Europe prepares for tough times ahead

28 September 2012 10:32  [Source: ICB]

EPCA board members give us their views on the opportunities and challenges facing Europe's chemical sector in the near future

Economic concerns continue to cloud the outlook for the European chemicals sector in the short term. Looking further ahead, the region's decreasingly competitive global feedstock position is a structural issue that will require innovative solutions.


 European chemical companies consider strategic moves

Copyright: RexFeatures

In a pre-European Petrochemical Association (EPCA)interview, EPCA president Tom Crotty, director of INEOS with responsibility for corporate affairs and communications, said the European chemical sector faces continued challenging operating conditions throughout the rest of 2012 and into the first quarter of 2013.

Lower downstream demand from key end-use markets, caused by the eurozone financial crisis, has caused cracker operators in Europe to lower operating rates, and this looks set to continue, according to Crotty.

Year on year, the industry has had nothing like as good a year as 2011, which was very strong, he said. "There were a lot of good signs of recovery, but then the second wave of the euro crisis hit us and that knocked confidence and demand. However, we're not looking at a [2008-2009] scenario where demand literally collapsed. We're seeing an easing back on demand. So for the industry as a whole, it is profitable, but not making mega profits in Europe."

Crotty estimates that operating rates are slightly lower than they were last year. "My guess is that they'd be in the low-90s range rather than the mid-90s range, so I'm sure they're down. From [INEOS's] perspective, we do have the benefit of quite a good mixed economy with gas and naphtha crackers to play with. So we're probably better than most - those figures may be an overestimate [for Europe as a whole]."

Demand for polymers has become erratic in Europe, with sectors such as construction suffering huge reductions in markets for building materials in regions such as southern Europe.

He said: "Where you've got more exposure to the building cycle, there have been significant reductions, especially in southern Europe. You've only got to see economies like Spain and Portugal, where there was huge consumption of polymers into house, apartment and hotel building - that's just not there any more."

Crotty said that INEOS has a focus on robust sectors such as food packaging that are not as dependent on the economic cycle.

"Where we haven't seen the decline that we did see in 2008-2009 is in the automotive sector. The car companies would say they aren't that satisfied with demand in Europe, but it hasn't fallen away like it did in 2008-2009."

Crotty expects the current challenging conditions to continue into the fourth quarter and first quarter of 2013: "We don't see a huge amount of change going into Q4 - a major signal for change is going to have to be an economic signal, and it's very hard to see where that is going to come from. I don't see any rapid improvements but I also don't think we'll see any rapid deterioration. I think we'll see much more of the same as we go into Q4 and Q1 2013."

Crotty added: "There are signs of a bit of stability kicking in around the euro. The European Central Bank's [ECB] position seems to be putting some confidence back."

The ECB has signalled that it will adopt a new strategy of buying unlimited amounts of sovereign debt from struggling EU states.

Europe is now firmly behind the US and Middle East on the feedstock cost curve. As the US chemical industry is reinvigorated by its abundant, cheap supplies of ethane derived from shale gas, Europe is in an increasingly precarious position.

New crackers and major expansions are planned for the US over the next three to five years, and the story of growth in the Middle East is well known. All this is based primarily on competitive feedstocks. In Europe, there are a few major downstream expansions, but nothing in ethylene on the scale of the other regions.

According to Crotty, "longer term, [shale gas] could have a significant impact because we're seeing the environment in the US encouraging investment. So over time, unless we get a rebalancing of that in Europe, then you'll get more investment going into the US, which will be highly competitive, relative to assets in Europe. That's why it's important for us to be engaged in developingalternative feedstocks."

He believes that, realistically, it could take five to seven years to develop shale gas feedstocks. "But on the scale of petrochemical investment that is not a long-term horizon I'm sure you'd see investment on the back of Europe shale gas availability."

Many politicians in Europe have been quick to condemn the exploration of shale gas. In September new French president Francois Hollande said his government would maintain the country's ban on the process of hydraulic fracking, the most important technology for obtaining shale gas.

Analysts also suggest that plans by Polish companies to boost shale gas exploration could be curtailed by the European Commission. Its latest report suggests the pursuit of shale gas may pose a high risk to human health and the environment, and must be strictly controlled.

However, Europe has abundant shale reserves, and the technology now exists to exploit them. Europe possesses a respectable 639 trillion cubic feet (tcf, 24.4bn m3)of technically recoverable shale gas compared with 862tcf in the US.

Crotty says: "There are a number of things we'd encourage governments to do to encourage investment, but on the feedstock front, the development of new energy sources in Europe is pretty important. There are opportunities in Europe that should be followed through and explored. Some countries show more willingness than others."

Encouraging the development of novel hydrocarbon sources in Europe is important for the region to maintain its competitiveness, he says, adding: "For the past few years we've talked about the Middle East having an unassailable position for its feedstock pricing. But in the last two years that has rebalanced as the US has come along pretty strongly."

Major cracker investments could take four to five years to put in place. "The sooner you develop confidence in European feedstock sources, the better," he says.

Crotty points out that Europe already has some advantage because of its existing gas-based cracking capability, particularly in northern Europe where North Sea natural gas has been exploited.

There are gas-based crackers in Scandinavia and the UK. INEOS has gas crackers in both those locations. "That's an ideal opportunity, because as North Sea ethane declines, it becomes even more important to find alternatives," he said.

INEOS has dreamed up an innovative solution to access more competitively priced feedstocks in Europe. Its ethylene terminal in Antwerp, Belgium, is now complete. It will be commissioned for the next three to four months and will be fully operational in the fourth quarter of 2012, according to Crotty.

He says the 1m tonne/year facility will enable the company to access ethylene from a huge range of sources, improving its cost position for the procurement of ethylene.

Crotty anticipates that INEOS will use most of the capacity.

"We are significant net buyers of ethylene - our short is well in excess of 1m tonnes, so on that basis, the terminal gives us a huge opportunity to bring ethylene into ARA [Amsterdam, Rotterdam, Antwerp] and therefore onto the network. It's like having an extra virtual cracker for us."

He said a major advantage it gives INEOS is the ability to be able to source ethylene from a large range of sources, making the company more competitive in terms of its ethylene procurement.

"It also gives us security for our downstream operations, which are reliant on that ethylene. It's avoiding the cost of not having product where you need it when you need it and that's very hard to put a price on."

He added: "Construction is finished and we're in commissioning phase now. It will involve putting ethylene in to test the facility."

Asked whether the terminal could be used by other companies, he said: "This has yet to be identified. We'd like to stay flexibleon that."

Plans for the facility were unveiled in July 2010. It will feed INEOS's ethylene oxide (EO) plant in Zwijndrecht, Belgium, and link to Europe's ARG (Aethylen Rohrleitungs Gesellschaft) pipeline.

Europe must harness its innovation expertise to drive opportunities for the industry, says Crotty. "The driver that sits behind that is environmental performance. If you look at where we put most of our product development effort these days it's into polymers that have light weight and strength, reducing weight loads on cars, aircraft, packaging contributing to CO2 savings."

He concedes that European producers inevitably cannot simply compete on price against the Middle East, which makes the creation of more high value products essential.

Crotty adds: "The key challenge remains the economic environment in Europe and us managing our businesses through that. We must remain competitive on all of our costs, but particularly our feedstocks. The resurgent US has a lower feedstock cost base than it has had for 15 years."


 BASF's Diercks sees the need for plant modernisation

Rainer Diercks, president of BASF's petrochemicals division and an EPCA board member says:

I see two main challenges for the petrochemical industry in Europe. The first is the differing cost level of feedstocks and raw materials throughout the regions.

The second is to cope with the age and the size of the existing plants in Europe. But these challenges partially also open up new opportunities. So the European petrochemical industry also has good reason to be optimistic.

Regarding the first challenge - the cost of feedstocks - we experienced large capacity additions of petrochemical plants in the Middle East mainly based on associated gas from oil production leading to a superior cost position. In addition to that, we have seen extensive shale gas exploration in the US leading to a substantial reduction of prices for natural gas and ethane.

As a result most cracker operators in the US have increased their share of lighter feedstocks and thus have experienced a significant improvement in their cost position. In Europe and Asia - at least within the next ten years - we do not expect a similar trend into lighter feedstocks, since availability of these natural gas feedstocks will remain limited.

But the advantage of lighter feedstocks comes at a price as these feedstocks result in a lower production of higher olefins. Propylene and crude C4 are, meanwhile, an important factor for the competitiveness of naphtha crackers compared to ethane or light feed crackers.

The existing supply shortage and the high demand for C3 and C4 are increasing their prices and thus the profitability of naphtha crackers. In Europe we expect naphtha to be the dominant cracker feedstock also in the future, so the shortage in C3 and C4 will not be as strong as it might be in other regions.

This opens up new opportunities for the European petrochemical industry.

At BASF, for example, we will build a new butadiene (BD) extraction plant in Antwerp, Belgium, building up on the existing crude C4 stream from our cracker in Antwerp.

BD has been experiencing high demand and short supply at the same time in the last years, which led to a distinct price increase for this product.

What about the question of Europe's aging chemical infrastructure? Most steam crackers are rather "old", so in order to continue to be competitive, it is necessary to increase maintenance measures and to invest into technical optimisation.

Also many of these plants are relatively small and are missing the cost advantage of the new world-scale plants in Asia and the Middle East.

But, on the other hand, a comparison of Europe with other regions also shows some advantages as many European producers operate well-integrated production sites that are short distances to customers and have advanced energy integration and optimised product usage.

Products from Middle East and potentially from the US have to be transported over long distances leading to higher logistics costs compensating partly for the lower production costs.

So the competitiveness of naphtha crackers even in Europe is not a major challenge as long as these crackers are strongly integrated into high-value downstream products. This is a key strength of the Verbund concept used at our sites for decades.

By: Will Beacham
+44 20 8652 3214

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