Europe’s petrochemical sector must prepare now for the trade war, US start-ups, Brexit and the circular economy, as I discuss in this interview with Will Beacham of ICIS news at the European Petrochemical Association Conference.
With higher tariff barriers going up between the US and China, the market in Europe is likely to experience an influx of polymers and other chemicals from exporters looking for a new home for their production, International eChem chairman, Paul Hodges said.
Speaking on the sidelines of the European Petrochemical Association’s annual meeting in Vienna, he said: “The thing we have to watch out for is displaced product which can’t go from the US any more to China and therefore will likely come to Europe.”
In addition to polyethylene, there is an indirect effect as domestic demand in China is also falling, he said, leaving other Asian producers which usually export there to also seek new markets and targeting Europe.
“The US isn’t buying so many consumer goods from China any more – and that seems to be the case because container ships going from China to the US for Thanksgiving and Christmas aren’t full. So NE and SE Asian chemical producers haven’t got the business they expect in China and are exporting to Europe instead. We don’t know how disruptive this will be but it has quite a lot of potential.”
US polymer start-ups
Hodges believes that the new US polymer capacities will go ahead even if the demand is not there for the product. This is because the ethane feedstocks they use need to be extracted by the producers and sellers of natural gas who must remove ethane from the gas stream to make it safe.
For these producers some of the cost advantages have already disappeared because of rising ethane prices.
“The exports of US ethane are adding one or two more crackers to the total. And without sufficient capacity ethane prices have become higher and more volatile.”
Hodges points out that pricing power is being lost as poor demand means producers cannot pass on the effect of rising oil prices. “Margins are being hit with some falling by 50-60%,” he said.
EU targets mean that all plastic packaging must be capable of being recycled, reused or composted in Europe by 2025. For the industry this could be a huge opportunity, but only if it acts fast, said Hodges: “We have to develop the technology that allows that to happen. We will need the [regulatory] approvals and if we don’t get moving in the next 12-18 months we are in trouble.”
According to Hodges: “We are in the end game for Brexit. We talk to senior politicians from both sides who don’t think there is a parliamentary majority for any Brexit option.”
He fears that if no deal can be agreed there is a chance the UK will refuse to pay its £39bn divorce bill.
“Then what happens to chemical regulation and transport? Although the bigger companies have made preparations, only one in seven in the supply chains are getting prepared,” he added. This is why we have launched ReadyforBrexit.
You can listen to the full podcast interview by clicking here.
The post Petrochemicals must face up to multiple challenges appeared first on Chemicals & The Economy.
Life doesn’t get any easier for Europe’s olefin producers and the consumers who depend on them. As the chart shows, based on latest APPE data, operating rates averaged just 78% in H1. This is almost as bad as H1 2009, when they were 76%. And it is a long way away from the 90% levels seen routinely until 2008. The detailed figures are almost more depressing:
- Ethylene production was just 9.3MT, versus the 10.3MT average seen between 2000-12
- Q2 production at 4.6MT was the lowest since 1998, lower even than 2009
- Q2 propylene production at 3.5MT was the lowest since 2002
- Butadiene production at 456KT was only 20KT above 2009, and otherwise the lowest since 1997
This dreadful situation may well continue, as long as central banks’ stimulus programmes continue to support oil prices at today’s unrealistic levels. Producers have little choice but to pass these prices down the chain, even though they cannot be absorbed by end-consumers. So volume and operating rates continue to make record lows.
There is also no easy solution within the industry’s control. Its feedstocks represent only a small proportion of refinery output, and so its destiny is heavily dependent on upstream developments. And European governments simply cannot allow many more refineries to close because of energy security risks:
- Europe is already over-dependent on diesel imports, for example – a precarious position, given that most cars run on diesel and not gasoline
- Meanwhile, Europe has developed a major gasoline surplus, which can no longer be easily exported to the New York Harbor market, due to lower US gasoline demand and the increased use of ethanol
Oil prices at today’s levels are thus the proverbial straw that potentially breaks the camel’s back as far as petchem producers are concerned.
Markets have moved into summer holiday mode in recent weeks whilst they wait for a new direction, as the chart shows. It is therefore timely to look back over developments since the start of the year:
The S&P 500 (purple) has been the clear winner, up 15%. The key to its out-performance has been the central bank stimulus programmes, which in turn have supported earnings in the financial sector. Without this bonus, earnings would have been flat overall. Equally worrying, as S&P note, is that “While companies have been successful at cutting costs, which is apparent from their bottom line growth, the businesses’ dismal sales results illustrate that they are simply not growing.” Another concern is that the latest GDP data shows wages and salaries were just 42.6% of GDP in 2012 – the lowest percentage since records began in 1929. Without growth in wages, it is hard to see how sustained growth can take place in the wider economy.
The US$ has also been strong (orange), gaining 9% versus the Japanese yen. This has been due to the policies of new premier Abe, who has tried to talk down the yen’s value in order to encourage exports. He also hopes the weaker yen will encourage inflation, and end Japan’s 20-years of deflation. But the yen has stabilised since May, as markets have instead focused on Japan’s unaffordable current account deficit. They have realised that Abe’s “fourth policy arrow” of a rise in the consumption tax (VAT) next year, will almst certainly reduce consumer demand, and thus make the return of inflation less likely.
Polyethylene (yellow) has also been strong, with export prices up 6%. This is counter-intuitive, as US polyethylene is mainly manufactured from ethane, where the US currently has a major cost advantage against oil-based producers in Europe and Asia. But clearly producers have chosen to prioritise profits rather than volume. Thus (as the blog will discuss later this week), they have focused their sales effort on Latin America and particularly Brazil, where the market is currently buoyant ahead of next year’s World Cup and the 2016 Olympics
Brent oil prices (blue) are down 3%. The New Year rally took them up 6%, but they then ran out of steam. It is, of course, remarkable that they are anywhere near current levels of $100/bbl, given the fundamentals of increasing production, slowing demand and high inventories. Other commodity prices have begun to fall, and oil also looks vulnerable. Interestingly, Daniel Yergin, a recognised expert on oil markets, has now begun to share the blog’s analysis of the situation.
Naphtha (black), has naturally followed oil price developments and is down 5%. This reflects the difficulty of passing through today’s oil prices along the value chain. Thus New Year optimism of a sustained revival in demand, which temporarily took prices 8% higher, has not been maintained. Lower production ex-refineries has, however, meant that prices have rebounded from April’s 15% decline, when demand worries took hold.
PTA (red) has reflected the weakening position of China’s economy and is down 5%. It saw only a modest New Year rally, when most analysts naively argued the new leadership would unleash another major stimulus programme. By April, disappointment had led prices to a decline of 13%, before higher oil prices provided support by pushing up prices for paraxylene feedstock.
Benzene (green) has, of course, essentially become a by-product in recent years, and its price has been supported by major cutbacks in supply ex-refineries and crackers. This meant its prices were artificially high relative to the supply/demand balance during 2011-12, but they they have since weakened sharply in 2013. It is, in fact, the only product to have been consistently lower than its New Year price all through the year, and is now down 17%. This is probably telling us something quite important about the underlying weakness of global demand.
Chemical markets do well when the consumer is feeling confident. Thus their weak performance in 2013 highlights the way central bank stimulus policies have produced the opposite result to that intended. If policymakers stopped provided free cash to their speculative friends in the financial sector, then energy and other prices would fall back to normal levels, and the consumer might feel able to start spending again. But at the moment, her money has to be spent on non-discretionary items such as heating her home, and on transport – so she has no money left for the discretionary spending that would support chemical sales.
In early March, the blog described itself as feeling like “a lonely voice, focused on what is really happening in the real world”. But gradually since then, the consensus view on growth and commodities regulation has begun to shift in its direction. For example, a recent New York Times article on China by Nobel Prize-winner Paul Krugman could have been based on recent blog posts:
- He says China’s wasteful infrastructure spend means consumption as a percentage of GDP is half the US level
- He then references Sir Arthur Lewis and the lesson of the Lewis Curve
- And finally he even worries that China is now experiencing its Minsky Moment
Equally, former US economic chief Larry Summers has now followed the blog in suggesting that “Quantitative Easing (QE) in my view is less efficacious for the real economy than most people suppose”.
Even more encouraging is that regulators are finally waking up to the fact that commodity markets have completely lost their role of price discovery, due to the combination of central bank liquidity and investment bank speculation. As the New York Times reported:
”In 2011, for instance, an internal Goldman memo suggested that speculation by investors accounted for about a third of the price of a barrel of oil.”
Whilst the aluminium warehousing scandal has finally reached the US Senate Banking Committee. Evidence from MillerCoors suggested this cost consumers $3bn last year, whilst Bloomberg reported “the 10 largest Wall Street banks generated about $6bn in revenue from commodities in 2012.”
Friday’s news that JP Morgan will exit its physical commodity business is thus an important step in the right direction. It will hopefully soon be followed by the other major players.
But policymakers have still not yet taken the critical step, which is to ask why their policies have failed so badly? They cannot yet bring themselves to recognise the simple truth that demographics drive demand. They still want to claim credit for the 1983-2007 economic SuperCycle, rather than accepting it was mainly due to the vastly increased numbers of Western BabyBoomers arriving in the 25 – 54 Wealth Creating age group.
Lower growth is now inevitable in the West as a result of these ageing Boomers reaching their low-spending and low income years. Whilst China’s one child policy since 1978 means its growth is also slowing, as its population ages.
The result, as the blog will discuss in a special series this week, is that companies have heavily over-invested in major new capacity, on the assumption that SuperCycle growth would continue. Now, disappointment is looming. Thus BASF CEO Kurt Bock warned on Thursday:
“We expect the development of the second half to be rather flat compared to the first half of 2013. Achieving our earnings target is significantly more challenging today than we had expected at the beginning of the year”.
Whilst Dow CEO Andrew Liveris warned that “while growth continues in China, we all have to reset expectations below historical rates.”
The chart shows latest benchmark price movements since January with ICIS pricing comments below:
Benzene Europe, green, down 16%. ”While prices have been on a steady downward trend since the start of 2013, they are still historically and structurally high compared with oil and energy pricing, thus making them difficult for end-use markets to absorb.”
PTA China, red, down 8%. “Restocking activity from textile factories worried that polyester prices will increase further on the back of higher raw material prices”
Naphtha Europe, black, down 6%. “Europe is structurally long, and sellers need to export to US gasoline and Asian petrochemical sectors to keep stocks in balance”
Brent crude oil, blue, down 3%.
HDPE USA export, yellow, up 6%. “Export prices were generally stable.”
US$: yen, orange, up 12%
S&P 500 stock market index, purple, up 15%
Cotton prices are falling again, since Monday’s reversal by the Indian government of its proposed ban on cotton exports. India is the world’s 2nd largest cotton exporter, after the USA, with 20% of the market:
• On 5 March, its Textiles Ministry banned all exports
• Domestic users had applied pressure to divert supplies to local markets
• Domestic prices immediately fell, whilst world prices jumped 5%
• Cotton farmers, and major importers such as China, then protested
• This week, the Agriculture Ministry announced the ban’s partial removal
The chart highlights the extreme volatility that has hit cotton markets since 2009. Demand suddenly jumped as China’s bank lending spree and stimulus programme took effect:
• Prices soared from 46c/lb in March 2009 to 227c/lb on 7 March 2011
• A drought in the USA also helped to reduce supplies
• But recently, prices and demand have weakened
• Last week’s 5% price rise on news of the export ban is already history
This is yet another clear indicator that China’s economy is cooling fast. In turn, this will reduce inflation, and help the government achieve its main policy objective of social stability.
The cotton price now seems headed back towards its traditional 50c-70c/lb range. This has important implications for petchem markets, and the C8 chain into PTA and PET.
Textile companies routinely change the blend mix between polyester and cotton, depending on the relative price between the two. So if oil prices stay high, C8 volumes and pricing will come under further pressure.