INSIGHT: Petrochemical industry profitability hit hard in Q4

16 January 2012 16:43  [Source: ICIS news]

By Nigel Davis

CrackerLONDON (ICIS)--The fourth quarter of 2011 was tough for naphtha-based petrochemical producers and most polyolefins players in Europe and northeast Asia.

ICIS margin data have charted the margin decline for cracker and polymer producers in the final weeks and months of the year amid widespread industry destocking. Profitability suffered as co-product margins dwindled and operating rates were forced down.

Global economic uncertainty hit the petrochemical industry hard, with the highest-cost producers undoubtedly suffering the most. The reversal in fortunes expected in fourth-quarter financial results for the sector will contrast sharply with the buoyant first half.

The margin decline worsened from the third quarter. “Demand stalled as many consumers lost confidence in the outlook for the global economy and heavily reduced their stocks at the end of the year,” Nexant ChemSystems said in a report that has just been released. Feedstock costs remained high while petrochemical prices fell from their mid-year peak.

Liquids-based producers in northeast Asia and in western Europe clearly suffered the most. Nexant believes that average profitability in the industry fell to its lowest level since the financial crisis took hold of manufacturing at the beginning of 2009.

The consultancy's petrochemical and polymer margin index plunged by 40% from the third quarter of 2011 to just 16  the index is based on the first quarter of 1984 being 100. The index for South Korea, representative of naphtha cracking in northeast Asia, was sharply negative.

In Asia, weaker demand from the important construction and automobile sectors; the floods in Thailand; and pressure on export demand for finished goods, all conspired to lengthen petrochemical markets and drive prices down.

The situation in Europe was difficult to say the least with operating rates, by Nexant’s estimate, close to 75%, the lowest since the end of 2008.

Market weakness hit players in both the US and the Middle East, although the cost position of producers cracking gas feedstock was considerably better than for their liquids-cracking counterparts.

Apart from cost-advantaged ethane, cracked predominantly in the Middle East and in North America, both propane and butane prices remained at a discount to naphtha. And butane provided the lowest cost route to ethylene for those producers with the feedstock flexibility, Nexant ChemSystems said.

Producers in the Middle East managed to hang on to higher margins longer but by the fourth quarter were hit by the weakness in European markets and the slowdown in Asia. The regional Middle East petrochemical cash margin index fell by 12% from the third quarter to 135, with the first quarter of 1995 being 100.

The quarter-to-quarter margin fall of 15% in the US followed a drop between the second and third quarters of the year and reached a two-year low.

The consultancy's Petrochemical Industry Profitability Index combines indices for olefins aromatics, intermediates and polymers and as such encompasses the types of operation found in many chemical company portfolios.

The fact that its European polymer margin index, for instance, remained at its lowest level for the past two decades, gives some idea of how polyolefins players were performing towards the end of 2011.

Weak demand led to much lower benzene prices, which dropped below those for toluene. But companies operating reformers were able to hold on to their margins on aromatics, given lower naphtha feedstock prices. “Reformate extraction units back integrated to naphtha continued to offer a more profitable route to produce xylenes,” Nexant ChemSystems said.

Financial analysts see the upstream margin decline providing some cost relief for European and other producers operating further down the petrochemical and chemical chains. Many of these businesses, however, will have been blighted by low demand in the 2011 fourth quarter.

The margins fall may also have halted given the restocking that is expected in the first quarter of 2012 and, certainly, the higher prices that producers are trying to push through on still relatively tight cracker product availability.

European ethylene producers, for instance, are looking for a three-figure increase to cover higher feedstock costs. Some say they are currently losing money.

In the US, ethylene producers are expected to benefit in 2012 from lower feedstock costs and somewhat stronger demand.

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By: Nigel Davis
+44 20 8652 3214

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