EPCA ’13: INSIGHT: Taking advantage of changing feedstock dynamics

06 October 2013 15:03  [Source: ICIS news]

By Nigel Davis

BERLIN (ICIS)--The Americans are doing it. And 14 companies, some of them from far afield, have announced plans to add cracking capacity in North America to take advantage of cheap ethane.

Shale oil and gas availability is rapidly changing the feedstock dynamic in the US and Canada. Already, cracker operators have switched plants to crack more gas and less in the way of liquids. The ability to crack predominantly natural gas liquids (NGLs), ethane propane and butane, has become an important driver for profitability in the business.

The impact on profits has been clear for some time now and to the extent that global players are looking much more closely at their high cost assets in Europe and comparing operations there with the sort of margins they can earn on ethylene and ethylene chain chemicals produced in the US and Canada.

The new, low cost position, with ethylene cash costs of production from ethane in the US around $350/tonne (€259/tonne), places any ethane cracker in North America in a clearly advantaged position on the global cost curve. Take that advantage downstream to a product such as high density polyethylene (HDPE) and the potential margin gain is significant.

No matter how long Europe’s liquids-based ethylene producers look at the picture, it does not necessarily change. The higher costs of ethylene production, even if cancelled out to some extent by adding back into the cracker envelope credits from the sale of cracker co-products such as propylene, butadiene and aromatics, cannot be argued against.

Proximity to markets, security of supply and grade range come into it but some assets are even more exposed than they might have been had the status quo prior to about 2007 been maintained.

But cracker feedstock dynamics are changing to such an extent that producers in Europe, particularly, have to ask themselves some tough questions.

Europe, and Asia for that matter, are not typically at the good end of the cost curve, Paul Ray, head of ICIS Consulting & Analytics said on Sunday at the 47th European Petrochemical Association (EPCA) meeting.

Nevertheless, Ray said there are still plenty of business options from companies in the sector. And, of course, the business environment can change.

Europe’s chemical producers are used to change, and used to restructuring – running businesses that are rapidly becoming commodities, developing strategies for a move away from those commodities towards higher added value products, usually backed by more significant technical and customer support services.

In many ways, this is the direction in which businesses in the already developed industrial and chemical markets in North America, Europe and Japan, will have to go. The real growth markets for commodity chemicals and intermediates are in Asia, and to a lesser extent in South America and in Russia/Eastern Europe.

Success in petrochemicals has rested on the ability to turn relatively cheap and unwanted crude oil or gas-based feedstocks into higher added value petrochemical intermediates and into polymers.HDPE variable margins

For the European, and others, the production of polymers and intermediates may be better (more cost-effectively) done in the Middle East, and now, in the ethylene chain, at least, in North America.

But over the medium to long term, questions have to be asked about the sustainability of low prices for ethane in the US. At the same time, the feedstock slate in the Middle East is changing with ethane, associated with oil production, running tighter and natural gas supplies running progressively short. The shift to using liquids to make chemicals in Saudi Arabia and elsewhere in the region will put additional strain on intermediates suppliers in other parts of the world.

Taking a look at the developing refining and mid-stream oil and gas picture also exposes shows how different scenarios could develop for petrochemicals.

Ethane prices in the US would move up if export markets are developed for US natural gas, the low price picture may not be that long lived.

Meanwhile, Europe’s naphtha picture is changing, with about 27m tonnes of naphtha availability in the region lost with the closure of crude oil refineries between 2005 and 2015. That lost naphtha is equivalent to about 9m tonnes of ethylene.

So the European petrochemical industry is contracting, and it will continue to contract to fit the changing feedstock dynamic as well as the market dynamic picture.

Players in the region may still have to take some tough decisions, but they have done so many times before. They also, possibly see more opportunities for value added business or some clever feedstock plays.

As the principal European petrochemical industry annual meeting gets under way, these topics sit high on the agenda. Europe’s petrochemical makers eye the North American shale play with some envy. They really want to see Europe’s strong potential shale position developed to their own and to the region’s advantage.

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By: Nigel Davis
+44 20 8652 3214

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