INSIGHT: Petchems' profitability heading for extended slump

05 January 2009 17:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Petrochemicals' profitability is suffering badly in the face of poor demand, the ongoing impact of the credit crunch and the weakened oil price.

Consultants ChemSystems suggest too that given the build up of global overcapacities the industry will slump into a trough towards 2011. Rapidly falling crude oil prices have proved to be even more dangerous than the ever-higher prices seen in the middle of last year, they say.

Producers may have done well to force prices up to help cope with higher feedstock and energy costs, but they are having to hand back the increase and some more as demand and prices collapse.

The problem is that the global olefins capacity excess could be as much as 27m tonnes over the next four years. This “alarming divergence” has been forecast for some time, certainly, but the collapse in demand and the oil price have not.

Petrochemicals makers could be relatively confident about their place in the world with still high crude prices and demand growth underpinning their efforts to counter overcapacities.

The impact of these multiple events, however, will be particularly severe.

The world’s major economies turned down in the latter half of 2008 and the knock-on effect of the credit crunch helped bring many chemicals markets to a virtual halt.

Most observers forecast a further weakening of GDP (gross domestic product) growth in the near term. ChemSystems' parent company, Nexant, does not anticipate economic recovery until 2011.

If that is indeed the case then global olefins consumption will fall significantly in 2010 and exacerbate the impact of olefins oversupply.

Producers will want to run new plants at full capacity as soon as possible from start-up. Many new facilities are being built to capitalise on significant feedstock cost advantage.

It will be the established producers in western Europe, in the US and the high-cost players in east Asia that will suffer.

Only high operating rates in the past have supported stronger product margins. ChemSystems suggests that operating rates for producers in western Europe and the US will slump to a broad trough around 2010 and that profitability will be further weakened by the downturn that began in October, worsened towards the end of 2008 and which is likely to extend into 2009 and beyond.

This will be a tough time for petrochemicals producers and for polymers makers of all sorts. Petrochemicals prices are expected to remain subdued through 2012 under the consultants’ “stable” oil price scenario, which suggests that crude prices will remain around $75/bbl.

The Nexant model this year encompasses three oil price scenarios, with the high case built on a price of $100/bbl and the low case on $30/bbl.

Petrochemical prices will be strongly influenced by the prevailing crude price. If crude oil prices stood at $76/bbl in 2010, linear low density polyethylene (LLDPE) is expected to trade at about $1,350/tonne, Chem Systems says.

The impact on petrochemicals of the sharply lower oil price and the slump in demand in the fourth quarter of 2008 was severe and will be reflected in the financial outturn for all industry players. The most highly leveraged could potentially suffer the worst, although all established players will have felt the heat.

In a quarterly profitability analysis for petrochemicals in western Europe, the consultants note the discrepancies that became increasingly apparent towards the year-end between spot and contract margins.

ChemSystems' cash margin indices appeared to have staged a recovery in the quarter, but this was due to the contractual difference between monthly and quarterly based petrochemical prices and naphtha priced on a daily basis.

Naphtha prices were at record lows in the quarter, trading at a discount to crude as reformer and cracker operations were cut back. But naphtha crackers ran at reduced rates or were temporarily shut down as contractual demand fell away.

Naphtha-based cracker margins more than doubled but European crackers were running at historically low rates.

Polymer prices collapsed in the quarter but integrated cracker margins were supported by cracker co-product credits. The near record high integrated economics for polyethylene producers have contributed to the downward pressure on polymer prices, Chem Systems analysts say.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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