When the world changes, companies either change with it or go out of business. The market for stagecoaches was never the same once cars came along. And not many students use slide rules today, now calculators are available.
Usually, of course, these market changes are slow-moving. So companies often fail to respond in the hope the old world will somehow return.
That is what had been happening with European petrochemicals. It has been clear for some time that the ageing population means there can be no recovery back to SuperCycle levels of demand. But nothing happened in response until INEOS and Solvin announced their JV in PVC, and effectively fired the starting gun on restructuring across the industry.
The depth of the crisis is shown by the fact that the two companies are No 1 and 2 in the PVC business. Normally market-leading companies do not need to merge. Nor will the European Commission normally allow them to merge .
Yet as the blog argued in its advice to the Commission, the alternative would have been to risk the closure of major parts of the industry – with an inevitable loss of jobs all along the value chain as a result.
Now another, equally significant move has been made in the refining business, this time by ExxonMobil (EM). In its typically far-sighted way, it has decided to spend $1bn on reconfiguring its Antwerp refinery in Belgium. As EM’s European refining head, Steve Hart, told the New York Times:
“From its network of refineries in northwest Europe, Mr. Hart said, Exxon Mobil will collect heavy fuels for which there is no longer much demand - like the so-called bunker used by older ships - and carry it by boat to Antwerp. There, a new refinery unit will distill the gooey substances into diesel and a similar lighter-weight fuel used by more modern ships.”
The reason for the new investment is the major shift from gasoline to diesel that has taken place on cost grounds in Europe’s auto fleet since 1990. Then, only around 1 in 10 cars used diesel. But today, more than half of new cars sold are diesel – and more than twice as much diesel is used than gasoline across the entire market.
Of course, the easy answer would be to close down Antwerp. Most of the analysts would like that ‘solution’, as it would boost earnings short-term. But how then would Europe obtain the fuel it needs over the coming decades? Would it really want to become even more dependent on imports from Russia, the US and Middle East?
Equally, what would EM do in the future, if it chose to abandon a market where it is currently has a leading position?
The grass may always look greener on the other side. But readers with long memories will remember Exxon’s efforts to become a major player in the office equipment market in the 1970s, when oil markets were similarly difficult.
This proved once again that ‘diversification is usually diworsification” as Fidelity’s Peter Lynch used to remark, as:
“A business that diversifies too widely, risks destroying their original business, because management time, energy and resources are diverted from the original investment”
Europe’s economy is not going to move into recovery mode, no matter what policymakers may wish to believe. But nor is it going to stop being one of the world’s biggest markets. As the blog told the NYT in the same article:
“European refineries have to invest in a difficult environment if they want to be around for the long term,” said Paul Hodges, chairman of International eChem, a consulting firm in London. “It would be far more expensive to pretend that somehow the world will return to the market conditions of 25 years ago.”
The message, and the challenge, for European petchem producers is the same.
WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
US$: yen, down 3%
Brent crude oil, down 1%
PTA China, flat 0%. ”Limited availability in Asia because of production cutbacks and shutdowns because of weak margins”
Naphtha Europe, up 3%. “Market is long, and increased output of naphtha-rich light, sweet Libyan crude oil could lead to a further rise in supply”
Benzene, Europe, up 7%. “4 new benzene units with 2MT capacity expected to come online in Asia by the end of July could help ease global availability and pricing”
S&P 500 stock market index, up 7%
HDPE US export, up 7%. “International buyers are only willing to buy replacement cargos at the moment, and are not interested in building inventory at high prices”