INSIGHT: Strong US ethane margins put spotlight on Europe’s crackers

29 October 2012 17:31  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The shale gas advantage is buoying US petrochemical producers at a time of sluggish demand and high oil prices, and as LyondellBasell showed last week this is a sector under pressure – but by no means under water.

Feedstock and energy costs are all important, and when they are low – as they are in the US currently – the world seems a much brighter place.

The Netherlands-registered but US-run global polyolefins and intermediates producer not surprisingly took full advantage of cheap natural gas liquids (NGLs) in the third quarter.

Its US crackers were operating at more than 100% of nameplate capacity while feedstock prices remained stable.

The contrast with Europe was sharp, with naphtha or liquids cracker margins exposed, given particularly weak economic conditions.

“Our olefins and polyolefins business in North America continues to provide excellent results,” said CEO Jim Gallogly in the company’s third quarter results statement.

“The olefins and polyolefins segment results for Europe, Asia and International (EAI) reflected weak European economic conditions, however, polyolefin sales volumes improved versus the second quarter,” he added.

The uptick in plastics volumes in Europe was a sliver of good news in a sea of bad.

The olefins results from the EAI region tracked back down towards breakeven, and were more reflective of the industry and economic environment than the second quarter outturn, the company said. 

EAI olefins earnings before interest, tax, depreciation and amortisation (EBITDA) were down by 210m from the second quarter of 2012, and $140m from the third quarter of 2011. 

A turnaround at the cracker in Wesseling, Germany, hit the results – but that only served to sharpen the focus on the US ethylene plants and gas cracking there. LyondellBasell already had a couple of olefins expansion plans under consideration, but is now looking at a third for its site in Corpus Christi, Texas.

The de-bottlenecking should be larger than the 250m lb/year (113,000 tonnes/year) expansion planned for Channelview, also in Texas, where the company has applied for environmental permits.

LyondellBasell is taking a very measured approach to the shale gas potential by expanding existing capacities, rather than aiming for a full-,blown, grass roots plant. The olefins result in the third quarter was up year-on-year because of higher sales, even though margins were squeezed slightly. The polyolefins business continued to do well, due mainly to improved polyethylene margins.

The poor EAI profits were lifted somewhat by better propylene margins and higher margins for propylene compounds and polybutuene-1. The trouble was that even with the much broader product slate, naphtha cracking in the region could in no way match the returns available from cracking low-cost ethane in the US.

A challenge for LyondellBasell – and for other backward integrated polymer makers in Europe – is to match costs to output and to polyolefins demand, which is showing little life at present.

LyondellBasell does not expect the traditional fourth quarter slowdown to be as bad this year as it was in 2011. The drivers of olefins and polyolefins demand remain intact in North America, Gallogly said, adding: “We do not expect to see the rapid increase in ethane prices experienced in 2011.

“Conversely, we expect European olefins and polyolefin results to remain weak in the fourth quarter.”

The European business, because of liquids cracking and its structure, can sometimes deliver stronger results, however, and the CEO highlighted polypropylene (PP) compounding and joint ventures performance in the recent third quarter.

Europe’s olefins-related businesses survive because of the broad product slate available from a liquids cracker.

“I think there will be some industry capacity rationalisations, but I don't think there will be anything extreme," Gallogly told financial analysts on Friday, 26 October.

"At this point margins are basically break even," he said. "There is obviously some pain in the industry, but everybody is working hard to reduce costs and try to address the issues that way."

($1 = €0.77)

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s
Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly

Get access to breaking chemical news as it happens.
ICIS Global Petrochemical Index (IPEX)
ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index