Vast over-expansion is underway in the global petrochemicals industry, as companies rush to build new capacity at a time when demand patterns are going through major change. US companies and investors are worst exposed, as their plans are based on exporting polyethylene and other ethylene-based derivatives.
There are a number of fundamental problems with these investments, as I have discussed in the blog and elsewhere. One key issue, currently not fully recognised, is that there are really very few outlets for the increased production in export markets:
- Latin America is a relatively small market
- The Asian market is already going to be over-supplied with new production from local producers (particularly China) and the Middle East
- Therefore significant volumes will have to come to Europe
But European producers will not prove an easy target for closure. One key reason is that they have gained competitive advantage in recent years from their ability to produce propylene as well as ethylene, due to their oil-based feedstock.
- The left-hand chart shows the ratio of European propylene prices to ethylene from 1978-2014
- The right-hand chart shows the ratio of European propylene production to ethylene from 1993-2014
- It highlights how propylene prices have moved to near-parity with ethylene, from just 60% in 1978
- As a result, European producers have been able to increase propylene production to average 75% of ethylene volume
This change is often overlooked by N American producers. Their gas-based feedstock, based on ethane, means their production is dominated by ethylene. And ironically, their shift to boost their use of ethane in recent years (due to the arrival of shale gas), has therefore provided further support for propylene producers in Europe.
In addition, of course, Europe’s refinery-based production provides further powerful support. Weak gasoline demand means Europe’s refineries would struggle to find alternative outlets for their naphtha feed into the crackers, if they were to close. And European governments are unlikely to be keen on allowing refineries to close, for obvious reasons of energy security
US producers thus have a very hard road ahead, if they do decide to continue with their multi-$bn expansion plans for new crackers. As former LyondellBasell CEO Jim Gallogly told his colleagues last month:
“Some don’t look far into the future but just react. Some will be too late. It is time to recognise (the reality). I would suggest that you think very, very hard about these investments. Some of you simply are going to be too late. And you need to recognise where you are at.”