Survival of the fittest: petrochemical manufacturers battle global glut

The survival mode of petrochemical producers is on in Europe and Asia. Years of capacity building in China, the top market for petrochemicals, and high energy prices in Europe have pushed margins down two years in a row.

The weakness of the sector is concerning for an oil industry that looks to petrochemicals as a way to maintain profits in future years when transportation fuel demand will fall with the energy shift.

Industry executives and analysts report that major producers in Asia, Europe, and North America are cutting costs by selling assets, closing older plants, and retrofitting their facilities to use cheaper materials, such as ethane, instead of naphtha.

As new plants continue to be built in China and the Middle East, despite the slowdown of the Chinese economy, producers will need to consolidate their ethylene and propylene capacities.

Plastics, industrial chemicals, and pharmaceuticals are all made from ethylene and propane, which is produced by petroleum products.

Wood Mackenzie, a consultancy, estimates that 24% of the global petrochemical production capacity could be permanently closed by 2028 due to low margins.

Eren Cetinkaya is a partner with McKinsey & Company. He said, "We expect the rationalisation to continue in Europe and Asia in this cycle." Eren Cetinkaya predicts that the current downturn is likely to last longer than usual, owing to a long-term capacity buildup in China.

Asia's producers are likely to face the most difficult outlook as oversupply is unlikely to be curtailed by some companies, who are unlikely to reduce output in new units or plants integrated into larger operations.

Mitsui Chemicals stated in an April statement that "since 2022, the business environment has become more difficult due to a number of factors, including a falling domestic demand and a dramatic oversupply as a result of new production plants launched in China, among other places in Asia."

Wood Mackenzie, a consultancy, said that the margins of Asian propylene producers are likely to be in the red for this year. Losses should average $20 per metric tonne.

Profit margins in Europe are expected to increase from last year, to reach close to $300 per ton by 2024. However, this is still 30% less than it was two years ago.

Propylene margins in the U.S. are expected to increase 25% by 2024, to $450 per ton. U.S. producers will be insulated from margin pressure by the abundant supply of domestic feedstocks that are derived from natural gas liquids like ethane. This is according to WoodMac analyst Kai SenChong.

ASIA PRODUCERS CHASE NEW MARKETS

In Asia, Formosa Petrochemical, a joint venture between Petronas, Saudi Aramco and Malaysia, closed two of its three crackers in the past year. Malaysia's PRefChem has also kept its cracker closed since early this year.

As their plants are integrated into oil refineries, South Korea and Malaysia keep up high run rates despite losses. This means they can't close or sell petchem units that are losing money without affecting other products.

Portfolios of most companies are balanced and integrated. "If you want to consolidate the companies, you either have to kill the strengths from one company or eliminate the strengths from the other," said an official of a large South Korean integrated refinery.

The official who spoke under condition of anonymity said, "I don't believe it will be easy for Korean companies to do this without clear benefits."

Companies are looking to India, Indonesia, and Vietnam as growth markets for their surplus supplies, as production and exports in the Middle East, China and the U.S. continue to grow.

Navanit Narayan is the chief executive officer at India's Haldia Petrochemicals. He said that India would be one of the world's most attractive markets because of its growing demand for polymers and chemicals and lower capacity.

In addition to finding new outlets, Japanese petrochemical manufacturers and South Korean petrochemical producers are exploring niche projects in order to boost their margins. They produce low-carbon and recycled plastics which could fetch a higher price as the demand for greener goods grows.

Mitsubishi Corp. is collaborating with Neste, a Finnish company to develop plastics and chemicals that are renewable. Sumitomo Chemical is working with Neste to develop plastics and chemicals that are less carbon-intensive than conventional products.

CONSOLIDATION IN EUROPE KEEPS UP

In Europe, Saudi Arabian Basic Industries Corp. (SABIC), and Exxon Mobil Corp. announced plans to permanently close some plants because of high costs.

SABIC also retrofits facilities in Europe and UK to process ethane more, as it is cheaper than the naphtha. Olivier Gerard Thorel is SABIC’s executive vice-president, chemicals.

Ethane is usually cheaper than oil-based naphtha. SABIC has flexible-feed crackers which can be used to feed naphtha as well as ethane and liquefied petrol gas (LPG).

WoodMac's Chong explained that the change is due to high energy costs, low demand and a weak economy in the region.

Houston-headquartered giant LyondellBasell, which sold its U.S. petrochemical assets in May, said it was exploring all options in Europe, when asked whether it plans to exit the petrochemicals business in the near term.

A spokesperson for the company said that "market conditions in Europe will be challenging on a long-term basis."

(source: Reuters)