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European Petrochemicals: Making Money Despite Deflation

Business, China, Company Strategy, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US
By John Richardson on 31-Oct-2014


By John Richardson

THE European petrochemicals industry has done staggeringly well since 2008 thanks to operating rate discipline, skillful inventory management and feedstock flexibility – for example, the INEOS and SABIC initiatives to import low cost ethane from the US.

And in 2014, the region’s cracker operators have even been able to increase average operating rates to 84% from 78%.

This is partly the result of temporary exceptional tightness in Asian ethylene spot markets, which is now coming to an end, that has enabled European producers to export more C2s to Asia. In August of this year, for example, on a year-on-year basis, ethylene exports from Asia almost trebled to 16,610 tonnes.

However, they have only been able to plug into this short term opportunity because they have greatly improved their competitiveness since 2008, say several industry sources. Europe is therefore well-placed to take advantage of more opportunities like this.

But as Graham van’t Hoff, CEO of Shell Chemicals, pointed out in a speech at the European Petrochemicals  Association meeting last month in Vienna: “With polyethylene (PE) imports to Europe anticipated to increase from 2 million tonnes to 4 million tonnes over the next five to  seven years, it is possible that this could potentially result in something like 1.5 to 2 million tonnes of European asset rationalisation.

“And a PE asset rationalisation in Europe could lead to length in the ethylene market and subsequent cracker rationalisation in Europe.”

The surge in imports would, of course, be mainly from the US as it adds lots of very  low cost ethane-based PE capacity.

But we live in a deflationary world, as I  discussed yesterday and on Wednesday  – and the above chart illustrates how deflationary pressures are building in Europe.

And so I think that:

  • As it becomes clear that oil prices are going to stay lower in the longer term, the huge advantage that ethane cracking has enjoyed over naphtha cracking will be eroded.
  • Lower oil prices are symptom of a weaker longer term outlook for global growth. This is the result of economic rebalancing in China, the end of Fed stimulus and the retirement of the Babyboomers.
  • All the above could, ironically, offer some  support to European petrochemicals as this might well lead to the postponement, or even cancellation, of  a significant number of US cracker projects.

And further, in the same speech, van’t Hoff said:  “Without going into too much detail, Europe – like many other regions – has surplus gasoline, with no obvious ‘new home’ for that extra volume. So what does this mean for chemicals?

“An efficient refiner would switch his attention to aromatics and discover growth and margins from petrochemicals.”

Could reformers that currently run to mainly make gasoline, for example, be converted into petrochemicals-only reformers?

The alternative would, of course, be to shut reformers down, and with them possibly whole refineries.

But, of course, this would also force the  closure of petrochemicals complexes that depend on these refineries for  feedstocks.

As van’t  pointed out about the chemicals industry as a whole in Europe: “It is a €558 billion industry providing over 1 million direct and nearly 5 million indirect jobs in Europe.”

Thus, Europe’s politicians need to be encouraged to better appreciate the big value that the chemicals industry delivers to the European economy as a whole. Improved partnerships between governments and petrochemicals companies can then be forged in order to help keep refineries and petrochemicals plants operating.

And on a purely cost per tonne basis, never mind the wider economic value, surely it makes sense to keep reformers running. They are old and so fully depreciated – and, as we said, with oil prices in long term decline, this will further add to the economic strength of oil-based petrochemicals.

All the above helps illustrate how companies in Europe, and elsewhere, can continue to make money in a world where demand growth will be a lot lower than people have been accustomed to.

Next week we will consider how the US should respond to the challenge of lower demand growth as deflation, globally, becomes further entrenched.