One never wants to see a major petchem plant shutdown, especially one with the history of Grangemouth in Scotland. It is the UK’s largest cracker site, with ethylene capacity of 1 million tonnes. Its production has a sale value of $1bn ($1.6bn), and a final value in food packaging, consumer packaging and automotive parts of around £5bn.
Yet as of today as the picture shows, the plant is shutdown, and the liquidators are expected to arrive shortly. The reason is that owners INEOS need to invest £300m in the plant to ensure its survival. And so far, they have not got agreement from the workforce to the changes that are needed to make the investment viable.
The ICIS news story below summarises the blog’s view of the implications of the issue for Scotland and the UK economy. It hopes that the workforce will change their minds before it is too late.
23 October 2013 15:58 [Source: ICIS news]
LONDON (ICIS)–The closure of INEOS’ petrochemicals complex in Grangemouth, Scotland, could down the line force downstream converters in the UK to shut because of higher costs caused by the need to import, chairman of consultants International eChem, Paul Hodges, said on Wednesday.
“It seems to me there is a real danger that the UK sleepwalks into a position where its manufacturing revival is put at risk as a result of this closure, which adds further problems on top of the UK’s already high energy costs,” Hodges said.
Switzerland-based INEOS earlier on Wednesday confirmed the Grangemouth petrochemicals complex it operates will remain closed after being shut down early last week in preparation for anticipated industrial action, adding that liquidators will be appointed within a week.
The Grangemouth plant is a critical part of the UK ethylene pipeline which links the UK’s petrochemicals crackers in Wilton and Mossmorran and Shell’s downstream operations in Stanlow, Hodges said.
The Grangemouth cracker has the capacity to produce 1.02m tonnes/year of ethylene, SABIC’s cracker in Wilton has a production capacity of 865,000 tonnes/year and Shell/ExxonMobil’s cracker in Mossmorran has a 830,000 tonne/year production capacity. A big slice of output will be lost with Grangemouth staying closed.
Hodges also points out that a pipeline extension from Wilton to Grangemouth was built in 1979 to help provide the operational flexibility needed to run the Wilton site, while Shell also benefits from the flexibility provided by the pipeline to move its ethylene from Mossmorran to Stanlow.
Hodges, who also writes a blog for ICIS, said the closure causes two real dangers.
“The large downstream UK plastic converter industry which uses polyethylene [PE] and polypropylene [PP] has to look overseas for more of its raw materials. This will adversely impact the UK trade balance in the short-term.”
“In the medium-term, it means that companies are more likely to shut because their costs are higher due to the need to import. The UK is already suffering from high-priced energy, and this could well be the straw that breaks a few camels’ backs,” he added.
Hodges also said in turn, a need to increase imports will increase costs for the converter’s customers in packaging, consumer products, automotive etc., while also creating supply chain issues around delivery schedules.
“Thus there is a clear risk that over time this will encourage downstream companies to rationalise production in the UK and import instead to meet UK demand,” he added.
This would be bad, but not necessarily critical, Hodges said, if the plastics/chemical industry was otherwise doing well. However, any upturn that was seen in July/August turns out to have been due to inventory building, as people feared the oil price would rocket if Syrian conflict developed.
“As wiser counsels prevailed on Syria, people now have find themselves with plenty of raw materials, and any thought of recovery has already been postponed (once again) to the New Year. And if one believes, as I do, that chemicals are a more reliable leading indicator than financial markets, this is not a good omen for the outlook for the real economy,” he said.
Wednesday night update. The Grangemouth issue has topped UK news reports all day, with the blog’s analysis quoted as a main part of the Financial Times’ lead story tonight:
“The Grangemouth complex supports thousands of other jobs in the region and supplies a host of chemical businesses, some of which could now be forced to switch to more expensive import suppliers.
“Analysts said it could prove impossible to find a buyer for the petrochemical plant, which has been suffering a shortage of gas feedstock from the North Sea. Ineos said it was losing £50m a year and investment to allow the import of shale gas would require £300m in new investment.
“If you are running a business in this industry today the last thing on our mind is taking on new capacity,” said Paul Hodges, chairman of industry consultancy International eChem.
“Mr Hodges said closure of the petrochemicals plant could undermine confidence across the UK chemicals industry, potentially further raising costs for companies already struggling to survive. “It’s straws and camels’ backs here,” he said.”
It was also quoted in the business section of the Daily Telegraph:
Paul Hodges, chairman of chemicals industry think tank International eChem, said: “We are talking about a hit to the economy of £5bn.”
He played down hopes of finding another buyer. “The industry is already in a bad way. It stretches the imagination to say this is the opportunity someone’s been looking for,” he said.
Friday night update. The New York Times published this excellent summary of the week’s events, also including the blog’s views:
“Paul Hodges, who formerly ran a large petrochemical business now operated by Ineos in Britain, said that what had been “an incredibly vibrant” petrochemical industry now needed reinvention and new investment.
“You have got to have a vision,” said Mr. Hodges, chairman of International eChem, a London-based industry consulting firm.
“Ineos has already lined up long-term supplies of raw material derived from shale gas brought “from the Appalachians to Scotland,” Mr. Crotty said. Alexander Kemp, a professor of petroleum economics at the University of Aberdeen in Scotland, said that the Ineos plan had “clear merits.”
“As for the plant’s oil refinery, most analysts believed that closure might cause short-term fuel disruptions but that over time other refineries in Europe with spare capacity could have stepped in. About 13 of 20 major refineries have closed in Britain since the early 1970s, but the Scottish government, which is to vote on independence from Britain next year, was very concerned not to lose the Ineos refinery.
“Very few governments are prepared to have refineries shut down because that has enormous implications for energy security,” Mr. Hodges said.”