INSIGHT: Petchem players look for ultimate answer

28 September 2008 15:22  [Source: ICIS news]

By Nigel Davis

 

MONTE CARLO (ICIS news)--If anyone asks what you have been doing this year - or how you might be occupying your time at the European Petrochemical Association (EPCA) conference - then the chart below says it all. Battling to keep the business on an even keel and generating a return, let alone a decent one.

 

It shows the top of the ethylene chain: where it all starts for most petrochemicals. So far it has been one helluva year.

  

Soaring naphtha costs have crippled upstream margins, pushing contract margins negative for a time at the start of July. There has been a sharp recovery as naphtha has tracked down with oil.

 

 

It is worthwhile asking where margins are heading now with naphtha feedstock and oil-based energy costs rising yet again.

 

Volatility is a pain: it hurts. Producers and users of petrochemicals are deeply concerned with how they might best cope with wide cost and price swings. The credit crunch also, hangs over the event like a gathering storm.

 

Remember last year? The European autumn in Berlin. Clement weather, a still steady outlook.

 

Contrast Monaco 2008. Sunny the weather may be but the outlook for most parts of this industry is not good.

 

We are on the down slope of the cycle so we ask: just how bad will it get?

 

Producers in some markets wonder how far prices may have to fall before demand returns. Remember, petrochemicals demand grows at a multiple of GDP not much below one times.

 

Yet the statistics show China chemical demand stalling - a Beijing Olympics effect, perhaps. Elsewhere, there is some evidence that converters are having difficulty finding insurance cover for the loans they need to run their business.

 

The tentacles of the financial crisis have well and truly reached chemicals.

 

Producing companies know they have to rely on their own analyses of how they might cope as supply/demand balances alter. Each view is different. The almost overwhelming consensus, however, is that times will be hard for many and even harder for some.

 

New plants based on low-cost feedstocks will be run to capacity. The more costly units will be turned down. Some players remain sanguine: demand for chemicals will not stop; at some stage buyers have to come back into the market.

 

At present, however, the economic situation is so hard to read that no-one really can tell, although a worse than expected slowdown is almost certain.

 

In such times, competitiveness is essential, financial strength a necessity.

 

We wait to see how the most highly leveraged firms in petrochemicals cope with the next few months and, indeed, the next two to three years.

  

A slowdown, sharp or otherwise, will be difficult to negotiate but not impossible to survive. The sector will emerge battered but, hopefully fitter.

 

Which companies then will have the right assets in the right place to be able to more efficiently and effectively capture growth?

 

Low costs and efficient routes to market dominate this business: the twin themes of the 42nd EPCA meeting, which on Monday looks at energy and on Tuesday sustainable shipping.

 

In a well-known book and radio play by Douglas Adams the ultimate question was asked. The ultimate answer was given: 42.

 

A tenuous link maybe but it would be something if the record number of delegates and industry executives attending EPCA this year formulated the ultimate answers - for their individual businesses, of course.

 

The four-day conference ends on Tuesday.

 

To discuss issues facing the chemicals industry visit ICIS connect

By: Nigel Davis
+44 20 8652 3214

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