Wilton closures highlight challenges for Europe chemical sites

The domino effect

11 August 2009 11:35  [Source: ICB]

Capacity closures at the Wilton, UK, chemical site highlights the threat to chemical sites across Europe 

RECENT EVENTS at one of the UK's most important shared chemical sites will be sounding alarm bells at similar sites across Europe as the recession results in more permanent capacity closures.

A spate of permanent closures at Wilton - a key part of the UK chemical industry - will result in a domino effect as one closure denies feedstock to other players on the site. At the top of the chain is Saudi Arabia-based producer SABIC, which owns an 865, 000 tonne/year cracker at the site.

In July, Spanish group La Seda de Barcelona announced the shutdown of its 500,000 tonne/year purified terephthalic acid (PTA) plant. Earlier that month, US-based producer Dow Chemical said it would close its 320,000 tonne/year ethylene oxide (EO) and 275,000 tonne/year ethylene glycol (EG) facility. The news sparked further closures by UK-headquartered Croda which said it would cease production at the site.

In the last two years, SABIC has closed an aromatics unit and INIVISTA said it would cease adipic acid production at the site by the end of 2009.

SABIC is due to bring on stream a new 400,000 tone/year low density polyethylene (LDPE) plant in August which will soak up some of the cracker's ethylene capacity once production is fully ramped up. But this still leaves SABIC with a great deal of excess from its the cracker.

Wilton has access to the sea via the river Tees, and is also connected to the ethylene pipeline running to Grangemouth/Mossmorran in Scotland and across the Pennine hills to the west coast Runcorn/Stanlow complex.

But, according to Glyn Johnson, a director at Brussels-based Kline, access doesn't solve its problem: "There is a long-standing excess of ethylene in the UK. US-based energy company ExxonMobil exports Mosmorran ethylene [from the cracker there] to its Northern Europe plants. One problem is the Tees, which is not deep enough to accept significantly larger or more ethylene carriers. Also, cryogenic capacity [to liquefy ethylene] at Teesside is finite. You can't get a lot more material out by boat."

One option could be to build more derivative plants at Wilton to soak up excess ethylene. Johnson said this would not be an attractive option: "SABIC will no doubt be thinking hard about its European ethylene strategy. I'm sure they don't want to feel they have their arm forced to develop derivative positions as a result of Wilton's declining attractiveness to the current downstream players."

Not everyone says that the situation is so dire for SABIC. Global consultancy Accenture says the site has developed sufficient infrastructure over the years to deal with excess ethylene. Theo Jan Simons, global chemical industry lead says: "An excess of ethylene was always an issue for the Wilton site and in response it has quite good infrastructure for shipping off liquefied ethylene, which would usually find its way onto the ARG pipeline system. The new LDPE plant should enable SABIC to deal with the excess ethylene."

Simons said Wilton has already benefitted from government support for the LDPE plant. He adds: "It's bad news that Dow is pulling out, but it's good news that Wilton has the infrastructure to deal with the situation."

SABIC spokeswoman Rachel Kundra adds: "The closures do not take effect until the end of January 2010, and we will have to see how the market is doing at that stage. The impact on SABIC of any closures of plants which consume ethylene will be very much offset by the fact that our LDPE plant is due to come on stream shortly, and when it is fully up and running, it will consume around half of the capacity of the cracker at Wilton."

Some consultants say Wilton highlights the need for effective state intervention for ailing European chemical sites. Paul Hodges, chairman of UK- headquartered International eChem, says governments need to think about the long-term survival of an industrial base when a site is under threat.

"At Teesside, you've got production of building-block chemicals which are pivotal to the development of new technologies. You need skills and know-how for the industries to evolve, building on the experience of the past. If you shut down Teesside, there will be a blow to confidence, skills will disappear and it will be very difficult to get momentum going for the building of new, low-carbon industries."

Global consultancy KPMG agrees, saying that the UK government needs to make a strategic decision about the importance it places on a viable domestic chemical industry.

Chris Stirling, European head of chemicals and pharmaceuticals, and Paul Harnick, European chemical and pharmaceutical executive, say: "The UK has to worry about whether it wants to have a secure supply of chemicals or whether it is happy to allow its chemical industry to whither away and be dependent on imports in the future.

"I don't think this has been done very effectively, and neither does anyone in the industry. Clearly industry is at fault for not pushing itself and not getting itself heard enough."

Harnick questioned the viability of the Wilton site, bearing in mind the recent closures: "You're looking [at] a third of the site's capacity already closed or about to close - this doesn't look great considering the operating model of the cluster."

IMPLICATIONS FOR EUROPE
We are likely to witness situations similar to that at Wilton playing out across Europe as the recession leads to capacity closures.

There is a consensus that the new polyolefins capacity - based on cheap ethane feedstocks - coming on stream in the Middle East will be targeted at Europe. Add to this the worst recession in decades, and the threat to chemical sites and clusters is obvious.

Fred du Plessis, president of the European Chemical Site Promotion Platform, says: "In general, at present, Europe is vulnerable: No-one could disagree violently with that statement. Across the board petrochemical sites are vulnerable, particularly those who face direct imports from the Middle East."

If a player wants to pull out, there are various strategies available to either persuade them not to withdraw, or to reduce the impact on remaining businesses.

According to du Plessis: "If a cluster is under threat, there might be temporary measures the rest of the site could take where the whole cluster could cut back production temporarily. We've always said that one of the strengths of Europe is its integration. The chances that people will shut plants that are integrated should be slightly lower but we have seen some examples where a key plant within a value chain has been shut."

He says it may also be possible to supply ethylene to a plant at a favorable rate to avoid losing a downstream customer to keep the whole complex going. "Because they're interconnected they can share a bit of the agony."

SHARED SERVICES
If one company pulls out of a site, the rest can face paying more for shared services such as electricity, steam, maintenance, waste water and security. This can be particularly painful if a company is a start-up with low cash flow.

There are different models in Europe. Sites like Wilton are owned by private companies, in this case Singapore utility group Sembcorp. If a player pulls out, global companies such as Sembcorp may be able to use their contacts elsewhere to find other companies to plug the gap.

At other sites, companies own shares in a company set up to provide shared services, allowing remaining players at a site to hold an exiting company to account, as Walter Pfeiffer, a partner at Germany's Roland Berger, explains. "For example, at the former Huls site near Frankfurt in Germany, the companies are co-shareholders of the facilities company. So if someone moves out they still have to share some of the costs because they are still shareholders. In a looser cluster, walking away is a lot easier."

CAPACITY CLOSED OR THREATENED AT WILTON/TEESSIDE

Petroplus refinery Refinery products Threatened with closure or conversion to storage
Dow Chemical Ethylene oxide/ethylene glycol Closed by January 2010
SABIC Aromatics End 2008
Artenius PTA Closure announced
INVISTA Adipic acid end of 2009
Source: ICIS

GOVERNMENT MUST ACT
Paul Hodges, chairman, International eChem
I don't think the government has got to grips with this yet: does it want to be a victim or a player? It should be talking to all the companies on Teesside and conduct a study to look at the basic building blocks. It seems pretty sensible to have a dialogue to understand what the issues are.

Read Will Beacham's chemical industry blog


By: Will Beacham
+44 20 8652 3214



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