Waiting for the up-turn European demand

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WAITING FOR THE UP-TURN

The deepening eurozone debt crisis and the slowdown in Chinese economic growth are continuing to dampen global demand for chemicals. Anna Jagger reports.

European chemicals trade association Cefic has warned that the debt crisis is hitting the sector harder than initially forecast, and chemicals demand in the region is now expected to contract this year.

“Domestic demand for chemicals will decline slightly compared with 2011 as austerity measures in EU member states dampen business orders and inventory build-up remains flat, due to continued weak EU business sentiment,” said Cefic director general Hubert Mandery.

Output of chemicals in the EU is expected to remain stagnant this year. This compares with Cefic’s previous forecast in December of 1.5 per cent growth. The association reported that for the first quarter of 2012, output fell 2 per cent compared with the same period in 2011, although it improved compared with the fourth quarter of 2011.

Cefic is optimistic that the EU economy will stabilise during the second half of the year, aided by overseas demand and a weaker euro boosting eurozone competitiveness. “A weaker euro should also help increase EU chemicals exports,” Mandery said. For 2013, chemicals output is expected to rise by 2 per cent, despite austerity measures and continued high unemployment levels.

The recent fall in oil prices is expected to foster long-term business activity. However, lower prices are resulting in destocking activities by customers across the global chemicals chain as they delay orders in the hope of capturing lower prices in the future.

Shale gas boosts US

For the European chemicals sector, a further concern is the improved competitive position of producers in North America as a result of increased production of US shale gas. The shale gas boom, made possible by new drilling technology, has transformed the energy profile of the US over the last decade. Chemicals producers crack the ethane content of the gas to produce ethylene – a key building block for the chemicals sector. Hence the availability of cheap and abundant US gas reduces both the energy and feedstock costs for North American chemicals producers.

“US [chemicals] exports will grow faster as capacity expands to meet local demand growth and exports resume,” said global investment company Bernstein Research. “Meanwhile, the European chemicals industry is at risk of slower growth.”

Low-cost US gas is positive for the global chemicals industry because, as well as lowering energy and feedstock costs, it spurs economic development, Bernstein observed in a report on the impact of shale gas on the European chemicals sector. The cost advantage is large for a few products, including nitrogen fertilisers and ethylene derivatives such as polyethylene (PE), polyvinyl chloride (PVC) and monoethylene glycol (MEG).

Over the next few years, the US chemicals industry will expand production of these products, while producers in other countries such as China will supply the naphtha cracking co-products that the rest of the chemicals industry needs, Bernstein said. Cracking of naphtha, the main petrochemicals feedstock in Europe and Asia, produces ethylene plus a variety of co-products.

Low-cost US gas supplies are prompting chemicals producers to build new ethylene capacity in the region. Much of this new ethylene production will be converted into PE, providing a major boost to North America’s plastics industry. Only five years ago, experts were predicting that the region could become a net importer of PE, as investments were directed mainly at the Middle East based on low cost ethane or the fast-growing Asian markets.

Now the US shale gas boom is offering a huge competitive advantage and could lead to an increase in the country’s ethylene capacity of 33 per cent by 2017, according to ICIS data. The calculation is based on announced new ethylene projects and expansions.

Dow Chemical, Formosa Plastics, Chevron Phillips Chemical, Shell and ExxonMobil

have all announced plans to build worldscale ethylene projects in the US. The projects are expected to start up in 2016–2017.

Dow announced in April that it would locate its project in Freeport, Texas. “For the first time in over a decade, US natural gas prices are affordable and relatively stable, attracting new industry investments and growth and putting us on the threshold of an American manufacturing resurgence,” stated CEO Andrew Liveris.

Jim Fitterling, Dow’s president of feedstocks & energy and corporate development, stated. “Today, 70 per cent of the company’s global ethylene assets are in regions with cost advantaged feedstocks – and we’ve seen the benefits this advantage provides given oil-based naphtha margin pressure in Europe and Asia.”

In addition to the announced projects, several companies have said they are considering investing in new ethylene projects. Most recently, on 21 June, Aither Chemicals said it has signed an agreement with Bayer MaterialScience to study a cracker and downstream chemicals project in West Virginia. Bayer would help evaluate third party interest in the downstream chemicals output, which could include PE, acetic acid and ethylene glycol, Aither Chemicals said.

The price of US gas – which contains primarily methane and ethane – collapsed to its lowest level for a decade at the beginning of this year. “While high oil and naphtha prices blighted margins in Asia and western Europe, much of the industry in the US saw feedstock costs fall sharply at the start of 2012,” USbased consultancy Nexant said in a report on Q1 petrochemical profitability. “Ethane prices tumbled almost a third, dropping to a record discount to naphtha, providing ethane crackers in the US with a staggering cost advantage of more than $550/tonne over naphtha crackers elsewhere.”

US chemicals producers reported more resilient demand than other regions in the first quarter, but destocking by customers contributed to a slowdown in May. “With crude oil falling from over $100/bbl to the mid-

$80s, buyers expect lower prices,” remarked Chuck Anderson, president of US chlorvinyls company Occidental Chemical (OxyChem). “So you are seeing people destocking pretty dramatically and this will continue until we find a bottom from a pricing perspective.”

Speaking at the American Chemistry Council (ACC) annual meeting earlier this month, Anderson said US chemical companies can expect difficult market conditions in the coming months. “There is tremendous volatility and uncertainty in the market right now. June and July are going to look pretty ugly, mainly due to uncertainty on the pricing front,” he said in a report by chemicals news service ICIS.

Watching China

Anderson also pointed to the risks associated with the eurozone crisis and the slowing growth in China. “There is no way the US won’t be impacted,” he said. However, the construction sector, a major consumer of chemicals such as polyvinyl chloride (PVC), is a bright spot in the US economy, he added.

Economists predict that China’s GDP growth could fall to below 8 per cent in 2012, from 9.2 per cent in 2011, impacted by the growing crisis in Europe and a slowdown in domestic real estate investments. Chemicals demand in the country was “flat to up slightly” in the second quarter of this year compared with the same period in 2011, impacted by a smaller than usual rebound post-Chinese New Year, said David Begleiter, research analyst with Deutsche Bank. In the rest of Asia, electronics-related demand is up slightly but there is pronounced destocking as a result of the falling energy and raw material prices.

Chemicals producers across the globe will be watching China carefully. Many have built production facilities in China and other Asian countries to supply the region’s growing demand for chemicals. Germany-based BASF, for example, says its sales growth will primarily come from Asia and that China already accounts for half its business. French chemicals producer Arkema intends to achieve 25 per cent of its global sales in the region by 2015.

While South East Asian countries are performing well, “Asia as a whole is currently not showing the momentum we might expect,” said BASF vice-chairman Martin Brudermuller. “The region is becoming more vulnerable.”

BASF expects the Chinese chemicals market to grow by around 8 per cent a year up to 2020, while for India, it forecasts 7.5 per cent growth. “So China and India are the real focuses for a global company,” he said in an interview with the Frankfurter Allgemeine Zeitung.

China accounts for about 50 per cent of the Asian chemicals market, with South East Asia, Japan, India and Australia accounting for the remainder, Brudermuller said. “We will spread our investments in Asia along approximately the same lines.”

As well as chasing fast-growing markets, Europe-based producers such as BASF are focusing on developing new products and technologies, particularly in the area of sustainable solutions. Companies are focusing increasingly on niche products to capitalise on their historic advantage in innovation to stay ahead of the competition.

The sector needs an EU policy that rewards firms that innovate, create jobs and expand operations, stated Cefic president Giorgio Squinzi. “Global competition remains fierce, both from the US shale gas boom boosting American manufacturing and from producers in the Middle East that hold a feedstock advantage and face lower energy prices relative to the EU market,” he said. “Policymakers must look for ways to solve EU debt problems to help boost the economy and bring stability back to the market. Otherwise, chemicals sector output will be dragged down further.” n