INSIGHT: EPCA '12: Managing volatility and uncertainty

08 October 2012 15:27  [Source: ICIS news]

By Nigel Davis

BUDAPEST (ICIS)--Chemical producers are in the vanguard of those companies that have to deal with the twin evils of volatility and uncertainty.

Delegates at this year’s 46th European Petrochemical Association (EPCA) meeting are facing very real headwinds in the fourth quarter as destocking takes hold well before the year end.

Every producer and consumer is nervous, with the economy in Europe uppermost in their minds. Demand growth is constrained although a slump across the board is not widely expected. So this is not a repeat of 2008-09.

But companies do operate in very uncertain times. What has taken hold up and down petrochemical value chains is a wider realism.

Markets are growing more slowly than expected. Firms are making money but they have to be running very efficiently and have a broad enough product spread to do so. Not much is expected from the fourth quarter of 2012 and the first quarter of 2013. Some players are not really contemplating an improvement, let alone an upturn, until the second half of next year.

To put the situation into some perspective, trade federation Cefic on Monday said that EU petrochemicals production was down 2.7% year-on-year in July and 2.2% in the January to July period. EU polymers production was down a more significant 5.8% year-on-year in July and down 5.5% January to July.

Consultant Paul Hodges talked on the sidelines of EPCA of the “unintended consequences” of quantitative easing, which have been a high oil price and wide swings in demand for products such as petrochemicals.

One follows the other as petrochemical value chains amplify oil price fluctuations. Demand tracks those swings as customers react to monthly and to spot petrochemical product price increases and falls.

Certainly, key end use industries and sectors in Europe face major problems. Construction and autos are depressed. But while construction activity is down, demand is said to be steady by at least one major supplier to the sector.

“It seems to have settled out,” INEOS Group director of communications and CEO of INEOS Olefins & Polymers, Tom Crotty said. “PVC [polyvinyl chloride] is okay,” he added. INEOS ChlorVinyls calls itself a European market leader in PVC and chlor-alkali.

It’s not great, but it’s not bad, Crotty said on the sidelines of EPCA. Europe’s auto sector has kept up and managed declining sales, he suggested. We haven’t seen the shutdowns which were a major factor in plunging chemicals output in 2008 – 09.

Crotty admitted that polyethylene (PE) is a tough business in Europe currently but said that the better placed producers are making money. “If you have a reasonably differentiated portfolio you are in good shape,” he said. Those trying to sell solely commodity polyolefins are unlikely to be in such a position.

The great challenges for cracker operators in Europe have to do with feedstocks: getting the feedstock mix right and playing as adroitly as possible with liquids cracking, which is still deriving value from ethylene co-products such as butadiene and benzene.

Indeed, the difference in the fourth quarter of 2012 is that benzene prices have been sustained in the market and that butadiene is still providing value for naphtha cracker owners.

The change in feedstock slates globally: the shale gas revolution in the US and gas cracking in the Middle East, both underpin the value that liquids crackers can generate while demand for products derived from C4s and C6 holds.

The goal is for better feedstock economics and higher customer value, Crotty said.

Europe’s economies are struggling in a changing global environment in which GDP is being driven more by population numbers than by industrial design.

As the influence of the industrial revolution wanes – or becomes more evenly distributed – then economic strength is shifting back towards the most populous nations.

A growing aspirant middle class in some of these countries, alongside other bands of consumers, will drive demand for chemical products in the years to come.

The clever companies will be those that understand changing demographics and the importance of global megatrends – the trends that are driving demand for products used for sanitation and water treatment, for different types of energy and those designed for a better environment – and adapt their corporate strategies to match.

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By: Nigel Davis
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