INSIGHT: European players must worry about costs and markets

23 November 2012 16:39  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--European chemical industry executives are quite rightly deeply concerned about their increasingly uncompetitive cost position.

Cheap shale gas means that North American players can make inroads into numerous product chains. The position is likely to persist although ethylene chain margins could be pressured if ethylene moves into oversupply.

Costs have also risen dramatically for producers that rely on cracker co-products, such as butadiene, as availability tightens with the shift in the global cracker feedstock slate. Conversations with some managers in recent weeks have underscored the fact that this situation will not change soon.

The Americans win out too because domestic demand is likely to be stronger than in Europe. Lower costs mean that they will be competitive in export markets.

GDP in the eurozone contracted again in the third quarter, by 0.1% following the 0.2% drop in the second quarter. EU GDP in the period only managed to climb by 0.1%.

Seasonally adjusted, GDP in the eurozone fell by 0.6% and by 0.4% in the EU compared with the third quarter of 2011. On the same basis US GDP was up by 2.3% and GDP in Japan up by 0.2%.

And while EU budget wrangling continues there can be little doubt that these are difficult times indeed, particularly when looked at from an international perspective – and all the large petrochemical players operate in many different national markets.

The eurozone’s economic problems seem so deep, so intractable, that the industry perhaps feels unable to do anything other than to maintain operating-rate discipline and constantly cut costs.

Borealis CEO, Mark Garrett, speaking on 16 November, put much of the frustration into words when he bemoaned the lack of action by Europe’s politicians on economic reform.

“I believe Europe has entered a 10-year stagnation period, just like the Japanese have suffered, and we can’t expect [Mario] Draghi at the European Central Bank [ECB] to fly in like Superman and rescue all of the politicians who aren’t prepared to make any fiscal or structural changes to the economy,” he said in an interview with ICIS.

Borealis had just revealed higher third-quarter 2012 net profits achieved on stronger base chemicals earnings and profits from the expanded Borouge joint venture in Abu Dhabi with state oil firm ADNOC.

“Despite the ongoing challenging market conditions in the European marketplace, the polyolefins business improved its financial results compared to the same quarter last year, supported by a higher price environment,” Borealis said.

The company is a significant Scandinavian and west European polyolefins producer but its Abu Dhabi venture, based on low-cost gas feedstock, is not surprisingly proving to be a money spinner.

The third phase of the Borouge project is currently employing some 23,000 contractor and sub-contractor employees. It will increase the Borouge olefins/polyolefins annual production capacity from 2m currently to 4.5m tonnes by the middle of 2014.

Borealis has always been very much focused on process and product innovation and just this month announced the acquisition of DSM and ExxonMobil's DEXPlastomers in the Netherlands. It will buy elastomer and plastomer specialties to complement its offerings in film markets.

But the push to make a higher proportion of added value polymer products can only take the company so far.

“Current developments indicate that the petrochemical business in Europe will remain challenging,” Garrett said in the Borealis third-quarter results statement.

“We will continue to optimise our European operations in order to stay at the forefront of the market.

“Borealis has positioned itself well over the last five years to be able to weather such difficult market conditions and always remains focused on its four pillars of safety, innovation, operational and commercial excellence.”

Garrett is not alone in believing that the market interventions by the ECB can only decrease in their effectiveness.

“The impact of each additional monetary measure is that each time Mario Draghi prints more money, the bang for his buck goes down, so until we get to a situation where we’re prepared to make the fiscal and structural changes, that will continue,” he said.

“We have a little less profitability this year,” he added. Nine-months net profits for the company are down compared with the same period in 2011.

And he added that 2013 will be a year when the company transitions towards the Borouge 3 start up. “Borouge 3 will be the biggest single kicker for our profitability in 2014 and 2015,” he said.

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

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