EPCA: Strong rebound restores confidence

03 October 2011 00:00  [Source: ICB]

Petrochemical producers enjoyed a strong performance in 2010 and the first half of 2011. EPCA president Tom Crotty discusses recent developments and the outlook for the sector and describes what to expect at this year's EPCA Annual Meeting in Berlin

 

John Kay

Petrochemical producers enjoyed sales growth of 20-30% in 2010, and in some cases substantially more, as demand recovered from the downturn and prices climbed. Earnings too have bounced back substantially after the difficult period in 2009.

The recovery, notes Tom Crotty, president of the European Petrochemical Association (EPCA) and a board director at Switzerland-based petrochemicals producer INEOS, "has been fast and steady and the general view is that the sector has done extremely well."

The improved situation has seen companies switching their attention back to longer-term aims and ambitions and has stimulated a recovery in merger and acquisition (M&A) activity.

The strong performance continued into the first half of this year, he adds, as "volumes have been strong, which has pulled up prices faster than anticipated." He argues that companies are now back on to a growth and development agenda, but with an approach tempered by the lessons of the 2008-09 crisis. "Many are looking to develop in a less risky way."

The sharpness of the downturn in 2009 drove stocks to all-time lows and removed all buffers from the supply chain, as companies sought to preserve cash. With no safety stocks in the system, outages have had a significant impact, helping to further increase tightness of supply, he explains.

However, Crotty cautions that, at the mid-point of 2011, levels were looking too high to be sustainable relative to the market supply/demand values in Europe. He expects a slight correction for the latter half of the year. "We are about mid-cycle at the present, but prices are at top of the cycle levels, so there is inevitably going to be some adjustment."

Some softening was already evident by July, with olefins prices coming off levels that had seen margins at a 10-year high earlier in the year. The picture for acrylonitrile is similar, says Crotty. The softening comes as a reality check, he notes. Lack of stocks coming out of the recession and nervousness about supply were the main stimuli for the high levels, more so than the strong demand, he believes.

But, he adds, "I don't foresee a looming disaster. The markets will not plummet down and for 2011, 2012 and 2013 we are on a tightening market pattern as we are still in a tight spot in terms of supply and demand. Volume growth is sustainable and margins will moderate, but not collapse."

New capacity is unlikely to bring much relief to this position, as the wave of new plants has largely passed. "We all sweated on the wave of extra Middle East capacity, but the situation now is not the same as it was five years ago." Also, he adds, the US excitement about shale gas reserves being used to feed new US capacity is unlikely to make a huge impact in global petrochemical terms.

"There is a lot of talk and hype, but in reality there is not that much [feedstock] around. It will be good for the US industry and allow it to reinvest, but it's best not to get too carried away," advises Crotty. "There's not going to be another 10 new crackers and no long-term impact on the global market."

On the positive side, though, he notes the shale gas will keep US gas prices highly competitive and keep gas cracking very attractive versus liquid cracking in North America.

Crotty is sceptical of shale gas becoming a big factor in Europe, given the cost of extracting any reserves that are found and environmental factors that are likely to beset any attempts at extraction in western Europe.

SELF-SUFFICIENCY IN EUROPE
While the US is rediscovering its interest in investment on the back of shale gas, in the Middle East producers are having to look at a wider feedstock slate to run proposed investments. Supply and access to low-cost ethane feedstocks has become more difficult, forcing regional players to look to expand their downstream offerings to take full advantage of the heavier but more expensive feedstocks.

This changing pattern will enable Europe to become more self-sufficient again in petrochemicals, Crotty believes, as the pace of investment in new capacity slows in the Middle East. But to be competitive, there is still some rationalization that needs to take place in Europe. There are, he notes, still some uncompetitive units and although there have been some adjustments and closures, notably among polymers and ethylene oxide units, "we will see more, which will ensure the market keeps reasonably balanced."

Continuing strong demand growth from China will see most of the new Middle East production capacity tied up in this direction, again taking the pressure off European players. Crotty argues that even if the Chinese government-mandated slowing of the economy does reduce GDP growth to 8% or so, it will not be a disaster for petrochemicals.

China's latest five-year plan, he explains, sets targets that will lead to an ongoing and significant demand pull. There is a strong regionalization program and a strong urbanization drive - requiring plenty of construction materials - plus a drive to upgrade and update petrochemical production and close older capacity.

"It is hard to see demand slowing down significantly and fundamentally and so China will remain a significant export market for the foreseeable future," he says.

While European players continue to ensure they get the most out of their existing, largely naphtha-fed cracker base, there has been increasing interest and investment in the use of renewable feedstocks as an alternative to fossil-based resources. Crotty believes there will be significant developments over the next few years as the sustainability agenda is more widely recognized. Companies will be looking to develop their business and their products and processes along these lines.

DEMAND PULL
There is already a demand pull from customers such as major retailers, as well as a push from industry looking to expand its raw materials slate and reduce dependence on increasingly expensive and volatile fossil fuel supplies. The top half-dozen big petrochemical players are active in this area, he notes. Initial activity has been driven in niche positions, where customers are willing to pay more for green or sustainable products, but Crotty can see it gaining momentum. The big unknown, he says, is at what point it may change the balance between conventional and renewable feedstocks.

If renewables do expand significantly there will certainly be a question of where the bio-feedstocks will come from, given the scale of production. There has been a somewhat of a backlash over the use of food crops as a source of sugars and starches for first-generation technologies, and Crotty believes long-term uptake will be critically dependent on second- and third-generation technology, using non-food biomass and wastes.

Ethanol from sugar cane may be alright in Brazil, he notes, but elsewhere there is plenty of waste carbon around to be exploited. INEOS, for example, is currently building a large unit in Florida in the US to commercialize its technology for converting a range of organic wastes from the food processing industry into ethanol and energy. It is also planning another in the UK, using domestic waste.

The concept, he explains, is that a conurbation of 1.5m people will produce enough waste to produce enough bioethanol for 10% blending into fuel, plus 30MW of power. But the ethanol could also be used as a chemical feedstock, for say bioethylene, and INEOS is looking at how this might develop in the future.

Many companies will also be looking at their energy usage as part of their sustainability drive. In reality, sustainability will mean different things to different businesses.

ANNUAL MEETING FOCUS
EPCA, he notes, does not have a policy or guidance on the issue, but does provide a forum for discussion. This was reflected by the theme of the EPCA Annual Meeting in Budapest, Hungary, last year, when the emphasis was on how the chemical industry could supply sustainable solutions to the needs of the world's growing population.

This year the Annual Meeting in Berlin, Germany, is focusing on the message that the chemical industry is all around us - accounting for 95% of the products we use every day. Crotty says the EPCA wants to keep the debate alive on sustainability and play its part in the International Year of Chemistry (IYC) in 2011. This is sponsored by the United Nations Educational, Scientific and Cultural Organization (UNESCO) and the International Union of Pure and Applied Chemistry (IUPAC).

"We concluded that as EPCA we wanted to get out more into the world and say what an important industry we are. In most of the EU - Germany excepted - chemicals has a poor image." As a result EPCA has co-produced with these bodies a promotional film for IYC, entitled "Chemistry: All about you", as a resource to reach out to young people from 10-20 and promote the benefits of chemistry.

It explains the importance of chemistry in our daily lives and how it provides the global population with access in a sustainable way to drinking water, food, clothing, health and health care, energy- and emission-friendly housing, transport, communication and education.

The film will be shown in Berlin both within the meeting and to the general public. A party of young people from across Europe has been invited to attend the Annual Meeting as guests of the Young EPCA Think Tank and past presidents of the EPCA. "We need to get into the way of thinking that the negatives are not what we should be focusing on. It's a real uphill battle for the industry. Even politicians are not well informed. Our industry is critical and people need to understand this. Only then will we be able to attract people to the industry."

This year's Annual Meeting features a panel discussion on end-consumer awareness about what the chemical industry supplies in daily life, with leading industry experts including the past CEO of Shell and former head of Shell Chemicals Jeroen van der Veer and Timothy Hanley, global chemical industry group leader at Deloitte Touche Tohmatsu. Also taking part are Ines Kolmsee, CEO of SKW Stahl-Metal-lurgie, and Giorgio Squinzi, president of European trade group Cefic.

Recognizing that one of the aims of the IYC is to encourage women in science, the closing session on sustainable development in the Middle East will feature a speech and Q&A session by Her Majesty Queen Noor of Jordan.

"We are looking forward to some good speakers and discussion. The presence of Queen Noor is a real addition as she does a lot in the area of education and will help celebrate the role of women in chemistry," concludes Crotty.


By: John Baker
+44 20 8652 3214



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