Lower refining rates support EU petchem margins

Refinery runs Aug10.pngSometimes every cloud does have a silver lining. And that’s currently the case with the fall in demand for oil products.

The European petchem industry is based on feedstock from refineries such as naphtha and LPG. And as the chart above from the IEA shows, German refinery runs, like others elsewhere in Europe, are down 15% due to lower demand for most oil products.

C2 OR% Aug10.pngThis has proved very supportive for petchem margins. As the second chart shows, based on APPE data , European operating rates for ethylene were only 82% in H1. Back in the Boom period between 2004-7, H1 rates averaged 89%.

Producers have done a lot in terms of self-help to reduce fixed and variable costs. And the monthly contract price certainly gives more flexibility versus the old quarterly system.

Even so, an 82% rate would have normally hit petchem margins, as producers fought to maintain market share. But instead, the 15% cut in refining rates meant cracker feedstocks were also reduced. So effective operating rates were much higher than 82%.

Thus producers were able to pass through H1’s higher oil prices, and spreads for ethylene versus naphtha actually increased to €422/t. Whilst lower overall production rates sent co-product prices for both propylene and butadiene above those for ethylene, for the first time in history.

How long will this silver lining last? The blog’s friends in the refining industry suggest that poor competitiveness will remain a problem for the European refiners, and they do not observe great optimism amongst leading players that might suggest a quick recovery.

However, it is also clear that petchem consumers are finding it increasingly hard to pass on the higher prices to their customers.

But in the meantime, EU petchem producers have their silver lining.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. He also serves as a Global Expert for the World Economic Forum. The aim of this blog is to share ideas about the influences that may shape the chemical industry and the global economy over the next 12 – 18 months. It looks behind today’s headlines, to understand what may happen next in critical areas such as oil prices, China and Emerging Markets, currencies, autos, housing, economic growth and the environment. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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