INSIGHT: Volume sales needed as prices push higher

14 February 2012 17:33  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Financial results from the oil majors have given a clearer picture of the impact of the fourth-quarter slump in margins and demand on petrochemicals.

They also put into perspective what might have to be done to raise profits sequentially in the first quarter of this year.

There was a considerable drop in volume demand in the fourth quarter as destocking took hold along many supply chains. The extent of recovery in the first quarter will be gauged as much by the pick-up in demand – whether restocking or actual demand growth – as by the increase in prices that producers push through in the first months of the year.

The ICIS Petrochemical Index (IPEX) is 6.4% higher in February compared with January, for instance, with aromatics showing the strongest increase. However, the upward price movements are largely being driven by rising crude prices. Asian prices are firming most strongly, followed by those in the US and in Europe.

There is a lot of ground to make up. UK-headquartered BP said on 7 February that its petrochemical segment profits had dropped 60.5% in the quarter compared with the year earlier period as demand fell away and prices came under pressure. The company also does not hold out much hope for improvement for the current quarter. “We also expect the marketing environment in fuels, lubricants and petrochemicals to remain subdued, given the outlook for global demand,” it said.

France's Total on 10 February reported fourth-quarter chemicals profits down 70.0%, with its base chemicals businesses in loss over the quarter – due in large part to the fall in petrochemical margins, but also partly to the impact of the sale of the company's stake in Spanish group CEPSA.

The results from both firms follow the patterns of lower fourth-quarter earnings reported by ExxonMobil and Shell for the biggest integrated petrochemical businesses.

Market conditions weakened considerably in October and November. The fourth-quarter slump followed the slower third quarter, when product demand was hit by customer nervousness. Product margins were squeezed later in the year as concerns grew about the eurozone crisis and China’s economic growth.

BP said its petrochemical margins finished the year at very low levels, having started 2012 on something of a high and benefiting from strength in paraxylene. BP focuses on paraxylene, purified terephthalic acid (PTA) and acetic acid, having sold its olefins and derivatives businesses to Switzerland-based INEOS in the 2000s.

BP has also become much more heavily reliant on Asia markets and growth in the continent. Its aromatics businesses faced weaker market conditions in the region in the fourth quarter as new capacity came on stream at a time, it said, of weaker demand.

Compared with the fourth quarter of 2010, BP’s chemicals volumes were down 3.8% year on year in the quarter – 4.3% lower in the US, and down 3.4% in Europe and 3.7% in the rest of the world.

Earlier, US-headquartered ExxonMobil had reported chemicals volumes down 1.2% in the quarter, with its chemicals profits down 49.1% – 26.6% lower in the US and 70.6% down for the rest of the world.

Of the $524m (€398m) drop in profits between the quarters, $230m was accounted for by weaker margins, ExxonMobil said, while volumes and “mix effects” (product portfolio changes) cut earnings by $40m. $254m of the fall was largely due to “unfavourable tax effects”.

Anglo-Dutch Shell said that chemicals sales volumes were down 16.2% in the quarter because of lower demand as well as the fact that increased maintenance had reduced production plant availability. Its chemicals profits for the quarter were down 22.9%.

Total said that the environment for petrochemicals in the quarter had “deteriorated significantly due to a decrease in product demand”. Sales for the segment, however, were up by 4.6%.

Higher operating costs helped keep chemical profits down in the quarter, and the segment was in loss at the operating level before accounting for equity earnings and a tax gain. Total reported adjusted net operating income for chemicals of €51m ($67m) from €170m in the fourth quarter of 2010.

($1 = €0.76)

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By: Nigel Davis
+44 20 8652 3214

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