INSIGHT: SABIC cuts in Europe highlight difficult competitive landscape

19 April 2013 17:18  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Upstream cuts and downstream concerns are likely to colour the first-quarter reporting season which kicks off this month.

SABIC grabbed the headlines on Thursday with its announcement of 1,050 job cuts in Europe. The cuts will be made from a European employee total of 6,000. In the Netherlands, where the company has its European headquarters and a number of chemical plants, 420 job losses are planned, according to union officials.

Wilton in the UK where the SABIC has a cracker and a downstream, relatively new, low density polyethylene (LDPE) plant, will lose one in seven of its workforce, according to reports.

The company said on Friday that two polypropylene lines in Gelsenkirchen, Germany, had been earmarked for closure and that a polyphenylene oxide (polyphenylene ether or PPO) asset would be moved from Bergen op Zoom in the Netherlands to Selkirk in the US. PPO is used to engineer the properties of polystyrene (PS) and styrene-based elastomers.

European petrochemical and polymer competitiveness is being starkly exposed in the current slump and as players in the US particularly gear up to take advantage of low-cost shale-based ethane feedstock. But downstream market weakness is putting longer-term pressure on products like engineering polymers and on more specialised products as Netherlands-headquartered coatings and chemicals firm AkzoNobel showed on Thursday.

SABIC is a low cost petrochemical and polymer producer in Saudi Arabia but is joining a number of its counterparts in Europe in making cuts in the current difficult operating environment. LyondellBasell is restructuring in Europe, for example, and there are indications that other companies will make cuts announcements soon.

Polymers demand in Europe has been poor with output down by more than 18% in the fourth quarter of last year compared with the pre-crisis first quarter of 2008 level. European demand has just not come back as expected because of weak construction and automobile markets and economic stagnation generally across the EU.

Producers also face a clear competitive threat from petrochemical firms located in North America and the Middle East which can utilise cheap ethane feedstock for their ethylene. The region’s polyolefins producers particularly are exposed.

“The planned restructuring includes the shutdown of certain assets and a net reduction of approximately 1,050 positions, while there will also be continued investments in plant improvements, new technologies and innovation,” SABIC said in a statement.

The company has reviewed all its European assets.

Other producers have been through a similar process for their European production and supply footprints.

LyondellBasell confirmed in February that it was talking to employee representatives (works councils) in Europe about further reorganisation with cutbacks likely in manufacturing and in research and development (R&D).

“We are working on a couple of more pretty significant items,” CEO Jim Gallogly said at the time, although the company said it would not give details of the cutbacks.

“The economic environment in Europe continues to present challenges to the petrochemical industry as well as to manufacturers in many of the markets that we serve,” a company spokesman added.

Nothing has changed for the better since then with European business mired in a weak demand and high cost-operating environment.

“The European market is facing structural changes that are likely to set a new course for future competitive challenges,” SABIC warned on Thursday.

“Our industry continues to face slow growth, as consumers’ spending on houses, cars and appliances and investments in infrastructure projects are down. These developments have led to structurally reduced demand and squeezed margins.

At the same time, competition has intensified from other regions, especially from the United States, which has the advantage of shale gas development, and Asia, which has increased local production capacity and consumption.”

There is an old story of attrition in the European petrochemical industry but the new (er) twists are feedstock cost competition in the ethylene chain and the aggressive expansion plans by producers in the US.

The new US plants have yet to come on-stream but the cracking of more low-cost ethane in the US as opposed to other olefins feedstocks and the wider availability of propylene has changed the competitive cost position.

The profit-generating capacity of European operations for global companies is starkly exposed particularly in polyethylene. Other derivatives and naphtha cracker co-products are in a better cost position but demand remains lacklustre in the weak EU operating environment.

Producing companies have to continually assess whether operations are fit for purpose and how best to secure supply to customers while retaining margins, a by no means easy task.

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By: Nigel Davis
+44 20 8652 3214

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