INSIGHT: Energy costs hit margins and demand

28 May 2008 17:18  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Dow Chemical CEO Andrew Liveris spoke on Wednesday of the energy crisis in the US. But the US is no longer alone as the crisis spreads worldwide.

Petrochemicals producers are among those facing the brunt of massive cost increases as oil prices surge and gas feedstock costs follow suit. But the entire chain is affected.  

The only response is to push prices up as high and as fast as the market can stand.

Dow is following in the footsteps of specialties maker Rohm & Haas in announcing across the board price increases.

The Midland, Michigan, chemicals giant says that from 1 June it will raise the price of all its products by up to 20% depending on their exposure to rising energy, feedstock and transportation costs.

It is also mirroring the proposed action of others which, in product lines where supply/demand balances allow, are seeking to push prices higher.

But rising costs are causing real problems throughout manufacturing.

“The government’s failure to develop a comprehensive energy policy is causing US industry to lose ground when it comes to global competitiveness,” Liveris said. “And our own domestic markets are now starting to see demand destruction throughout the US.”

Couple rapidly rising costs with stifled demand and you have a recipe for disaster.

The world’s largest chemicals players are feeling the heat in traditional, well-established markets. Slower growth in North America and Western Europe means a lot to producers with the bulk of their sales there.

Certainly, the industry, almost in its entirety, is looking for still strong rates of growth from China and wider Asia to come to the rescue. But developing market demand can only absorb so much.

Companies are faced with another period of aggressive cost control.

Dow says also that it is “accelerating its existing top-down competitiveness review for all its businesses and manufacturing facilities” in the light of still higher feedstock and energy costs.

The immediate upshot on Wednesday was the closure of an LDPE (linear low density polyethylene) line in Tarragona, Spain.

Dow indicated that it was willing to lose volumes of the polymer in order to gain price increases. LDPE is exposed because it is not doing well and demand growth in Europe and North America has slowed.

Demand growth is expected to remain relatively flat, consultants Chem Systems say in a new polyolefins report.

Global demand for LLDPE exceeded that of LDPE for the first time in 2007. The degree of penetration of LLDPE into the combined LLDPE/LDPE market in 2006 reached 50%.

Polyolefins makers are among those hardest hit by recent cost increases. The ICIS weekly polyethylene margin report for Western Europe for 23 May showed that producer margins suffered a serious fall.

Naphtha prices were up nearly 6% and integrated margins fell by some €84/tonne with most of the fall at the cracker.

The point about this report is that it calculates variable cost margins and does not take fixed costs into account. Add in the latter, and May looks as though it will have been a very poor month for the sector.

China and wider Asia will help maintain polyolefins growth rates this year, Chem Systems suggests, but it warns of a downturn starting in 2009.

The planned wave of polyethylene and polypropylene capacity additions will force operating rates down and dent the profits of companies that have basked in an extended tight market.

Steeply rising energy costs, however, add another factor to the equation and suggest that the second half of 2008 will be difficult too.

If producers cannot push through cost increases then their competitiveness will be hit. If energy costs continue to rise then demand growth will be slowed.

The sector downturn has beckoned for a long time but in the current circumstances looks as though it is approaching fast.

By: Nigel Davis
+44 20 8652 3214

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