INSIGHT: Industry moves into uncharted waters

28 March 2008 13:00  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Take a deep breath. For some, the next 12 to 24 months will be virgin territory: A time of volume declines and tough selling, with prices under severe pressure.

Others may take a more sanguine view having seen most if not all of it before. But for both sides, the going will be tough.

The expected supply driven downturn will be different from previous dips in the cycle. We live in a world of high priced oil, high priced naphtha and relatively, at least, high priced ethane feedstock.

Energy costs are particularly burdensome. Petrochemicals producers have ridden this rising tide of costs remarkably well for an extended period, as industry CEOs have suggested, the sector has sunned itself on a cycle plateau.

But in bulk petrochemicals at least what goes up eventually has to come down.

Large parts of this supply-driven business are highly cyclical. A great deal may have been done to militate against the negative impact of the next supply driven downturn but the downturn will come nevertheless.

Seasoned industry commentators say it is only a matter of time before the market is overwhelmed by new capacities springing to life in the feedstock rich Middle East.

This is a game of competitive advantage writ large with the advantaged players set to start-up over the next few years production capacities based on low cost feedstock.

At the same time significant new capacities will come on stream in fast growing markets like India and China.

These plants on the one hand will help supply domestic petrochemicals demand and on the other balance out imports from new export-led capacities being built elsewhere.

It may then be a question of which region is least exposed to the import or, rather, the last tonne of under-priced material.

The received wisdom is that the North American market will be protected given an ethane cost advantage over oil-related naphtha. The higher-cost, predominantly naphtha-based, markets will be most exposed to low cost Middle East imports.

Yet one wonders whether Middle East players now active in Europe and other parts of the world would actively seek margin destruction.

True, the tonnes will have to go somewhere but given the right level of demand growth they can be absorbed over time. Operating rates will be depressed, the question is, by how much?

As the global petrochemicals industry turns its attention to Texas and the upcoming National Petrochemical and Refiners Association’s 33rd International Petrochemical Conference, the talk has to be of these critical balances of supply and demand. NPRA has focused the meeting on domestic energy and security and global regulatory issues, both critical to the future wellbeing of the sector.

Delegates will be turning their attention also, however, to other key drivers that will impact operations in the more immediate term. The current year may not be set fair for petrochemicals - there are far too many uncertainties to allow players to feel anything approaching comfortable.

Meteorological analogies may be well worn but the weather reports say there is a 30% chance of thunderstorms in San Antonio early next week.

The sector certainly faces a stormy near-term future.

By: Nigel Davis
+44 20 8652 3214

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