INSIGHT: Europe’s crackers will run low but not close

05 March 2010 17:36  [Source: ICIS news]

By Nigel Davis

Cracker closuresLONDON (ICIS news)--Does a company just have to work through this slump until it reaches a period of healthier margins and better returns? Or, do the critical decisions to eventually close disadvantaged and uncompetitive plants and put money elsewhere have to be taken now?

Only if it were that easy. The pundits are in full voice. Plants need to close, they say. Europe, northeast Asia and North America will be hit hard by the coming wave of Middle East olefins and polyolefins capacity.

Times will be tough. More new production facilities are being built in Asia and planned for other faster growing parts of the world.

If you have operations in the slower growth regions, just what do you do?

Well, perhaps, you don’t shut them down, which was a point made in the ICIS Asia Chemical Connections blog on 25 February.

Significant new volumes of petrochemicals should become available over the next couple of years, but after 2011 the number of planned new additions starts to slow.

You may feel virtuous in 2014-2015, possibly around the time of the next olefins chain upturn, but you will have lost business, and the chance to make more money.

Look at past shutdowns in Europe. Back in 1993, BP decided to close and dismantle its cracker at Baglan Bay, in Wales, UK. It seemed like a good, indeed virtuous, decision at the time. But, in hindsight, it lost the company a decade or more of revenues from the plant.

This time around, is the situation much different? Operating rates are low, plants are losing money and the prospects for European producers are bleak. But none of this will necessarily force cracker closures.

Consultants have looked at the global and European cracker-cost curves and determined which crackers they believe should be closed. It is not difficult to perform a similar exercise and identify units in Germany, France, Spain and Italy, the days of which might well be numbered.

Output from the Middle East and China is likely to double between 2007 and 2012, consultant Kevin Boyle told the ICIS World Olefins Conference this week.

China’s demand for ethylene-based chemicals may be significant. But as new facilities are built in the country, so the growth of imports slows. The import peak has already been passed for some products. It may be soon for others.

Boyle calculates that net imports of ethylene-based product into Asia will, in fact, fall from 14.5m tonnes in 2009 to 10.8m tonnes in 2012. Product is expected to back up into Europe.

Boyle forecasts cracker operating rates of around 70% when the capacity glut hits. The new producers in the Middle East are expected to run their plants hard  they need to  but they have deep pockets and can weather it out in difficult times.

Not so perhaps for their counterparts in Europe, where costs are high and producers are expected to find it difficult to compete in their own markets, much less for exports.

Options are few, although social issues are likely to become increasingly important as times get harder. In Europe, closure costs are high and the process is lengthy and difficult.

The argument goes that US producers can close plants and adjust output when the going gets tough, although that may not always be the case. Integration is key here. If a plant is integrated back to a vulnerable refinery, then feedstock supply becomes an issue.

In North America, as elsewhere, it is easier to shut capacities sitting on a pipeline network rather than units performing a critical function at the heart of a cluster. Global companies can take decisions on global businesses. The decision-making process for the isolated producer is arguably more difficult.

Companies have planned for the inevitable but suffered shock from the financial crisis and the subsequent global economic downturn. Margins are being recovered, but the outlook remains uncertain to say the least.

Few will want to take on the additional burdens now of plant closures, even if the fundamentals suggest that they should.

An extended downturn and a capacity glut will hit the European petrochemicals sector hard.

Companies have had plenty of time to prepare for the latter. It still depends on whether the former knocks them for six.

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By: Nigel Davis
+44 20 8652 3214

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