INSIGHT: Feedstock cost competitiveness the big challenge for Europe

04 October 2013 17:23  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The competitive threat to petrochemical and polymer producers in Europe comes on a number of fronts but principally on feedstock costs.

Largely linked to oil, those costs have remained consistently high while low cost gas-based producers in the Middle East and now in the US have chipped away at domestic European markets.

The global economic downturn, coupled with the fiscal cliff hanger in the eurozone, has only exposed European producer weaknesses. Chemical imports have been rising, while exports, particularly to the important China market, have remained flat.

Producers this week have shown that they have to take tough decisions against the backdrop of weak demand and lost competitiveness. The consequences of those actions should not be underestimated.

Underlying trends are making themselves felt and it is becoming clear that European petrochemical producers, while exposed at the cracker are also extremely vulnerable in the major polymers and increasingly in certain intermediates.

INEOS this week, for instance, said it had written down to zero its petrochemical assets at Grangemouth in Scotland. They were once valued at £400m ($645m).

The petrochemical site, with its two crackers, a 700,000 tonne/year gas cracker and 320,00 tonne/year liquids cracker, has lost £150m in the past four years, the company said. Gas liquids feedstock supply from the North Sea was running out and employee pension and other costs were high, it added.

“We had no option but to write down these assets, said chairman of the Grangemouth Petrochemicals Business, Calum MacLean in a statement. “After four years of heavy losses, the petrochemicals business is effectively worthless. Without lower costs and an alternative source of additional raw material it will close 2017, at the latest,” he added.

INEOS has faced the impact of higher feedstock costs – even though the larger of the two Grangemouth crackers is fed on natural gas liquids (NGLs) from the North Sea – and weak downstream product demand.

It also said on Friday that it would close a 300,000 tonne/year vinyl acetate monomer (VAM) plant at Saltend near Hull in the east of the UK. The plant derives its ethylene feedstock from Grangemouth.

At the sharp end of the competitiveness issue, the company has been trying to successfully operate a world scale intermediates plant in a high cost region against the impact of low cost competition in a low growth market.

Demand for VAM in Europe has not been good – force majeure on VAM from Saltend was declared in February this year. The lack of that capacity had little effect on the European market.

The Saltend VAM businesses has faced stiff competition from much lower-cost producers in the Middle East and North America.

Product from Saudi Arabia, derived from lower-cost ethylene, has taken a place in the market having first arrived from the Kingdom in 2010.

A VAM producer in the US, LyondellBasell said this week that it had signed a 10-year agreement for the storage and handling of glacial acetic acid and VAM in Antwerp with Oiltanking Stolthaven. It said Europe has an increased need for these imports.

LyondellBasell Acetyls, which says it is the world’s second largest producer of VAM, has highly integrated production facilities at La Porte in Texas where it has access to ethylene derived from shale gas.

INEOS Enterprises said that low-cost imports and a hostile trading environment had made the closure of the Saltend VAM plant inevitable despite expenditure on the business and the efforts of management and employees.

“Regrettably, our cost per tonne remains significantly higher than the international competition and as a consequence we have lost a number of important contracts,”  CEO of INEOS Enterprises, Ashley Reed, said.

“The VAM market has become increasingly targeted by cheap imports mainly from Saudi Arabia and the USA, both of whom benefit from low cost raw materials,” the company added.

“The VAM plant in Hull gets one of its main raw materials, ethylene, down a pipeline from Grangemouth in Scotland. Despite this integration, Grangemouth site has not been able to provide products at a low enough cost to enable the Saltend site to match its competitors prices,” it added.

INEOS says it wants to lift the competitiveness of the Grangemouth site - it says it has spent £1bn there since 2006 but the dwindling supply of feedstocks from the North Sea have meant that it has only been able to run the Grangemouth production units at 50% of capacity.

It is considering importing ethane from the US to Grangemouth but has said that the costs of doing so would be high. It already has a plan to import ethane from the US through an existing terminal to its gas cracker in Rafnes, Norway.

A “survival plan” for Grangemouth, including investment in a new gas import terminal for the site would cost in the region of £350m the company says. It has approached the Scottish government for £9m in grant funding for the project and is seeking £125m in loan guarantees from the UK treasury.

“Any investment will only come to the site if it can be shown to be economically viable,” the company said in a statement on Friday.

($1 = €0.62, €0.73)

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By: Nigel Davis
+44 20 8652 3214

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