Europe petrochemicals get jittery

Will Beacham

18-Oct-2018

After a bullish run in sales growth and profitability, Europe’s petrochemical sector has entered a new phase where multiple challenges are dimming the prospect of another stellar year.

Sources at October’s European Petrochemical Association (EPCA) event in Vienna were preoccupied by a long list of themes: maintaining margins in the face of higher oil prices; softening demand growth as the global economic upswing falters; the US-China trade war; Brexit; and the US polymers start-ups. Bubbling alongside these immediate challenges is the impact of the circular economy and the plastic-waste disaster, though some argue that swift action is required here too.

Margins have been falling for naphtha-based chemical and polymers producers in Europe as higher oil-­related feedstock prices have failed to translate into increased downstream sales prices. The ability to pass on price hikes depends on whether the market favours buyers or sellers.

Several indicators suggest buyers may increasingly have the upper hand as we move towards the end of the year. European purchasing managers indexes have been heading downwards for several months, as have those for China, leaving only the US still in bullish territory. Stock markets around the world have also become jittery as fears grow about the ability of emerging markets to repay dollar-denominated debt. As interest rates rise and the dollar strengthens, debt becomes a lot more expensive to service.

AUTOMOTIVE SLOWDOWN

These factors are feeding down into the real economy as lower consumer confidence causes hesitation in making purchases. In September, car sales in China fell by 11.6% year on year, the biggest decline in seven years and the third straight month of contraction. New automotive sales forecasts published this week by IHS have slashed third- and fourth-quarter global car production targets. Third-quarter global light duty vehicle production is now forecast to decline by 2% against an earlier figure of -0.7%, driven by cuts in Europe. Meanwhile, worse performance in China led to a fourth-quarter production forecast of only 0.5% growth versus 1.8% before. European chemical companies are heavily exposed to the automotive sector, as the above graph from analysts at J.P. Morgan suggests.

The trade war has already affected China’s economy, where lower demand for finished products aimed at export markets has fed through into falling chemical sales for key products such as polyvinyl chloride (PVC). The tariffs are also pushing up prices for US consumers of products being directly and indirectly targeted.

There are fears in Europe that US and Asian polymer and chemical exporters will target this region as growth in China falters. With the US polymer start-ups in full swing this year and next, and around 4m tonnes/year of new polyethylene hitting global markets, this is a major concern.

EUROPE PE NEGATIVE

ICIS reported in October that falling demand has pushed European low density polyethylene (LDPE) prices down below feedstock ethylene prices. Cracker margins (including co-products) are still positive, but the spread between ethylene and PE prices is low. One producer said the situation is reminiscent of 2011-2012, which led to the permanent shutdown of several PE plants in Europe.

In Europe’s linear LDPE (LLDPE) market, local producers are matching low US export prices. But, as yet, there is no sign of any flood of US material into Europe.

By 2025, the EU has set a target of 50% recycling for plastic waste with producers being given mandatory responsibility for management of the waste a year earlier. By 2030 all EU plastic packaging must be recyclable. Although a long way off, these targets almost certainly will impact demand for virgin polymers. Producers need
to act now to develop packaging that is truly recyclable or invest in chemical and mechanical recycling.

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