Future US ethylene capacity may wipe out European production: KPMG

29 July 2013 21:51  [Source: ICIS news]

HOUSTON (ICIS)--The more than 10m tonnes of ethylene capacity set to come online in the US by 2017 could well be the death knell to commodity chemical manufacturing in most of Europe, analysts with global auditing firm KPMG said on Monday.

The only chance commodity chemical manufacturing has in Europe is if it goes full bore into creating its own shale gas revolution as has occurred in the US, said Paul Harnick, KPMG’s global chief operating officer for the company’s chemicals and performance technologies practice.

However, for many companies producing in Europe, “it’s already too late,” he said in a telephone interview on Monday.

KPMG recently published a report on strategic realignment in the global chemical industry. One of its focuses was on how the large increase of US ethylene capacity thanks to a host of announced ethane cracker projects would alter trade flows across the globe.

As a mature economy, the US does not have the ability to absorb all of its forthcoming ethylene capacity and thus will be sending it out for trade across the globe, the report stated.

KPMG sees three potential scenarios resulting from the US capacity boom, which it says are not mutually exclusive.

The first is a return to boom-and-bust cyclicality in the US with large margin swings and the closure of old plants.

The second is price and margin erosion in Asia due to increased competition from US product flowing into the continent. Currently, the Middle East is the major supplier, but the shale boom will make US product increasingly cost competitive in Asia, KPMG said.

The third is a doomsday scenario for European commodity chemical producers: If US producers export directly to Europe, or Middle East producers respond to increasing competition in Asia by switching their export focus to Europe, European producers will have a difficult time competing due to their reliance on pricier naphtha feedstock and older, less efficient plants.

“Inevitably that will lead to closings and restructuring,” Harnick said.

While the outlook for commodity chemical production in Europe is bleak, specialty chemicals may still have a place the global table, Harnick said.

The analyst sees the companies in the region having strong intellectual property bases that can be useful as part of joint ventures in other parts of the world.

As a mature economy with a growth feedstock disadvantage, European chemical companies still can leverage their wealth of technological know-how to access the growth in emerging markets, he said.

Europe is still a place where … you can go make a lot of money,” Harnick said.

It is a point shared by his colleague, Mike Shannon, KPMG’s global leader of chemicals and performance technologies practice.

“It’s not that Europe can’t be profitable,” Shannon said. “There’s just not any growth over there.”

By: Jeremy Pafford
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