Market intelligence: Europe must change its chemical sector to face challenges

11 October 2013 10:10  [Source: ICB]

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 is rapidly changing the feedstock dynamic in the US and Canada. The ability to crack predominantly natural gas liquids (NGLs), ethane, propane and butane, has become an important driver for profitability in the business.

Phamacists Rex Features

Rex Features

A focus on food and healthcare could be the way to go

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 derivatives 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 high density polyethylene (HDPE) and the potential margin gain 
is significant.

HIGHER COSTS FOR EUROPE

The higher costs of ethylene production in Europe, even if cancelled out to some extent by adding back credits from co-products such as propylene, butadiene and aromatics, cannot be argued against.

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, said Paul Ray, head of ICIS Pricing & Analytics at the 47th European Petrochemical Association (EPCA) meeting on 6 October.

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 restructuring – running businesses that are rapidly becoming commodities, and developing strategies for a move towards higher added-value products, backed by significant technical and customer support services.

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. For European and other players, 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. Ethane prices in the US could move up if export markets are developed for US natural gas. The low price picture may not be that long lived.

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 feedstock in Saudi Arabia and elsewhere in the region will put additional strain on intermediates suppliers in other parts of the world.

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.

Players still have to take some tough decisions, but they have done so many times before. Europe’s petrochemical makers eye the North American shale play with some envy.

They want to see Europe’s strong potential shale position developed to their own advantage.

OTHER DISRUPTIONS

In the meantime, it always make sense to at least consider some of the outlying factors that could have a major impact on business.

EPCA delegates on 7 October were asked to entertain a number of alternative futures posited by senior industry executives and by historian Niall Ferguson.

The world will continue to rely on oil, gas and coal for the foreseeable future even as the use of renewables is pursued and energy efficiency improves, BASF CEO Kurt Bock said. BASF may continue to look at the possibility of processing more renewables but has calculated that it would take a land area the size of Montenegro just to replace the feedstocks needed for its Ludwigshafen production site in Germany with renewables.

From a chemical executive’s perspective, it is very much about feedstock availability, cost certainly, but also about what can be made and sold successfully in developed and developing world markets.

FOOD, HEALTH, BIOTECH

SABIC CEO Mohamed Al-Mady challenged Europe’s petrochemicals players to think long and hard about the parts of the business that might suit them best – businesses related to food and healthcare perhaps, with the idea being that some fundamental chemicals processing might be better left to players with a lower cost base.

Europe needs to develop a more robust chemical industry and one that can capitalise better on regional strengths. Europe’s chemicals players should focus on three areas, Al-Mady suggested: research and cost efficiency; technology and innovation; and developing solutions for some of the over-arching trends affecting demand and wider society in Europe.

Expand a knowledge-driven chemical industry focused on the needs of the consumer and on the food, health and biotech industries was Al-Mady’s message.

CHINA AND US IMPACT

Ferguson’s most direct challenge to current industry thinking was the idea that the growth of megacities in China and emerging economies would drive strong chemicals and plastics demand growth might be wrong. He also suggested that “the age of plastics could end in our lifetimes”. Bio-engineering and other break-out technologies may change the face of the chemical industry. More likely, history may show that chemicals production, in Europe and elsewhere, suffer under the influence of shocks to global oil production, weakened China demand and slower growth in the US.

Ferguson warned that conflict in the Middle East could persist for a decade, and that oil prices could be kept high as a result. China’s financial problem is as big as that in the US in 2007, he added. “When the Chinese financial crisis comes along, you’ll all have to revise your projections,” he said.

However, Ferguson believes that the monetary and fiscal problems of the US are probably the most significant the world faces.


By: Nigel Davis
+44 20 8652 3214



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