Market intelligence: First-quarter chemical profits highlight wide regional gaps

10 May 2013 09:39  [Source: ICB]

It was a tale of three regions for the big petrochemical makers in the first quarter. Ethylene production and profitability continued to be buoyed in the US by the ready availability of cheap feedstock (primarily ethane). Europe continued to play the balancing game, with fluctuating oil-related naphtha costs set against miserably flat demand.

China struggled as the impact of the weaker global economy and the once-in-a-decade handover of power in the vast country served to slow down chemicals demand growth.

Rock chasm Rex Features

Rex Features

The profitability gaps between regions are wide

These are tough times for producers of olefins and aromatics, and particularly for the downstream polymer makers. A weak manufacturing industry and, to a lesser extent because it is so broadly based, consumer demand are putting the squeeze on operators at a time of high and volatile oil prices. Demand is weak and while petrochemical product prices generally may track crude oil with a short time delay - so do costs, for the majority.

The table (below) shows Q1 profitability for the major players. While it needs to be viewed with a degree of caution, it illustrates the broad trends. It focuses on petrochemicals and plastics performance rather than that for the more specialised product businesses of the big diversified chemical players. The companies shown, which include integrated (with upstream oil and gas) and non-integrated producers, are ranked by the year-on-year petrochemical profit change in the first quarter.

Although there is some variation in the profit levels reported - earnings before interest tax, depreciation and amortisation (EBITDA) in some instances; net operating profits, etc in others - it is the changes relative to the first quarter of 2012 that are most relevant.

Producers with crackers in the US have made moves for more than two years now to capitalise on the ready availability of ethane and other natural gas liquids (NGLs) from shale. The ethane price in the US has been low for some time and producers have aimed to run flat out to maximise ethylene profitability.

Downstream from the crackers the world is not quite so bright, as polymer demand comes under pressure from the weak US economic recovery and the battered house construction sector.

US UPSTREAM STRENGTH

The strength of the olefins and derivatives markets in the US is seen in the chemicals earnings of the big oil majors and in, for example, the performance plastics business of Dow Chemical, the Q1 financial results for which are shown in the table.

The ExxonMobil US chemical results for the quarter stand out: they grew by 74% year on year to $752m, while chemicals profits outside the US pushed 44% higher to $385m. It was mainly better commodity margins, the company said, that increased chemicals earnings by $320m.

The profit performance from chemicals for Phillips 66 is included to demonstrate how well its joint venture with Chevron performed in the quarter.

Dow's earnings gain at the group level was led by its performance plastics businesses.

"Our performance plastics franchise delivered a very strong performance due to robust and positive US feedstock fundamentals and focused price discipline in Europe, where the market remains very soft," Dow Chemical CEO Andrew Liveris told the investment community.

The sharp distinction between olefins and polymers performance in the US and in Europe is reflected in the LyondellBasell results for the quarter. US ethylene margins were "great", according to CEO Jim Gallogly. The European business, however, was challenged by high costs and weak demand, although some relief came from lower naphtha prices at the end of the quarter.

profitability table

INEOS said in its Q1 trading statement that demand in North American markets had been firmer than that in Europe and Asia. Full benefit was taken from the current feedstock advantage, as its North America olefins and polymer profits climbed by 42%. European olefins and polymers results were down by 61%, but also hit by a cracker outage in the south of France.

LyondellBasell is cutting back in Europe, although it is saying little about it. Saudi Arabia's petrochemicals major, SABIC, is also restructuring its European operations and making extensive job cuts.

SABIC saw its Q1 net profits drop by 10%, although that was largely a consequence of lower sales volumes for some of its affiliate companies, which undertook planned maintenance.

SINOPEC HIT

The financial results for the giant Sinopec show how chemicals output in China has been hit by the slowdown.

The company tends to produce its chemicals to service China's manufacturing powerhouse, the activity of which has slowed with the wider economy.

The detail within Sinopec's quarterly result is sparse, as it is with some of the other oil companies, including those that roll chemicals and refining results together.

But the company did say that it produced 0.5% less ethylene in January-March 2013, at 2.4m tonnes, than it did in the first quarter of last year.

The BASF results shown here are for its chemicals operations, which include petrochemicals, monomers and intermediates. In the higher feedstock cost environment, the chemical giant's petrochemicals businesses were able to pass on costs to help lift prices and margins. Demand was stronger for the firm's monomers, which include isocyanates and intermediates, particularly for butanediol.


By: Nigel Davis
+44 20 8652 3214



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