ICIS WEBINAR: Flattening of global ethylene cost curve may lead to M&A downstream

NEW YORK (ICIS)–The flattening of the global ethylene cost curve from the collapse in crude oil prices, with US producers largely losing their feedstock advantage, could spur US chemical companies to look for deals further downstream to diversify.

“In my view, you will see larger US companies that have previously tied their flag to the mast of low-cost polyethylene (PE) production, particularly for export markets, if not reconsider their strategy, then at least increasingly look in a more interested way at downstream assets in Europe and perhaps Asia as well,” said Sebastian Bray, chemicals equity analyst at Berenberg. He made his comments in a webinar, part of a series being hosted by ICIS.

“These assets they’ve built over the last few years still throw off quite a bit of cash, but the competitive advantage and the rate of demand growth are probably not going to be as great as was originally conceived,” he added.

The global ethylene cost curve has flattened markedly since January 2020, with European and Asian producers using naphtha feedstock in much better position today from a cost standpoint, said Nigel Davis, ICIS Insight analyst, on the webinar.

However, European producers face their own challenges, from weak downstream demand to cuts in oil refining rates responding to less gasoline and aviation fuel demand threatening the production of naphtha feedstock for petrochemicals production.

“At least 6.6m tonnes/year of Europe’s ethylene production capacity is threatened by oil refineries running at reduced rates or ceasing production,” said Davis.

This represents 26% of total European ethylene capacity. For propylene, about 5.9m tonnes/year of capacity is under threat, or 32% of total capacity. Propylene is produced directly by refineries, and by steam cracking of naphtha.

For benzene, around 4.0m tonnes/year, or 37% of production capacity is similarly threatened, he noted.

While mega deals are not expected, there could be a steady drip of acquisitions of European chemicals businesses by a mix of US strategic buyers and private equity firms in the next 18-24 months, noted the analyst.

“There are some opportunities on the midstream and specialties side where valuations would have been a barrier to making a move previously, and that’s not the case for many of these companies today,” said Bray.

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Focus article by Joseph Chang