Lower oil prices support European cracker operating rates
on April 15, 2015

C2 OR Apr15Who would have believed, a few years ago, that European cracker operators would see an operating rate of 84% as something to celebrate?  It would have been thought a disaster prior to 2008, when rates typically ranged around 90%.

But whilst nobody is flying flags, last year was the best year since 2007.  And as the chart shows, based on APPE data, it was a major improvement from the 78% level seen in 2013.

Even better news, of course, was the collapse in oil prices, which started to restore the balance with gas-based plants in N America and the Middle East:

  • European producers had managed the situation by keeping their operating rates low to support margins
  • This had supported prices for co-products such as propylene and butadiene, as well as pygas
  • They also invested in technology to enable them to operate successfully at these lower levels
  • An operating rate of 85% would have been thought a minimum level before 2008

However, high oil prices have been only half of the problem.  If we assume they will continue to fall back to historical levels, the industry will still be faced with the challenge of changing demand patterns – caused by Europe’s ageing population.

Countries with median ages of 46 years, such as Germany and Italy, are not suddenly going to start buying new houses and cars at the Supercycle levels seen when Europe’s BabyBoomers were in their prime consumption years.

Instead, companies are going to have to come up with new, more service-based, business models targeted at meeting the currently ignored needs of Europe’s rising numbers of those aged over-55.

That is the real challenge for the next few years, to reinvent the industry.  It needs to move away from the focus on supply issues, and instead focus on understanding the changes underway in demand patterns.  The return of lower feedstock prices provides a golden opportunity to meet the need for more affordable products, suitable for those living on low incomes and pensions.

The industry has been through many such reinventions in the past, and it has a talented pool of employees able to help drive the transition.  There is no reason to believe it cannot succeed.

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