By John Richardsn
A brilliant seven months or a collapse in average profitability to its lowest level since end-2009 are two radically different takes on the fortunes of European petrochemicals so far this year.
The description of a brilliant January-to-August was given to my colleague Nel Weddle, European olefins editor for ICIS pricing, by a couple of industry players during last week’s European Petrochemical Association (EPCA) meeting in Berlin.
And yet consultancy Nexant ChemSystems, in its quarterly petrochemicals review, estimated a decline in European average profitability to end-2009 levels.
This reflected across all regions as Nexant’s polymer margin index declined by more than 40 per cent -its lowest level in almost two years.
Our naphtha cracker margin analysis supports the comment about the last seven months being exceptionally good. Click here to view –
GlobalcrackermarginsOct2011.ppt
So what’s going on?
The answer, we think, is the same as it has been for the last two years – ever since the inventory disaster of Q4 2008. Profitability has been concentrated upstream at the cracker end of the business, supported by frequent technical problems, disciplined operating rates and tremendous co-product credits from butadiene and propylene.
This helps to explain why European polyethylene producers recently described to my colleague Linda Naylor, our ICIS pricing polyolefins editor in Europe, that their margins were non-existent.
On a standalone basis it’s grim. For example, the 30 September ICIS pricing Weekly European PE Margin Report estimated standalone low-density PE (LDPE) margins at their lowest level since end-2009.
Nexant agrees that the pain has been felt mostly by the standalone players. Third-quarter profitability in polyolefins, polystyrene (PS) and polyvinyl chloride (PVC) was sharply lower, the consultancy adds.
The rest of the year looks like being a damp squib as stocks are run down and operating rates further reduced at European crackers in the hope that in January and February, buyers will return in significant numbers.
But what of the buyers? We have been thinking this for more than two years now, but how much more pain can many of them take, given weak demand across Europe?
Will market discipline ultimately damage the cracker operators due to a sudden acceleration in business failures among the converters and fabricators?
The European olefins business might, in turn, continue to shrink – and to push more customers close to the edge – as long as the Eurozone debt crisis remains unresolved.
Businesses are, of course, motivated by quarterly returns with individuals always keen to achieve their bonus targets.
And so it is left to the politicians to come up with a long-term plan to help the petrochemicals industry, and probably numerous other industries in Europe, escape the death spiral we just described above.
Relying on Europe’s current crop of politicians is not a vey comforting thought