Market intelligence: EPCA: challenges in volatility, uncertainty and innovation highlighted

12 October 2012 09:41  [Source: ICB]

Themes at the European Petrochemical Association (EPCA) meeting include dealing with volatility and uncertainty, and how companies can make the most of innovation

Chemical producers are in the vanguard of those that have to deal with the twin evils of volatility and uncertainty.

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


 The construction market is weighing on Europe

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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 for 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 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.

Paul Hodges, chairman of UK-based consultancy International eChem talked on the sidelines of EPCA about the "unintended consequences" of quantitative easing - 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 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 of the major suppliers to the sector.

"It seems to have settled out," said Tom Crotty, CEO of INEOS Olefins & Polymers. "PVC [polyvinyl chloride] is okay." 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 2008-2009.

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 (BD) and benzene.

Benzene prices have been sustained in the market and BD 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 - economic strength is shifting back towards the most populous nations. A growing 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.

And turning innovative ideas and actions into profit is a laudable goal for any company but so much can be lost in the process that the costs and risks associated with it sometimes overwhelm the will to try.

In an increasingly interconnected world, established corporate structures appear to work against innovation rather than giving it room to flourish.

Room it needs, speakers at the 46th European Petrochemical Association (EPCA) meeting suggested last week. Industries are incredibly structured, it was said, so the question is: How can they be freed to get to the 'sweet spot'?

Corporations perhaps need to create a company within a company, said John Kao, chairman of the Institute for Large Scale Innovation. "Without some sort of hybrid you're not going to get where you want to go," he suggested.

"There is a lot of knowledge in the chemical industry that hasn't been released to its customer base," former chairman of Belgium's Janssen Pharmaceutical, Ajit Baron Shetty, said. He believes that sector firms are the owners of wells of underutilised innovation.

But the chemical industry hasn't developed the kind of visibility that might allow it to tap into the ideas of others, said Soumitra Dutta, dean of the Samuel Curtis Johnson Graduate School of Management at Cornell University in New York, US.

Dutta's remarks are telling. Information technology is empowering people, he said, but firms are being left behind. "How do organisations react to this change?"

"Technology today is no longer about technology alone - it is about people," and closing the technology gap between people and organisations has become essential, Dutta said.

Underlying the most successful and forward looking firms is a corporate culture that provides time and space for free thinkers. This is a management as much as an organisational issue.

It is all about unleashing the potential of workers in an organisation - from the top down and now increasingly from the bottom up.

By: Nigel Davis
+44 20 8652 3214

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