INSIGHT: Driving competitive advantage in uncertain times

11 March 2011 19:49  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Ethylene producers in Europe and North America are on a roll, making good money while they can in what is becoming an increasingly uncertain demand environment.

In Europe, cracker operators have been able to match output to supply remarkably well through 2010 and into 2011. Operating rates have inched up as demand has improved, but returns have been maintained with beneficial raw-material-cost pass throughs.

Olefins prices have climbed in the US recently on supply uncertainties largely related to the recent fire at the Enterprise natural gas liquids (NGL) complex in Mont Belvieu, Texas. And producers are buoyed by the development of shale gas resources, which could give them a ready, highly cost-advantaged supply of ethane for years to come.

The high point for petrochemicals earnings came in the third quarter. While the fourth quarter was better than most expected, demand-growth uncertainty abounds. The business is still underpinned by the high oil price, with demand apparently not yet back to the levels seen before the financial crisis and deep global recession.

The demand uncertainty particularly has played out in Asia where cracker margins have been under pressure from weaker market sentiment in the face of an uncertain demand future. Cost pass through has not been as easy as it has appeared in other parts of the world.

Fighting in Libya and civil unrest in North Africa and the Middle East have pushed oil prices higher in recent days. But the disastrous Japan earthquake is expected to have a significant impact on the Japan economy and drive oil demand down further. Crude oil prices weakened on Friday as news of the devastation was absorbed.

The last thing petrochemical, and certainly polyolefins, producers need now is a drop in the oil price significant enough to make customers think again before making critical product purchases. The period of rapidly rising petrochemical product prices - some of which in recent weeks have hit record highs – could be coming to an end.

The past few quarter have shown what can be done in difficult times with demand rising relatively strongly. Factor in the expected cyclical slowing of demand growth in petrochemicals in 2011, and the future begins to look murky.

But most petrochemical producers have a clear purpose and have learned a great deal over the past two years. While money can't be made in the trough, it can be shooting out the other side. Cash flow in this business over the past four quarters has been significant as firms have learned to cut and better manage stocks and working capital. Given current uncertainties, there is little appetite for releasing the brakes to let significantly more product flow.

But these are all short-term issues in a world in which demand for ethylene products is expected to rise significantly.

To make money in petrochemicals over the longer term – to have the ability to iron out and possibly benefit in the peaks and the troughs - requires a disciplined and long-term approach.

ExxonMobil Chemical president, Steve Pryor said as much this week when he also stressed the benefits of integrating petrochemical operations with the refinery.

Superior returns are possible by the application of such an approach, he said at the CERAweek conference. "This constancy of purpose has enabled our downstream and chemical businesses to achieve a combined average return on capital employed (ROCE) of 20% since 2000," he added. That is an impressive rate of return by any standard given the pressures on refining for most of the decade and the bad years for chemicals before 2005. ROCE for chemicals in 2010 was 26.3%

ExxonMobil focuses on engineering, cost optimisation and timely product delivery. The company makes its refinery and chemicals integration work through the effective site-wide optimisation of feedstocks, products, costs, capital and people, enabling all product lines to benefit from the same lower costs, Pryor said.

Some 90% of ExxonMobil's “operated” petrochemical capacity is integrated with refining or upstream gas processing. Molecule management is designed to help the company, the refinery and petrochemical site operator utilise feedstock resources most profitably.

In a year in which most companies impressed, ExxonMobil reported chemical earnings at a record $4.91bn,  up by $2.60bn from 2009.

The company told financial analysts this week that demand growth for global commodity chemicals - such as polyethylene (PE), polypropylene (PP) and paraxylene (PX) – will be above gross domestic product (GDP) to 2015 as new markets are penetrated and there is further materials substitution. ExxonMobil believes that there is a higher growth potential for some of the specialties it makes and that Asia Pacific will account for 60% of future growth.

And the company is going where the growth is. Its new Singapore complex will give it 2.5m tonnes of additional capacity to meet Asia-Pacific demand growth. The first units at the complex will start up this year.

Underpinning the business in the US, however, is the ability to crack gas, liquids and heavier feeds. But there is little doubt that in current circumstances, gas is king. Pryor said that the opportunity extends outside North America and will be shaped over decades.

For more on ExxonMobil's chemicals business see ICIS company intelligence

By: Nigel Davis
+44 20 8652 3214

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