Make hay while the sun shines in Europe

BASF’s stellar first quarter chemicals earnings indicate how well Europe’s commodity chemical producers have been doing so far in 2017.

Its chemicals segment posted a 36% year-on-year increase in sales to €4.1bn, “largely as a result of higher prices in the petrochemicals and monomers division”, according to the company. Overall BASF net profit grew 23% year on year to €1.71bn driven by higher sales volumes and prices.

A slow but steady improvement in demand across the region may have caught buyers and sellers by surprise. Demand in Europe has been healthy since the structural decline in oil prices made their production more competitive globally. The weaker euro has also helped exporters and improved Europe’s global position.

Margins powered ahead in the first quarter with the European naphtha-based spot ethylene cracker margin doubling from below €500/tonne in January to over €1,000/tonne by mid-March. As oil fell from recent peaks, naphtha costs declined whilst pricing levels were maintained.

Sentiment is a powerful force and the first quarter European cracker turnaround season – though well prepared for – may have led to fears of product shortages and sparked more spot buying.

European chemical producers are preparing for the potential influx of North American production later in 2017 and some have built in a greater degree of flexibility than usual into their sales contracts.

As demand ticked up it is possible that customers maximised their contractual volumes, leaving producers with little spare capacity for the spot market.

Some producers also trade on the spot market as buyers as well as sellers and this activity may have tightened spot supply in the first quarter.

Petrochemical prices were also much higher in China and Asia during the first quarter and this may have also supported higher European pricing. BASF also benefitted thanks to “significantly increased earnings contribution” from the BASF-YPC Nanjing joint venture site.

The BASF chemicals results caught financial analysts by surprise. Bernstein said that the overall chemicals Verbund earnings before interest and tax (EBIT) excluding special items of €2.00bn was 20% above its own estimates and 14% above consensus expectations.

Bernstein attributes the result to “strong volumes across divisions, and price increases in Chemicals due to acute supply tightness of cracker products, isocyanate and acrylics.”

They point out that Performance Products and Functional Materials & Solutions were able to pass on a big chunk of raw mats inflation thanks to solid demand.

WHAT’S NEXT FOR EUROPE?

It could be a case of “make hay while the sun shines” for European producers. As the first big wave of US ethane-based expansion starts up later in 2017 – most of it destined for export – we can expect to see significant extra volumes heading across the Atlantic.

That could put pressure on all commodity chemical operators across Europe as a major new source of competition springs into action. European producers and their Asian counterparts will hope that delays and cancellations in the China coal-to-olefins sector will ameliorate the situation. Any delays to the US wave would also help.

Meanwhile, Across Europe cracker margins into the second quarter have already declined from the Q1 peak and BASF remains cautious.

President and CEO, Kurt Bock said: “We remain cautious when it comes to our outlook for the full year. We still see considerable risks with regard to macroeconomic development and the political environment.”

Sales growth of at least 6% is forecast and: “We want to achieve slightly higher EBIT before special items compared with 2016. In this case, ‘slight’ means a change of 1-10%; we expect this increase will be toward the top end of the range.”

Nel Weddle and Nigel Davis contributed to this article.