INSIGHT: Low-cost feedstock boosts US chems as Europe struggles

09 November 2012 16:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--High costs and the uncertain outlook are hobbling European petrochemical producers, driving uncertainty and helping to push profits down. By contrast, producers in the US are buoyed by low ethane cracker feedstock and low natural gas-based energy costs. The domestic US demand picture may be uncertain, but the cost position is not.

This reality has been exposed this week with companies from both sides of the Atlantic producing widely different third quarter financial reports.

Austrian oil company OMV on Thursday reported sharply lower petrochemical profits for the third quarter despite a 5% increase in sales volumes. The company said its ethylene /propylene net margin was down 18% year on year. “Petrochemical margins and volumes will continue to be under pressure as a subdued economic environment weighs on prices,” it added.

In sharp contrast, US vinyls group, Georgia Gulf, reported a 14% higher third-quarter net profit on 12% lower sales but 19% lower costs.

Vinyl resin sales prices were lower in the quarter, although volumes were up, the company said, but its chlorovinyls profits were much higher.

Georgia Gulf sees the low-cost ethane position continuing to underpin performance. The company is due to merge with the commodity chemicals business of PPG and sees a low-cost ethylene feedstock and energy cost position giving it a clear competitive advantage. It is also the latest company to say it is considering a new cracker investment in the US.

“Going forward, we believe low-cost natural gas in North America will remain globally advantaged as a source of energy,” CEO Paul Carrico said. “We expect this to place the Gulf coast chlorovinyls producers in a strong position to supply domestic and export customers.”

But while the low-cost position boosts enthusiasm in the sector in the US, in Europe, it has the reverse effect.

Ahead of publication of a report from German business group BDI, which forecasts continued low US natural gas costs, big chemical makers and others have complained about the impact of Europe’s higher energy costs.

There is the suggestion that energy intensive industry investment will move from Europe to the US. Higher costs are damaging European industry competitiveness.

Europeans are paying four to five times more for natural gas than in the Americas, the Financial Times newspaper reported BASF executive board member Harald Shwager as saying. That means that competition has increased for all manufacturing sites in Europe.

The competitiveness of several sectors will be affected, Bayer CEO Marijin Dekkers is reported to have said.

Financial analysts this week noted that chemical business sentiment is deteriorating not just in Germany, Europe’s most important chemicals market, but also in China.

Germany’s latest chemicals IFO business sentiment index indicates deteriorating conditions in the fourth quarter and in 2013, Bernstein Research said in a note to clients.

“The Chemicals IFO survey shows expectations for business activity in the next six months to be significantly worse than the last survey. The latest October data-point was -24.5 vs. -15.2 in September,” it added.

“In addition, the October Chinese PMI (Purchasing Managers' Index) surveys suggest manufacturing continues to stall, whereas the September and October US PMI suggests a return to growth.”

US chemicals production volumes continued to improve through September, the analysts noted. But the latest data from Europe (for August) show volumes still deteriorating, year on year.

Read Paul Hodges' Chemicals and the Economy blog

By: Nigel Davis
+44 20 8652 3214

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