European Political Suicide Seems Unlikely

HDPEmarginsendMay2014

By John Richardson

For once, we are not going to talking about demand but will instead focus only on supply.

“In all scenarios, the US captures market share away from Europe,” the American Chemistry Council’s (ACC) chief economist, Kevin Swift, said in a presentation last week.

As my colleague Nigel Davis, in another of excellent article, writes: “US chemicals exports are expected to rise and the ACC sees the US capturing global market share. Higher cost players in Europe will be most exposed, firstly in ethylene chain products.”

A common assumption is that European crackers will shut down to help make way for all the new US shale gas-based capacity additions.

But if you take a look at recent margin analysis from ICIS (see the chart above), the performance of the European industry isn’t at all bad.

Why shut down a plant when you only have to cover variable costs, a you don’t have any debt left over from building  the plant? The chart indicates that Europe is comfortably covering variable costs.

We also live in a very political world, as we discovered last November with the rescue of the Grangemouth petrochemicals complex in Scotland, the UK, which was partly the result of government intervention. More government-driven rescues could be on the cards.

Refineries will also be kept open because we live in such a political world, even if on paper they uneconomic. This means that European petrochemicals producers will continue to enjoy an excess of local naphtha. This saves them some 30/tonne on freight costs for naphtha compared with their Asian competitors, estimates one consultant.

Ironically, of course, also, the US shale revolution might just come to the rescue of Europe through the emergence major US-European ethane exports. This is probably a stretch because of the logistics costs involved, but we know at least two other European petrochemicals producers, along with INEOS, that are looking at this option.

And we also live in a world of diminishing supplies of co-product credits, thanks to both the lightening of the US feedstock slate and possibly the same in Europe if ethane exports from the States really take off.

Another assumption is that the overall US manufacturing revival will exert pressure  on both the European cracker operators and their customers and customers, customers -  all the way downstream to finished goods. But this again assumes that European politicians will be prepared to commit political suicide by allowing a collapse in employment.

China might end up becoming a lot more self-sufficient in petrochemicals than some US players think – making even less room for US exports.

Sorry, we lied. How can we, on any occasion, not talk about demand? This article sums up the economic outlook for the US.

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