharply, he said.

In that position, the company was able to lift export cost effectively to places like China, India and Latin America. Demand for polyethylene continues to be strong, he said, and there are supply limitations.

The demand pull downstream from the cracker is particularly important now given shrunken margins from both naphtha and ethane fed plants which, in the fourth quarter, were below the three year average on the US Gulf coast.

The industry needs further polymer price increase to help restore returns.

But as everyone in the business knows, new capacity additions may well take the shine of margins and profits from later this year.

New capacities in Iran, however, are not operating effectively and the start-up of some units continues to be delayed. Arya Sasol polyethylene units look like being delayed by at least two to three months. Jam Petrochemicals PE units also will be late. Lipton suggested that there were supply reliability and product quality concerns with Iranian PE.

Because of US financial sanctions, buyers were having difficulties getting letters of credit from any of the major banks to [purchase] polyethylene from Iran, he said.

Given its latest PE operating rate projections Nova Chemicals expects 2008 to be a very good year and stronger than it previously forecast. “We also expect industry supply and demand balances to stay strong in 2009, 2010 and 2011 and return to current very high levels in 2012,” Lipton said.

Even given a negative view on the US economy a scenario with 0% US GDP (gross domestic product) growth, global operating rates remain strong and industry margins should be excellent, Nova Chemicals says.

The company’s detailed view is on its website.

By: Nigel Davis
+44 20 8652 3214

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