By John Richardson
We hope and pray that the nuclear crisis in Japan will be resolved and that the rebuilding process following the earthquake and tsunami can be begin.
My colleagues at ICIS news are doing a comprehensive job in covering the disaster in terms of how it is affecting the petrochemicals industry with Nigel Davis, editor of the Insight section of ICIS news, providing the essential context.
This post from fellow blogger Paul Hodges also provides an excellent summary of the crisis and some scenarios for the industry.
Below we take a break from our own coverage and focus on another topic - some thoughts on the future competitiveness of the European petrochemicals industry.
A widely-held assumption has been that a lot of European petrochemicals capacity will have to shut down as a result of lower-cost capacity elsewhere, particularly in the Middle East.
But the European industry enjoyed tremendous profitability in 2010 as a result of production being carefully aligned to demand.
More important reasons for these stellar results were probably the age of the plants and lack of investment in maintenance as a result of the 2008 global economic crisis. This led to a high number of force majeures.
Perhaps the biggest reason of all, though, was lack of naphtha from refineries. The collapse of demand in 2008, a long-term decline in US gasoline demand and the start-up of state-of-the-art "full conversion" refineries in Asia put the older European refineries under a lot of pressure.
Plant reliability should now improve as a result of the strong 2010 earnings.
But these earnings will give the Europeans a greater capacity to hunker down and wait for another fly-up in margins if the next 2-3 years prove difficulty because a weaker macro-economic environment.
Barring another major global recession that effects demand for all petrochemical products, Europe's use of naphtha as its main feedstock could continue to deliver very strong co-product credits.
The lightening of feeds in the US, as a result of the shale-gas bonanza, has helped tighten butadiene, benzene and propylene markets.
So has the most recent wave of new capacity which was predominantly in the Middle East and gas-based.
A further factor behind the C3s tightness has been polypropylene (PP) demand growth above the expansion in global GDP and in excess of that for other competing polymers.
This is the result of PP gaining market share from these other competing polymers, such as polystyrene (PS), and a lot of focus on application development.
Producers have therefore been lured into adding substantial amounts of PP capacity, in excess of feedstock availability.
Another even bigger bonus for European petrochemicals could be greater, rather than less, availability of naphtha over the next few years.
More than 50% of new vehicle registrations in Europe are of diesel vehicles.
European refiners might have to run harder to make diesel which will result in greater naphtha production. Exporting naphtha and gasoline to the US is going to get even harder because of the country's continuing decline in gasoline consumption.
Refining capacity in Europe might, in theory, be shut down in if the losses on naphtha and gasoline exceed the money to be made from diesel.
But the same mentality applies to refining as petrochemicals: Why be the first, and maybe the last, company to close capacity when there could be another fly-up just around the corner? (The global refining industry fairly recently made tremendous amounts of money as a result of the Hurricane Katrina disaster. The disaster left the gasoline market very under-supplied).
Environmental clean-up costs and contract obligations with customers may also continue to act as barriers to closure (as is again also the case with petrochemicals).
And if more overseas companies such as PetroChina - which recently acquired Ineos refinery assets - buy into the European industry they are unlikely to want to shut down.
The big oil companies are divesting refining assets in order to concentrate on more profitable exploration and production (E&P). A good example was Chevron's sale last week of a refinery in Wales, the UK, to Valero Energy.
Smaller companies such as Valero seem unlikely to want to buy-in and close-down assets.
A further factor preventing capacity being scrapped could be the intervention of governments anxious to maintain national fuel supplies.
If European petrochemical producers, therefore, do not shut capacity down as expected who might be the losers if there is another major economic crisis?
We are going to explore this theme in later posts, but the losers could be the South Koreans and other Northeast Asian producers.
They are facing much-tougher competition for import volumes into China from the Middle East. China's import growth could also slow down due to structural shifts in the economy and greater petrochemicals self-sufficiency.
South Korea, Japan and Taiwan are also entirely dependent on imported oil and heavily dependent on imported naphtha.
Like all scenarios there are a few caveats. Here are a few:
1.) The European economic crisis deepens, forcing further closure of manufacturing industry
2.) The Japanese earthquake and tsunami leads to major changes in the global economy, the scenarios for which are laid out in the post from Paul Hodges - which have linked to above
3.) The high price of propylene results in strong growth of on-purpose production, thereby reducing co-product credits for the liquids cracker players
4.) Continued tightness in C3s leads to PP demand destruction and, as a result, eventual weaker demand for propylene
5.) Co-product credits remain so good that the US makes a major switch to heavier feeds (This won't be naphtha as "heavier" in the US means moving from ethane to propane and butane). This weakens the competitive position of the Europeans