INSIGHT: Sector retains margins at cracker but downstream exposed

19 July 2011 17:17  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Petrochemical producers managed to maintain profitability in the second quarter, despite higher feedstock costs and lengthening downstream markets, consultants Nexant ChemSystems say.

Companies in most regions were able to balance additional costs with prices and reap the benefits of still relatively robust demand, at least until the end of May, when high olefin prices clearly began to bite

So financial results from the major players for the quarter and certainly the first half comparably should look good. The question will be how the sequential quarter-to-quarter financials pan out.

Analysts will also be poring over views on the outlook given the current pressure on the US economy, the developing eurozone debt crisis and the expected consequences of China’s battle with inflation.

Increasingly, it is market sentiment in China which helps define global profitability.

In the second quarter, the Asia markets proved the exception in terms of on-going profitability, as demand from China slowed, leading to lengthened markets across the region.

Producers in Japan and South Korea were hardest hit, although low import volumes in markets that, until then, had demonstrated particularly strong rates of growth rang alarm bells globally.

The sharp decline in petrochemical prices in Europe and North America in June reflected growing concerns about demand in both regions, as well as a sharp but only temporary drop in the oil price.

ChemSystems says that feedstock costs remained a major concern in the second quarter.

Crude oil prices rose on continued political unrest in the Middle East and North Africa.

Brent free on board (FOB) crude oil prices averaged $119/bbl (€84/bbl) in April and May, more than 13% higher than the first quarter average, and naphtha prices topped $1,000/tonne. LPG processing was attractive from a price perspective, but not given the high value of propylene and C4s.

Yet tight olefins markets pushed contract prices to record highs.

“Strong olefin markets supported margins at the cracker, preserving [the] profitability of integrated producers,” the consultants say. “Meanwhile, [the] average profitability of the South Korean industry fell to a six-quarter low as markets lengthened considerably, with derivatives hard to place in China.”

The consultants’ quarterly report highlights not only the distinct regional nature of the petrochemical industry, but also its global interconnectedness.

Weaker demand in Asia pushed products into the European market, at a time when cracker operators were deterred from reducing operating rates because of high margins. European demand growth was faltering at the same time.

Markets in the US were “balanced to tight” through the quarter, but high olefin prices began to choke off downstream demand as they did in Europe. Cracker outages and production run-downs at refineries – some planned, some not – restricted olefins supply.

The weaker demand picture in China led to output from the Middle East increasingly being directed towards Europe.

ChemSystems’ snapshot view highlights the fact that the strong second quarter performance in Europe and the US masks very different trends across industry sub-sectors.

“Most of the margin continued to be captured at the cracker, with [the] profitability of non-integrated operations being severely squeezed,” the analysts added.

This will colour the performance of sector players, depending on how integrated or exposed to the weaker products they are.

Record high olefins prices hit the profitability of intermediates and polymers, and weaker demand for some of these materials came as a direct result of high prices.

So while naphtha cracker margins in Europe climbed to their highest since the third quarter of 2008, the ChemSystems data shows that leader polypropylene margins could hardly cover variable costs “achieving the third lowest margin of any quarter in the last two decades”.

The firm’s report highlights the wide differences in performance achieved from sector businesses. It underlines the factors that have contributed to another strong quarterly performance – and those that have undermined the sustainability of those returns.

($1 = €0.71)

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By: Nigel Davis
+44 20 8652 3214

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