Nobody was expecting very much from Q4 ethylene production in Europe, as several plants had been taken offline in December due to lack of demand. And yet it is still possible to be disappointed by the actual outcome as reported by APPE. As the chart above shows:
- Q4 production at 4.4MT was the lowest since the terrible results of Q4 2008 (purple)
- H2 output at 9.2MT was almost exactly the same as in 2012, and only just above 2008
- Total 2013 output at 18.5MT was the lowest since 1996, when volumes were still climbing year-by-year
In fact, the chart gives a clear indication that European ethylene production is now in steady decline. Operating rates were just 78% in 2013, worryingly close to the 77% seen in 2009. That might have been seen as a one-off post-Crisis problem. But data since then suggests a long-term trend is now underway.
Propylene data confirm the miserable picture. It was the highest since 2010 at 14.6MT, due to changes in severity to maximise output. But Q4 was weak at 3.4MT, and lower than 2012 as propylene prices came under pressure.
Butadiene was the same story, with output at 1.9MT in 2013 also the lowest since 2009, and otherwise the lowest since 1996. The lack of recovery in the European car market continues to take its toll, as the blog will discuss later this week in relation to the problems at Lanxess.
The latest EU olefin operating rates (OR%) were very disappointing, even though they were not a surprise. As the chart shows, ethylene rates were just 81% (based on APPE data). They were far below the 90%+ rates that were normal before the crisis began.
These rates would normally have left the industry in crisis mode as regards profitability. But they were “rescued” by the parallel collapse in refinery runs, and the shortage of propylene/butadiene caused by the major shift to ethane feeds in the USA.
The second chart, from the International Energy Agency, highlights the truly startling change in German refinery runs since the financial crisis. Germany is the EU’s largest and most prosperous country. Its refinery runs hardly ever fell below 2.1mbd before 2008. Since then, they have never reached this level, and were just 1.8mbd in February.
This average 18% fall in refinery runs gave major support to effective olefin OR%, as almost all EU crackers are based on refineries – either for naphtha or LPG. The high co-product values for propylene/butadiene were also critical in enabling the industry to deliver strong profitability.
Latest data from the IMF shows that the EU remains the world’s largest economic unit. Its GDP in 2010 was $16.2tn, 26% of the global economy. The USA was next with $14.5tn, and China 3rd with GDP of $5.9tn.
So what happens in Europe matters greatly to the global economy.
Equally, petchems are one of the best leading indicators that we have for monitoring the health of the broader economy. So the chart above of ethylene production in the EU 15 (plus Norway), based on APPE data, provides good insight into what lies ahead:
• Q4’s 4.4MT output (red line) was the lowest since 1995, excluding 2008
• Total 2011 output of 19.6MT was the lowest since 2000, excluding 2009
• Q4 operating rate was just 72%, and H2 only 77%
This is not good news, by any standard.
Another way of interpreting the data is to average 2010-2011 volumes. This takes account of 2010’s stock-build as crude oil prices rose, and then 2011’s destocking. It gives an average volume for the 2 years of 19.9MT. This would be the lowest volume since 2001, excluding 2009.
The conclusion is obvious. Demand destruction is underway in the world’s largest economic region. It also seems unlikely that things will improve short-term with oil prices at a sustained record level, and with EU governments committed to an austerity approach.
Producers and consumers have done a superb job over the past few months in reducing output in line with demand. In the short-term, they should hope for a reward in terms of a bounce in orders. H1 should be the seasonally strongest part of the year.
But only an extreme optimist will regard this as a sign that the economy itself is turning the corner. And policymakers’ continuing inability to finalise Greece’s inevitable default is a reminder, if one were needed, of the banana skins that now litter the world’s economic outlook.