INSIGHT: US producers take advantage as demand dynamics play out

16 April 2012 17:38  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--INEOS on Monday talked of improved olefins and polymers (O&P) margins in Europe in the first quarter, but its financial results for the period show how high costs and slow growth continue to hobble the business.

The operating environment is much better than at the end of last year, of course, but the contrast with North America, where cracker operators such as INEOS are playing the ethane advantage to the full, is stark.

North America gas-based feedstock costs have tracked lower in 2012 because of the ready availability of shale-gas liquids. Petrochemical producers are riding high with their product prices better reflecting the price of oil, while volumes strengthen with the US economy.

Lower ethane costs contributed to a spike in ethylene margins in the quarter, while planned and unplanned outages assisted in keeping ethylene supply tight. (Up to five crackers, or 10% of US ethylene capacity, are expected to be down in the March-April period, a fact that helped keep ethylene prices high in the first quarter.)

INEOS said that polymer demand “remains solid, supported by an improving US economy”. Its O&P North America profits in the quarter were up by 23% compared with the relatively strong first quarter of 2011.

Producers in the US are doing well. ConocoPhillips said at the start of this month that it expected its first-quarter chemicals results to be higher than for the same period last year because ethylene margins were among the strongest seen in the industry in the past 20 years. The US-headquartered oil major participates in the business through the 50:50 joint venture Chevron Phillips Chemical.

US IPEX, WTI and Henry Hub prices to Q1 2012

The picture is very different in Europe, although volumes have improved and higher prices have helped lift margins above unsustainable levels. Switzerland-registered INEOS lost money in its O&P Europe businesses in the fourth quarter of last year and 2012 did not get off to a good start.

Naphtha prices climbed at the start of the year with oil but cracker product price increases were pushed through and margins strengthened. Demand for ethylene and propylene was solid, INEOS said, and butadiene did well. Polymer demand was described as moderate.

But cracker operators and derivatives producers were still squeezed by high feedstock costs and INEOS reported a 61% drop in profits from O&P Europe year-on-year.

Generally, petrochemical product margins in the first quarter were near historic lows, consultants ChemSystems said on 11 April. “Weak economic activity and a lack of confidence in the outlook led to frail demand, restricting the opportunity to raise prices,” it added.

As the US natural gas price dropped, so US gas-based producers margins rose, the charts from ICIS on this page show. ChemSystems data suggest that the ethane advantage in the US over naphtha was as high as $550/tonne in the quarter.

US variable ethylene margins Q1 2012

High oil and naphtha prices burdened producers in Europe and Asia in the first three months of the year. And volume demand growth has been slow.

Europe’s economies continue to struggle, although there is some life in manufacturing industry. Asia demand did not come back as expected after the Lunar New Year holiday. Market sentiment was depressed as China cut economic growth targets.

The somewhat weaker Asia picture was reflected to some extent in INEOS’s Chemical Intermediates results, where first-quarter profits were down by 20%.

A record quarter for phenol was due to good demand and constrained supply. Oligomers demand was strong in all sectors, INEOS said. Nitriles were improving, it added, but ethylene oxide (EO) performance was mixed – good demand in Europe was offset by a weaker monoethylene glycol (MEG) market in Asia because of softer polyester demand.

($1 = €0.76)

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By: Nigel Davis
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