INSIGHT: The potential impact of site closures

25 October 2013 16:39  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Businesses which operate in the UK chemicals sector and their workers breathed a sigh of relief on Friday on the news that INEOS had agreed to re-open its Grangemouth petrochemical plants and refinery.

The climbdown by the Unite trade union, which represents workers at Grangemouth, and acceptance of the significant changes to employment terms and conditions demanded by INEOS, means that the plants can re-start.

INEOS confirmed its commitment to Grangemouth and to an investment of £300m ($484m) at the site to import ethane to raise the petrochemical plants’ competitiveness.

The pressure to accept the firm’s conditions had been intense involving both the Scottish and UK governments.

The Grangemouth refinery is a strategic asset for Scotland and for the UK. The petrochemical plants are important in a UK context and are fed by naphtha and by gas liquids from the North Sea.

The fact that it is just under a year before the Scottish government holds a referendum asking whether Scotland should be an independent country underscores the political backdrop to the INEOS decision.

The bitter dispute between INEOS and Unite threatened 800 permanent jobs at Grangemouth and the work of 2,000 current contractors. But the implications of closure were much wider.

There is some indication that they have been better recognised.

The UK may have lost large swathes of manufacturing but many businesses rely on Grangemouth as consumers and as suppliers. The possible permanent closure – INEOS said it was prepared to liquidate its Grangemouth petrochemical assets – would have had a severe knock-on effect. The cracker’s influence does not stop at the factory gate.

The ethylene plants account for more than a third of the capacity on the ethylene pipeline system which links Grangemouth, the Shell/ExxonMobil owned cracker at Mossmorran in Scotland, Sabic’s cracker at Wilton in the northeast of England and Shell plants in Stanlow in the northwest.

There are capacities to produce benzene, butadiene and ethanol, linear low density polyethylene and polypropylene at Grangemouth downstream from the two crackers at the site.

Petrochemical producers in Europe are under intense pressure from cost-competitive facilities in the Middle East and now from the US. So INEOS wants to bring ethane into Grangemouth and into Rafnes in Norway to feed its two European gas crackers.

It has agreements in place for exports from Marcus Hook in Pennsylvania to Europe.

The strategy is looked on with some scepticism by its peers but with most of the capability in place, INEOS will introduce greater feedstock cost and availability flexibility into its European production network.

This bet on shale plays well too with the UK government’s drive for greater acceptance of shale gas exploration in Britain which has made progress but which faces some public opposition.

The INEOS dispute has highlighted the predicament ethylene producers and other chemical companies face in Europe.

About 3.5% of Europe’s ethylene capacity is set for closure – INEOS’s crackers at Grangemouth represent 4% of the European total and one third of the company’s European capacity, debt rating agency Moody’s said on Friday.

It suggested before the INEOS decision to re-open its plants in Scotland had been made, that more adjustment would be required.

“We think oil companies will need to support the rationalisation effort in the industry,” it said. “This is because they own a number of relatively small crackers in Europe (with capacity of less than 400,000 tonnes/year), which tend to have lower economies of scale and have lower profitability. These crackers represent approximately 9% of total European ethylene capacity.”

But Moody’s suggests that shutdowns among these smaller units are unlikely in the next two years because they are run on integrated cracker/refinery economics and potentially lengthy negotiations with the labour force.

INEOS owner Jim Ratcliffe and his small management team were able to force change on the Grangemouth workforce, their lockout producing the desired results. The company believes that it can now secure competitive production operations at the site.

A similar outcome would be unlikely elsewhere.

($1 = €0.72, €1 = £0.85, $1 = £0.62)

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By: Nigel Davis
+44 20 8652 3214



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