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European Petchems: Necessity is Again The Mother Of Invention

Business, China, Company Strategy, European economy, European petrochemicals, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US

HDPEmargins23April

By John Richardson

WHEN has a European cracker gone beyond its useful life? Forty or 50 years? Or maybe if you spend the right amount of money, it can last for a great deal longer.

Devoting enough ingenuity and capital on boosting your cracker’s energy efficiency and feedstock flexibility can also secure the future of your business.

Sure, the macroeconomic environment remains very worrying and it is hard to see where a recovery will come from. Politicians remain as clueless today as they were when the European crisis began, which I shall discuss in detail next week.

But, as is the case with shale oil and gas, necessity is the mother of invention. When you know that you are facing potentially ferocious import competition from feedstock-advantaged Middle East and US producers, this gives a strong incentive to recycle every kilojoule of heat produced by a steam cracker.

You also have fully depreciated assets in Europe and so you have no big debts to pay back.

You also have, in some cases, geographically protected markets. An inland and cracker along with derivatives plants might be able to survive for a lot longer than some people imagine, simply because the logistics costs of replacing olefins and polyolefins etc. with imports is too high.

I think the US petrochemicals along some analysts have therefore got plain wrong in thinking that the European industry will just roll over and die.

The problem for the US is that it needs more European polyethylene (PE) capacity to close down in order to make room for its huge and ill-advised capacity expansions. It also needs China to carry on importing big volumes of PE, but that is also unlikely to be the case. Without China, the export-volume maths for the US simply don’t add up,

And as fellow blogger Paul Hodges pointed our earlier this week, the big switch to mainly ethane feedstock at existing crackers in the US has led to global propylene shortages that have further supported the European business. European crackers are, of course, naphtha-based and so the region’s producers have been able to raise propylene output to take advantage of this shortage.

There is yet another reason for the resilience of the European industry: Weak gasoline demand resulting from, again, the poor economy and the big switch to the use of diesel as transportation fuel.

Closing down steam crackers would leave refineries with nowhere to place their surplus naphtha and would thus force other refineries to shut down. Local supply of transportation fuels is critical to the stability of any economy because the alternative of depending on imports is very risky. You can end up with the pumps running dry because of shipping problems.

Plus, as we found out with the story of Grangemouth in the UK in late 2013, refineries add huge local overall economic value. So do, again, steam crackers and so the European refining-petrochemicals industry in general has big motive to reach out to politicians and say, in, effect, “There is no such thing as a free market anywhere in the world, and so get real please and offer us some support.”