Market Intelligence: UK energy challenge

13 December 2013 15:04 Source:ICIS Chemical Business

Announcements of several capacity closures in the UK highlight the difficulty the country has in remaining competitive with high energy and feedstock costs in a poor demand environment

The confirmation of further plants closures shows how tough it has become to run upstream chemicals businesses profitably in the UK. Costs are the critical issue, alongside feedstock availability and shifting market demand.

Naphtha-fed units will shut at Grangemouth

Copyright: INEOS

Times have been tough since the 2008/09 crash. The UK economy shrank by 7.2% over that period, British chancellor of the exchequer George Osborne said on 5 December. The UK economy, however, has been recovering much more strongly this year than expected. GDP growth for 2014 has been forecast at 2.4%.

But while a stronger economic recovery is encouraging for chemical producers, Europe’s wider economic problems, and the huge petrochemical production cost differential with the Middle East and North America, can only weigh heavily on the chemicals sector.

The shale revolution in North America is exposing the production economics of ethylene and products such as polyethylene (PE) and polyvinyl chloride (PVC). European production can probably be made to work but profitability is clearly challenged by feedstock economics and Europe’s high energy costs. Switzerland-headquartered INEOS confirmed that it will close a 295,0000 tonne/year benzene unit at its petrochemical site in Grangemouth, Scotland, by the end of this year. And the 320,000 tonne/year liquids cracker at the sites and an associated butadiene units will close in the second quarter of 2015.

Polyethylene terephthalate (PTA) producer Lotte Chemical UK said on 4 December that while it would go ahead and open a new, 200,000 tonne/year PET plant on Teesside, England in 2014, it intends to close a nearby, 40-year old 500,000 tonne/year PTA facility .

As the Lotte Chemical announcement shows, petrochemical producers in Europe also have to face up to the fact that while they struggle with costs and relative profitability, for most of the market the action is in Asia.

Lotte Chemical may be expanding its PET production capabilities in the UK but a rapid change in the PTA market in 2012 and 2013 has made it difficult for older PTA units to compete with modern, world scale facilities that have lower manufacturing, and particularly, lower energy costs. “The global supply-demand balance [for PTA] is unlikely to improve in the foreseeable future as huge additional PTA capacity has already, and will continue to, come online in China,” the company said. INEOS in October said it would close its 300,000 tonne/year world scale vinyl acetate monomer (VAM) plant in Hull, the UK. That plant was shut for a while in 2012/13 with little or no impact on the depressed European VAM market.

“Low cost imports and a hostile trading environment made closure inevitable”, the company said when it announced the closure.

INEOS’s bigger problems in the UK have resurfaced in 2013 at Grangemouth in Scotland where the company’s threatened closure of the petrochemical site has been staved off by a new agreement with its workforce. INEOS believes that Grangemouth can be profitable if it is able to feed its 700,000 tonne/year gas liquids cracker there with ethane from the US. The company is setting up long-term ethane supply agreements for its gas cracker at Rafnes in Norway and wants to do the same for the UK plant.

The INEOS plan is not seen as a model for Europe, where most crackers take liquid feed, but demonstrates what might be achievable given the significant cost (and gas liquids availability) differential that is expected to continue to exist between North America and Europe.

INEOS could convert its NGLs-fed cracker at Grangemouth to process pure ethane but does not have plans to do so. It currently runs on a broader NGLs feedstock slate.

Feedstock flexibility is all but essential for cracker operators in Europe, particularly those integrated downstream into polyethylene and products like PVC.

How other producers might introduce greater cracker feedstock flexibility, possibly including ethane imports into their feedstock mix, relies on possible future ethane availability as well as on cracker conversion and delivered feedstock costs.

INEOS says that its cash cost of ethylene production at the Rafnes cracker is likely to fall to a little over $500/tonne once ethane is brought to Norway from the US.That would be about twice the current US cash cost of production, based on ICIS data. Ethylene production costs at the INEOS site in Rafnes, where the cracker is fed by ethane and propane from the North Sea, currently are around $950/tonne.

The plan to lift the competitiveness of the Grangemouth petrochemicals production site relies on the availability of a loan guarantee from the UK Treasury as well as a small loan from the Scottish government. The competitiveness of other chemical plants and facilities in the UK also rely on greater appreciation by the government of the importance of the sector to the economy.

The UK and the rest of Europe need a business climate that is more responsive to global competition, chemical industry executives believe. In the UK, a recently established Chemistry Growth Partnership wants to encourage growth in value of the “chemistry using sectors” by 50% by 2030. This group is working up plans as to how this might be achieved.

The growth will be built “on the priorities of energy, innovation and supply chains and underpinned by skills and trade,” chief executive of the UK’s Chemical Industries Association, Steve Elliott said last month.

A great deal of progress will have to be made on energy costs and on the development of the UK’s shale resources to make the sector more attractive to international investors. The CIA criticised the UK chancellor for “not providing answers” to Britain’s industrial ­energy crisis.

“We need to see the promised rebates from the range of climate policies impacting on our power prices made broader and deeper and in a way that provides better long term business certainty for investment,” Elliott said.

The UK industry wants rebates from the UK-only Carbon Price Floor which imposes charges on all kinds of fossil fuels and hits chemical companies producing their own electricity.

A similar exemption applies in Germany, for instance, although is coming under attack from climate change action protagonists.

“The Chancellor has also highlighted [in his Autumn Statement] the benefits of saving energy. We, therefore, continue to press for the need to completely exempt our combined heat and power generators from the Carbon Price Floor to help mitigate April’s double tax hit on our ability to make competitive use of this energy efficient technology,” Elliott said.

He highlighted the fact that energy prices in the US are a third of those in the UK because of shale gas.

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By Nigel Davis