An ageing population and record annual levels of oil prices create massive headwinds for Europe’s petrochemical producers. One means demand growth is much reduced from the SuperCycle. The other means these lower volumes cost more to produce.
What a pity, you might say, that the industry is not part of the financial sector. Then it would have been the sweetheart of the last European Commission, and received massive bailouts as well as special treatment on regulatory matters.
But instead petrochemicals, which are the building block for most of today’s consumer products, see their costs rising to support the banking sector – whilst their regulatory burdens are increased. Its a funny old world.
The hard facts are in the chart above, based on new APPE data for Q1:
- Operating rates in what should have been the seasonally strongest quarter of the year were just 82%
- This was better than the 79% seen last year, but only equalled 2012 levels
- It was nowhere near the 90%+ level that was normal in the pre-2008 SuperCycle
The only good news is that the US and Middle East move into ethane feedstocks has helped keep propylene and butadiene prices higher than usual. So European producers, like those in Asia, have been benefiting from higher overall netbacks than would otherwise have been expected. But, of course, this also helps to destroy downstream demand, as end-consumers find it harder to afford the products being produced.
Thus whilst ethylene production at 4.9MT was back at 1999 levels, propylene volume at 3.7MT was still only equal to 2004 levels, as was butadiene volume at 0.5MT.
One hopeful sign, as the blog discussed yesterday, is that growing crude oil gluts in the US and elsewhere may well be the catalyst for a return of oil prices to a more normal historical relationship to gas prices. That would cause major short-term dislocation in terms of destocking and working capital. But it would be very good news longer-term.
However, today’s lack of demand growth will not get better, as Europe continues to age. Equally, its exports to China are now being reduced as China bursts its property bubble. This has a double impact, as China is not only buying less, but also exporting more. It is now becoming a PVC exporter rather than importer, for example.
Similar woes are impacting Europe’s refining sector, which has lost its gasoline export market in the US, and is configured to supply gasoline rather than the diesel that now drives Europe’s transport fleet. At some point, probably not far away, someone is going to have to start to address these problems.
The modern European economy could live without ‘too big to fail’ banking monoliths. But it can’t live without the products provided by the petrochemical industry. The new European Commission will hopefully recognise this fact early in its term of office. It cannot afford to repeat the mistakes of its predecessors,