Commentary: Europe chemicals gain ground against US

Will Beacham

09-Jan-2015

Plummeting feedstock costs mean that Europe’s chemical sector is gaining ground against the US, according to figures produced by ICIS Consulting.

As rapidly falling crude oil values feed into lower naphtha prices, margins for European cracker operators increased sharply in the final months of 2014, while margins for US ethane-based operators have fallen (see graph).

Though there is a time lag, chemical prices have fallen in tandem with falling crude, reducing the margins of US producers that use ethane feedstock. European producers, on the other hand, are benefitting – at least in the short term –from the steep fall in naphtha values.

Provided the lower oil price is sustained, the global competitive landscape for chemicals could change once again as the US advantage wanes. Questions are already being asked about the huge swathe of cracker investments planned for the US in the wake of the shale gas boom. The economics of these crackers relies on the US having a sustained feedstock advantage over other regions. Profitability and return on investment were planned at a time when global chemical prices were relatively high, based on a high crude oil price.

EU margins

Kevin Swift, chief economist of the American Chemistry Council, insists the US will retain its advantage, though it will erode. He said Brent crude would have to fall to $28bbl and Henry Hub gas rise to $4/MMBtu before a tipping point was reached on competitiveness.

Although some projects are already underway, there is a realistic possibility that others could be delayed or cancelled. Could we also see a resurgence in Europe? If the region looks likely to become more competitive in the long term, companies could plan to rebalance their investment strategies.

Europe’s chemical industry should also start to see some benefit from the prospect of falling gas and power prices. Gas prices are related to oil in Europe, and electricity may also start to fall as generating costs decline.

However, demand within Europe is not strong. The region’s economy has entered a period of deflation and the quantitative easing is on the cards. Economic growth is also stalling and business confidence is declining, not helped by the turmoil in Ukraine and worsening Russian economy. Yet chemical producers are benefitting from the collapsing euro which has fuelled exports and cut imports of many commodities.

Some commentators predict low oil prices are here to stay. International eChem chairman Paul Hodges, who forecast a collapse in a May 2013 ICIS interview, says that high oil prices were based not on true supply and demand but on financial speculators. Now true market fundamentals are taking over. Hodges forecasts a return to the historical level of around $30bbl.

Future supply is one side of the equation, and Saudi Arabia has made it clear that is has no plans to cede market share by reducing production. There are few signs of any curtailment to US shale oil production yet.

On the demand side, growth is forecast to be lacklustre. China is more focussed on rebalancing its economy and recovery is tailing off in Europe. The outlook for the US economy is better, but not spectacular.

Longer term, Hodges suggest that demographic factors such as the aging population in both mature and emerging economies may dampen demand permanently. Other economists are more bullish, focussing instead on increased demand from emerging markets.

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