INSIGHT: Europe and Asia face cracker cull

09 November 2011 15:46  [Source: ICIS news]

By Andy Brice and Elaine Burridge

Naphtha cracker at sunsetLONDON (ICIS)--Dow Chemical’s CEO Andrew Liveris highlighted the problem at the US producer’s third-quarter earnings conference call late last month.

Higher naphtha costs and shrinking product margins are putting liquids crackers in Europe and Asia under threat.

Dow reckons that some 2m tonnes/year of cracker capacity in Europe and Asia could close. Whether those crackers will be temporarily idled or permanently shut down will depend on the direction of the economy and how strongly confidence recovers, Liveris said.

Naphtha costs have risen while co-product prices, particularly those for benzene and propylene (and now butadiene) have dropped.

Polyethylene (PE) prices are under pressure amid worries about Europe’s beleaguered economy and expectations that demand for the resin will fall.

“Right now, as predicted, we are facing trough-like supply/demand conditions in the ethylene chain. We expect high cost crackers in Asia and western Europe to begin to feel the margin compression in the very near term,” Liveris said.

“In Europe and Asia we do believe the industry is at a point where asset decisions will be taken as a result of these current margins,” he added.

"We've identified about 4m tonnes/year of vulnerable production right now based on pure naphtha plays, mostly in Europe but some in Asia. I think it will be more idling than shutdowns.”

Tom Crotty, director of Switzerland-headquartered producer INEOS, agreed with Liveris’s comments but said this needed to be put in context.

Some 48% of the world’s ethylene capacity is naphtha based, which amounts to around 55m tonnes, he said. An attrition of 2m tonnes/year represents less than 4% of the total.

“We have already seen closures of smaller scale naphtha crackers over the past couple of years totalling some 1m tonnes/year of capacity and I am sure we will see more of this in the next few years,” said Crotty.

The economy, proximity to the Middle East, dependence on naphtha and the size and age of crackers makes European crackers the most vulnerable.

If ethylene growth slows down in 2012, then it is possible that some capacity would close, added Paul Bjacek, chemicals and natural resources, research global lead at management consultancy Accenture.

The EU’s capacity is linked to derivative units and co-product chains, so closure would require some period of pain lasting more than six months. However, 2m tonnes/year is not a lot to ask, which Bjacek suggested was closer to 7% of European capacity and 1% of world capacity.

“A reasonable forecast, in our opinion, is around 1m-1.5m tonnes/year,” said Daniele Ferrari, CEO of Italy’s Polimeri Europa.

“It will surely be necessary to arrange reductions of production capacities, with particular regard to the oldest and most inefficient plants.”

Polimeri Europa has already taken steps in 2011, shutting its 250,000 tonne/year Porto Torres cracker in Italy, including the site’s aromatics and polyethylene (PE) plants. These will be replaced by a new 350,000 tonne/year bio-processing complex that is due to come on stream in 2013 or 2014.

Alexander Keller, global head of chemicals/oil practice group at Roland Berger Strategy Consultants, also agrees that cracker capacity will need to be closed in Europe, but suggests “it should be more than 2m tonnes [rather] than less, looking purely at economics”.

“What we expect to happen in reality, is that less will be closed; we expect a minimum of 1m tonnes/year in Europe. This would stand for 2-3 crackers. There might be some potential for more in Europe up to 2m tonnes/year, but I do not expect that to happen in the next five years.”

However, closing units in Europe will not be without its difficulties, mainly because many crackers in the region are partly integrated into refineries.

One major producer noted that it would be difficult to run its refinery without a steam cracker. Given the integration value between the refinery and petrochemicals production, the source questioned who the potential candidates were and where they will be based.

“If you look to consumers, there still are a majority who are landlocked,” said the producer. “If you close crackers, you still need to make sure product gets to them - it’s very difficult [because of logistical issues].”

Paul Hodges, chairman of UK-headquartered consultancy International eChem, added that refining economics, as well as petrochemical profitability, needs to be considered: closure would mean the refinery would have to either cut runs, or close down. Also, any major closures in Europe would adversely impact the continent’s ability to rebuild its manufacturing base - a key strategic objective for the future of its economy.

Although improvements have continuously been made to ethylene plants, 75% of Europe’s capacity was built before 1980 and 35% produces less than 500,000 tonnes/year, according to Bjacek.

The median plant size in Europe is about 470,000 tonnes/year compared with North America, which is 660,000 tonnes/year, he said. New world-scale naphtha crackers are considered to be in the range of up to 800,000 tonnes/year.

“Capacity at risk is generally made up of those units that are either sub scale, have an expensive logistical feedstock supply, expensive logistical product sales, have poor co-product capability, or any combination of these shortcomings,” said Crotty.

“There are a number of crackers within Europe and Asia that have these problems and I would not be surprised to see more falling by the wayside as Dow suggests.”

Strong competition in the important polyolefins derivatives market will also drive European producers to restructure their cracker capacities, added Ferrari.

“Furthermore, the competition is sharpened by an increased supply, which is more competitive in terms of costs, coming from other areas of the world, particularly from the Middle East,” he said.

“This scenario results in non-satisfactory rates of utilisation of plants and poor gross margins that do not grant adequate profitability for the sector. High costs of naphtha during 2011 have penalised the European and Asian crackers with respect to the North-American and Middle-Eastern ones, fed by gas.”

In Keller’s view, switching to lighter feedstock and specifically shale gas in the US is adding pressure to the global naphtha-based cracker landscape. Consequently, he believes that as well as closures, there will be further investment in flexible fuel crackers. This has already happened to a large extent in Europe, in particular the ability to switch between naphtha and liquefied petroleum gas (LPG).

Europe is suffering from weak demand growth. Plants that have higher feedstock flexibility and are better located in terms of consumers, such as in Germany or the Benelux (Belgium, Netherlands, Luxembourg) countries, are those that will continue to have most advantages in the future.

In western Europe, Italy and the UK are most vulnerable in terms of possible closure, said Keller, as there are some crackers already on the watch list. Furthermore, some capacities in eastern Europe are at high risk because of ageing assets and their small scale.

Anglo-Dutch Shell Chemicals is among those making changes, with plans to close its 240,000 tonne/year 2B Rheinland cracker at Wesseling, Germany, this month. Similarly, INEOS is still considering shutting its 320,000 tonne/year G4 cracker at Grangemouth, UK. It is the smaller of two crackers at the INEOS Grangemouth site and a final decision on the plant's future is yet to be made.

“Europe needs to take an urgent look at how it can follow the US lead and revitalise its petrochemical industry,” said Hodges.

“The concept of regional clusters could offer some ‘quick wins’ in this area. This requires suppliers and consumers to develop plans that will help enable both to prosper in the increasingly difficult world that likely lies ahead in 2012.”

Crotty added: “There is no geographic or national guide as to which crackers are at risk [in Europe]. The same applies to Asia where there are some crackers in Japan, South Korea and even China that have the same shortcomings.

“In terms of where supply will come from to make up any shortfall from smaller units closing; for ethylene and propylene that will be a combination of expansion of the more efficient units in Europe and Asia, alongside growth in Middle Eastern and some North American gas-based units. For the longer chain derivatives, Europe will continue to need large, efficient naphtha and mixed feed crackers.”

Countries in Asia that rely on more expensive feedstocks and face less favourable conditions such as labour costs and local legislation are likely to suffer from international competition. Crackers with advantaged or government-protected feedstocks, especially light feedstocks, are said to be best positioned.

“On the assumption that China and Japan’s crackers will be protected by the government, I suppose you would assume that [South] Korea and Taiwan’s crackers are also vulnerable,” said Fred Peterson, director of US-based consultancy Probe Economics.

Opinions differ on the timing of any shutdowns but some believe they should happen as soon as possible considering the very weak demand for ethylene and propylene derivatives and a considerable excess of capacity.

“Now is the time,” said Peterson. “Some will restart with economic recovery - which could take years. Financially-caused recessions like this one, and the next possible one in Europe, take years for recovery.”

However, Keller takes a longer term stance, suggesting that shutdowns will be made in the next 3-5 years, and that they are likely to be permanent, even if they are not reported as such.

Ferrari said: “In the short to mid-term these shutdowns will re-balance the current excess capacity. Therefore we expect an improvement in plant utilisation rates as a consequence.” 

“In the long term it is probable that the generated gap between supply and demand will be covered by imports from the Middle East, and possibly from North America as well, considering the advantages stemming from the use of shale gas.”

Countries like China and India are about to build more capacity and will be looking for new outlets, potentially even outside their domestic markets, said Keller. “We expect an increase in ethylene production from approximately 120m tonnes in 2010 to 170m tonnes in 2020, and utilisation rates globally going up to more than 90% on average,” he said.

Crotty thinks it inevitable that there will continue to be changes in olefins production in Europe but expects these to be marginal. Producers operating large-scale crackers with modern efficient technology have a combination of gas and liquids capabilities, refinery integration and a broad and differentiated derivative portfolio that will thrive and be key to the success of the industry, he said.

“Europe shouldn’t give up on a business where it retains considerable strengths,” said Hodges. “Instead, it should focus on innovation and achieving higher performance, via product development and better site integration.”

Additional reporting by Al Greenwood in Houston and Franco Capaldo in London

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By: Andy Brice
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