INSIGHT: Investing for efficiency in tricky European environment

04 May 2012 15:00  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--These are tough times for Europe’s cracker operators and those integrated downstream to polyolefins. Feedstock and energy costs are high and demand is weak. Operating rates are nowhere near optimal and far removed from those seen at the peak of the petrochemical cycle in 2008. Some producers are importing ethylene to make up the volumes.

While operating rates and margins have improved from the fourth quarter of last year, operators are challenged to raise prices to generate stronger margins upstream while downstream demand growth remains uncertain.

To put the first quarter challenge into perspective, naphtha costs were 18% higher in the quarter. The ICIS index representing a basket of petrochemical prices in Europe (IPEX) climbed 21%. Europe’s energy prices have been climbing.

Europe’s stumbling economies and the high cost position of many of its industries put local operations at a competitive disadvantage. And this is in addition to a relatively high-cost regulatory burden of policies on chemicals control (Reach); climate change (the emissions trading scheme, ETS); and pollution control (the Industrial Emissions Directive) to which producers in other parts of the world are not exposed.

Not so long ago, olefins and polymers producers in Europe were most concerned on the supply side about the possible impact of low-cost capacity additions in the Middle East. Now, it is the “shale gale” in the US and the attention the availability of cheap natural gas liquids (NGLs) is putting on olefins (and subsequently derivates?) investments.

In a high cost, low demand growth environment, Europe is, on the face of it at least, not the best place to be doing business. The German economy looks stronger but the southern eurozone states are cruelly exposed by the debt crisis.

Europe’s crackers provide the feedstocks for important end-use sectors such as construction and autos, with polymers demand constrained by the lack of European economic growth. Meaningful polymer demand growth this year, for instance, realistically is only likely in markets in central and eastern Europe.

Europe will face challenging economic conditions in 2012 and, perhaps, 2013, debt rating agency Standard & Poor’s said this week. Passenger vehicle registration would decline for the fifth year in succession as a result, it suggested “with potential declines in some countries in the double digit range”.

Recent data show that petrochemicals production in Europe in February was 2.5% lower than in January and 3.5% lower than in February 2011. Polymers production was down 3.0% month to month and down 2.6% year on year.

Against the backdrop of the debt crisis and Europe’s medium-term woes, it is not surprising that companies have looked to costs.

Eni decided last year, to realign its petrochemical activities, which are predominantly Europe-based. The focus is on costs and include cracker and polymer capacity reductions but also, importantly, efficiency improvements.

Cracker operators across Europe have had to re-visit cost structures in a difficult cost and demand environment. In such circumstances, some capacities are set for closure while others will be upgraded.

A great deal can be done to raise cost and environmental efficiencies. Last month Sabic, for instance, said it would spend €135m ($178m) upgrading its 1970s vintage Naphtha Olefins4 cracker at Geleen in the Netherlands over the next 18 months. The unit’s energy efficiency will be raised by 8% in the process and capacity by 2%, Sabic said. The plant is rated at 675,000 tonne/year according to ICIS.

Multinational companies have the option, of course, of investing in multiple locations and might be expected in the current climate to focus resources on the US, or on ventures in the Middle East or Asia.

Experience has shown, however, that lower-cost investments on existing facilities are vitally important when it comes to sustaining business over the longer term. And Europe’s cracker and polymer production base requires continued investment if successful, large-scale manufacturing is to be sustained.

European business is in the middle of a difficult period, the extent of which cannot easily be judged.

Companies have talked in this reporting period about gaining momentum month to month in the first quarter, although European operations have been shown to be among the most exposed to high costs and weak growth.

This lack of growth is a source of heated debate, analysts at Credit Suisse acknowledged earlier this week. “In particular, there is uncertainty as to which economic indicator is giving the right signal; the Ifo showing sharper momentum or the PMIs [purchasing manager’s index] showing a recession,” they said.

The Ifo is a widely-followed business climate index for Germany: the eurozone PMI reflects surveys in manufacturing and services.

As long as there is not another shock, the bank is relatively upbeat and believes that new business can begin to flow.

Europe’s growth has been affected by softening in the US and Asia as well as fiscal tightening in some countries in the region, it said.

“The surveys are, thus, suggesting that the economy is going through a soft patch at the moment – evident in the deceleration of the PMI – but prospects for the future remain brighter, evident in the Ifo’s upward trend.”

W Europe ethylene capacity May 2012

($1 = €0.76)

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By: Nigel Davis
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