INSIGHT: Europe has to adjust for fit ethylene future

20 December 2010 16:37  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Europe’s cracker operators face an increasingly difficult future as they try to make money against the backdrop of a changing competitive environment.

Costs are rising and will continue to do so, particularly when the EU’s updated climate control regime comes into force at the beginning of 2013.

The impact of more expensive carbon on large producers of CO2 in the chemical industry is likely to be significant. The Association of Petrochemical Producers in Europe (APPE) has suggested that the EU’s post-2013 emissions trading system (ETS) could lead to the closure of close to 10% of the region's ethylene plant capacity.

Producers have done remarkably well this year. Monthly contract prices have been pushed higher on the back of rising feedstock costs. Demand for derivatives has been sufficient to drive the crackers hard and period of tightness has kept all players on their toes. Given higher year-end oil and naphtha prices, there is a push on for a significant increase for the January 2011 contract.

In the medium term, however, Europe’s older, isolated crackers will be under pressure as never before and decent margins from them will be hard won.

Despite suggestions from consultants and accountants that European crackers must close, the announced capacity cutbacks to date have been limited but for some capacities that have been brought down, restart is questionable.

Players can be under no illusions, that, particularly, derivatives from low-cost producers in the Middle East will eventually make a mark on the business in Europe.

Cracking conventional liquids in the region has become a costly business compared with the gas advantage enjoyed by the operators of new gas cracking capacity in the Middle East.

The ethane cost advantage for players in North America is such that they now see themselves as the second-most cost effective in the world.

European players have knuckled down, however, and sought more effective feedstock flexibility. More heavy liquids or, rather, disadvantaged, feeds can be cracked in certain units. Upstream integration has improved to the extent that some plants in Europe remain highly competitive.

But the cost curve has flattened, and in regionally comparative terms more crackers are under pressure.

That is why the words of APPE's executive director, Pierre de Kettenis, ring harshly. The additional cost of purchasing carbon credits in the next phase of the ETS could lead to the closure of 2.2m tonnes of the Union’s 25m tonnes of ethylene capacity, he says.

There are 52 crackers in Europe, and some of them will be under further threat of closure, as additional costs of an estimated €30/tonne ($39/tonne) have to be borne to cover the cost of carbon.

Hardly surprisingly, it is the isolated and non-integrated units that are most exposed but the older units without effective energy-recovery systems are also threatened.

APPE reckons that ethylene production costs in Europe are $800-900/tonne. That range compares with $200-300/tonne in the Middle East.

De Kettenis says that some 600,000 tonnes/year of capacity has closed each year through the recent economic crisis and will not reopen.

There are further permanent closures to come, with Shell closing 240,000 tonnes/year of ethylene capacity at Wesseling, Germany, by the end of 2011. INEOS has yet to make a decision on the closure of its ageing 320,000 tonne/year G4 cracker at Grangemouth in the UK.

The actions by both of these companies, however, give some idea of how Europe’s ethylene makers continue to react to the longer-term strategic pressures.

Shell continues to push for greater refinery integration for its crackers in Europe. Its plant at Moerdijk in the Netherlands will be cracking a significant proportion of heavy feed by the middle of the decade.

INEOS has signalled its intention to build an ethylene terminal in Antwerp to give its large ethylene oxide unit there much more feedstock flexibility. The fact that the terminal will be able to take advantage of an expected increased availability of deep sea ethylene and will be linked directly to the extensive ARG pipeline network shows just how important Europe’s regional and global ethylene integration plays are.

And there is still a great deal of work to be done, even for some of the largest producers and users of olefins in Europe. Some players, well integrated downstream, have sought to adjust and revamp polyolefins production capabilities under the expected competitive threat from the Middle East. They are waiting for others to do the same.

That waiting game can only continue for so long before cuts are made. Europe’s ethylene demand, even though it has improved markedly, is likely to grow much more slowly than in some other parts of the world.

Balancing output to demand cost effectively in changed circumstances will be the name of the game. Units that are not operationally and financially robust will struggle to survive.

($1 = €0.76)

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By: Nigel Davis
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