EPCA: Taking action to stay competitive

27 September 2013 11:04  [Source: ICB]

The petrochemicals sector in Europe seems to be taking a long time to recover from the effects of the 2008 financial debacle, with some analysts predicting that without some radical restructuring plant operating rates may not return to their pre-crisis levels for many years.

However, although the industry is struggling to reach the same output levels as six years ago, its performance in areas such as profitability, costs reduction and operating efficiency is much better than suggested by indicators such as production volumes and capacity utilisation.

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The petrochemical sector is working hard to maintain high levels of performance

There is a lot of behind-the-scenes work going on to make the industry a much more robust competitor in the international market place. Nonetheless, for the moment the sector seems to be having problems getting back into line with trends in the European economy as a whole.

Just as the major economies of the EU have showed signs of turning the corner, figures for petrochemicals output have worsened. Second-quarter gross domestic product (GDP) figures in the 17-nation eurozone recorded a 0.3% increase, equivalent to a 1.1% annual rise, which has prompted politicians and economists to conclude that it is on the road to recovery.

“I am optimistic that Europe will start to move out of recession and come back towards low growth at the end of 2013,” says Hans-Jorg Bertschi, EPCA treasurer and chief executive of the Swiss-based logistics company Bertschi Group.

“There is a good chance that Q4 of this year will see an improvement in the economic situation in recession-hit European countries and others that are stagnant”, he adds. “There are very clear improvements in purchasing managers’ indices (PMIs), giving a good indication of better growth rates in countries such as Germany and the UK.”

But, by the late summer the revival had not been evident in rising petrochemical sales. Ethylene output in the second quarter in Europe amounted to only 4.6m tonnes, according to figures from the Association of Petrochemical Producers in Europe (APPE). This was 3.7% lower than the same period in 2012 and 4% below that of the second quarter in 2009 when the output for the year tumbled to 18.8m tonnes —14% lower than in 2007.

In the first half of this year ethylene production totalled 9.3m tonnes, which was 16% lower than the first half of 2007. Propylene output at 7m tonnes dropped by 3% compared with a year ago but was only 9% lower than in 2007. Butadiene (BD) production at 966,000 tonnes was 7% lower than a year ago and 11% below the 2007 level.

In some countries like Germany the petrochemicals sector has also been trailing other chemical segments. This seems to be reversing the historical trend for petrochemicals, which are usually the first section of the chemicals industry to show evidence of a revival when the economy as whole is picking up.

“Since the second half of last year we’ve been seeing a clear upward trend in speciality chemicals in Germany, while there’s also been an upswing in polymers and consumer chemicals,” says Henrik Meinche, senior economist at German’s chemical industry association, the VCI. “But petrochemicals and other base chemicals have stayed flat – although we expect they will show an increase soon because petrochemicals are providing the raw materials to the industry’s higher added value sectors.”

Some senior executives believe that a major upturn in petrochemicals in Europe may be at least a year away. “I don’t expect a big change in Europe in 2014 which looks likely to be much the same in terms of demand as this year,” says Rainer Diercks, president of BASF’s petrochemicals division and an EPCA board member. “Maybe towards the end of next year there could be a slight improvement in demand but even that is difficult to predict.”

Once an upward curve in petrochemicals sales becomes established, producers in the sector will be hoping for a substantial 
improvement in Western European operating rates. Capacity utilisation in ethylene, the benchmark for operating rates, has been languishing in the upper 70s or lower 80s per cent range since 2008.

“Recently, the operating rate for ethylene was at its lowest level since 1999,” says Paul Hodges, chairman of the London-based consultancy International eChem (IeC). Even in the post-2000 years before the 2008 crisis, the operating rates in Western Europe hovered a lot of the time around the middle-to-upper 80s per cent. “In the 1980s and 1990s the industry was considered to be doing relatively well with rates around the lower and mid-90s per cent, while a rate of 85% was regarded as being disastrous and in the long term unsustainable,” explains Hodges.

“Mainly due to demographic factors, the European economy faces a long period of slow growth,” he continues. “So there is a need for some restructuring with present total ethylene capacity being reduced from a current 23.8m tonnes/year to perhaps around 21m tonnes/year. It has to be well planned so that good plants do not disappear because of random closures. To do nothing would make things worse.”

Nonetheless, some of the operating rates along the petrochemicals derivatives chain have contrasted sharply with those for ethylene. Last year in Western Europe output of linear low density polyethylene (LLDPE) at 2.8m tonnes was 101% of nameplate capacity which has remained static at 2.8m tonnes/year for at least five years, according to the APPE figures.

EU producers table

The operating rate for high density polyethylene (HDPE) was 97% last year when output totalled 4.3m tonnes. But it was lower than the four previous years when the operating rate was above nameplate capacity on three occasions and reached 99% on the other.

Styrene operating rates have been as low as those for ethylene with levels in the upper 70s or lower 80s per cent in four of last five years.

This overcapacity in Europe and elsewhere was a major impetus behind a decision in 2011 by BASF and INEOS, two leading styrenics producers, to merge their businesses into Styrolution, a 50:50 joint venture.

INEOS and Solvay earlier this year placed their mainly European-based businesses in vinyls, another petrochemicals segments 
suffering from considerable overcapacity, into a 50:50 joint venture with annual sales of €4.3bn ($5.7bn).

However, the main strategy adopted by producers has been not so much divestments or restructuring initiatives but programmes aimed at cutting costs and raising operational efficiencies. This has enabled them to avoid steep declines in margins in the wake of not only low operating rates but also higher feedstocks costs resulting from high crude oil prices and declining selling prices.

Despite the excess capacity in ethylene and some other petrochemicals, European producers have managed to keep output broadly in line with demand. The lack of excess supplies, ironically in a region with a lot of excess of capacity, has resulted in a depleted spot market for many petrochemical products.

“Buyers are purchasing only contracted volumes,” explains Jossi Landesman, director of Antwerp-based trader BMS and an EPCA board member. “With demand being so poor they don’t want to take the risk of having quantities of product they don’t need. We have consequently a weak spot market with little liquidity but also an unpredictable one.”

“Stocks are being kept at a minimum level,” he adds. “Once demand does pick up prices could shoot up as supply and demand get out of balance. But there are no signs of that happening yet.”

EU producers table

For petrochemical producers in Europe, another current cost disadvantage is their continued reliance on naphtha as an ethylene feedstock at a time of high oil prices. Over the last few years global naphtha prices have been extremely volatile while those for ethane, the cheaper gas-based alternative feedstock, have been relatively stable.

Another major production cost for petrochemical businesses in Europe has been that of energy, which now averages around 50% of the sector’s manufacturing costs depending on the type of plant.

“With ethylene crackers which can generate their own energy the energy costs are around 20% with feedstock costs accounting for much of the remainder,” says Graeme Wallace, APPE sector manager. “But the proportion of costs rises along the downstream chain so that with plastics, for example, energy costs make up 80% of the total.”

“Absence of competition is a big cause of high energy costs but it is not the only one,” says Peter Botschek, production, energy and environment manager at the European Chemical Industry Council (Cefic). “Surcharges to meet the extra expense of enlarging the share of renewables like wind and solar energy in the electricity market are also now a large contributor to rising prices of electricity in the EU.”

The UK is an example of a country where liberalisation of the market by itself is not sufficient. Virtually all parts of the energy market — from gas supplies, power generation through to retail distribution — have been open to competition as a result of privatisation. Yet for energy-intensive industries such as petrochemicals the country’s energy costs are among the highest in Europe.

“With liberalisation, unfortunately, one result is that no-one takes proper responsible for ensuring there are sufficient energy supplies,” says Alan Eastwood, senior economist at the UK Chemical Industries Association (CIA). “We have a lack of sufficient gas storage facilities so there are huge spikes in gas prices in the winter months. Coal-fired power plants are being closed but replacement gas-fueled capacity is not being built. All this is ultimately deterring investment in petrochemicals and other energy-intensive chemicals in the country.”

In response to the difficulties of expensive feedstocks and energy at a time of an economic downturn, petrochemical operators across Europe have been focusing on cutting costs over which they have control and on raising operational efficiency.

“Those companies which have been improving their structures have been in a good position to withstand the effects of the downturn,” says BASF’s Diercks. BASF’s chemicals segment, around two-thirds of whose €13.8bn sales last year comprised petrochemicals (over half in Europe), with much of the rest being bulk intermediates), achieved earnings before interest, tax, depreciation and amortisation (EBITDA) of €2.4bn — equivalent to a margin of 17.4%.

This sort of enhancement of cost structures and operational efficiencies is what will be needed across Europe’s petrochemicals sector to deal with imminent global challenges.

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