OUTLOOK ’18: Europe chems eye oil price and imports while demand growth holds firm

LONDON (ICIS)–Europe’s petrochemical producers have been riding high in 2017, achieving record earnings, so 2018 is likely to present unique challenges.

Good times never last – although recently they have been remarkably long-lived – and the deeply embedded understanding is that this business is notoriously cyclical.

The argument can be made that overarching cyclicality has been replaced by volatility, but production capacities globally are creeping up and the local regional market is not immune to their influence.

The usual pressures apply, but in 2018 polyethylene (PE) from the US and from India is expected to hit the European market, for instance, adding to the pressure on ethylene derivatives from shale-based capacity build up in North America.

Producers in Europe have been on a roll for longer than expected.

The oil price slump in 2014 gave naphtha cracker operators and upstream petrochemicals a lift and, since then, the European economies have climbed out of the mire and begun to register stronger growth.

China demand has been better than many expected and helped to underpin export business.

This all translated in 2017 to EU chemicals output growth of 3%, according to the industry’s trade group, Cefic. It is looking to output growth of 2% in 2018.

“The recovery of the chemical sector follows the overall economic growth in the EU in the first three quarters of 2017, driven by a robust consumer demand as well as investments in new production capacities,” it said in early December.

“The growth of the EU manufacturing production, primarily in the automotive, construction, metal production and electronics sector, has led to an increased domestic demand for chemicals. Furthermore, the exports of the EU-produced chemicals to, among others, Asia and Russia have increased.”

Petrochemicals, which are the building blocks for most chemical intermediates and end products, have benefited hugely as a result.

Prices in Europe have held up remarkably well too.

The impacts of the moving oil price have been absorbed, with the ICIS Petrochemical Index for Europe 20% higher during 2017 than in 2016.

The index represents the movement in price of a basket of petrochemicals and polymers including ethylene, propylene, butadiene, benzene, toluene, styrene, paraxylene (PX), PE, polypropylene (PP), polystyrene (PS), polyvinyl chloride (PVC) and methanol.

Companies have been able to generate superior margins in many businesses in 2017 – the charts show ICIS naphtha-based integrated low density polyethylene (LDPE) and cracker margins ($/tonne) on a quarterly and an annual basis.

Crackers have been running well, ethylene is well balanced, and propylene has remained tight.

Some businesses downstream of the cracker have been good too although the calculated integrated LDPE margins shown here have narrowed as the year has progressed.

Cracker operators are confident going into 2018, expecting little change compared with 2017 in the first half.

They have raised some concerns about the second half, however, based on the uncertainties about the possible flow of imports from North America, where derivatives plants have come on stream ahead of the expected wave of cracker start-ups.

Producers, therefore, expect to get off to a relatively good start in 2018.

The higher oil price puts more pressure on them to pass through increased costs, they operate in a high cost energy environment and their competitive position is always under cost and regulatory pressure.

The reliability of production plants, crackers and other units will be of prime importance if demand holds up in the way it is expected to.

Europe has an ageing cracker fleet and while it is not necessarily the crackers themselves that could cause trouble, associated equipment and engineering could.

Customers will be watching the supply situation closely.

The ICIS Live Supply Disruption Tracker is available to subscribers from late December 2017. It is available here.

By Nigel Davis