INSIGHT: Higher costs, ample supply squeeze producers

04 February 2011 17:02  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--ExxonMobil made a good showing in chemicals in the fourth quarter. But its 13% lower sequential quarter-to-quarter segment earnings reflect the squeeze put on all petrochemicals producers towards the end of 2010.

“The biggest impact quarter on quarter was the rapid rise in feedstock costs that really outpaced price increases,” ExxonMobil chairman Rex Tillerson told financial analysts this week. New capacities had also weakened the oil giant’s chemicals margins, and the downward margin trend had continued into January, he said

The impact of higher oil-related feedstock costs in particular, but also of higher ethane prices in the US, will be widely felt across the sector in the first months of 2011.

As the earnings season gains momentum, the heartening return to strong profitability is overshadowed by cost and margin pressures. Rising crude oil-based feedstock prices simply cannot be passed on quickly enough. Demand uncertainty has increased given the commodity price pressure in so many markets, not simply in chemicals.

“Overall, the world continues to recover to pre-recession levels,” Dow Chemical CEO Andrew Liveris said on 3 February. “However, with inflation concerns in emerging geographies, lingering unemployment issues in the US and sovereign debt issues in Europe, we remain prepared for a reversal in momentum.”

Having ridden the rising earnings tide, companies are prepared for a period of flatter growth.

“The closing quarter of 2010 was a disappointing end to the year for many petrochemical producers,” consultancy  ChemSystems said in a sector report released this week.

Tightening markets in Europe could not outweigh the impact of higher feedstock costs, and western European petrochemical industry margins were depressed by 25% from the third quarter peak, it added. Average operating rates for the sector dropped back to 81%. Naphtha cracking margins were squeezed by €160/tonne ($219/tonne).

The situation was different in the US, where tightening markets helped support margins despite almost 30% higher ethane costs.

Polyethylene consumption in the quarter was strong. Average margins were down just 5% compared with the third quarter of 2010 and well above the long-term average given the comparative competitiveness of ethane cracking.

Petrochemicals demand in Asia remained strong through most of the quarter, but concerns were raised towards the end of the year on fears of slower exports of finished goods.

Margins for producers in the Middle East pushed higher, with ChemSystems' cash margin index for the region showing a rise of 14% quarter to quarter.

“Many petrochemical producers will be exposed to a very harsh trading environment in the near term,” ChemSystems says, talking about a business in which capacity additions in 2011 are expected to continue to exceed incremental demand growth.

“Whilst consumption growth is much beyond the control of the industry itself, the supply side, over which it has direct influence, presents an alarming divergence.

“The considerable cumulative excess capacity built since 2008 will take many years to [absorb] and operating rates will remain heavily depressed in the near term,” it adds.

($1 = €0.73)

Click here to find out more on the Europe, Asia and US margin reports
To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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