Quarterly Business Analysis Quarter 1 2007
European Petrochemicals Start Year Strongly
West European petrochemical industry has experienced a very buoyant start to 2007. After making strong gains in profitability on easing feedstock costs in the final quarter of 2006, European petrochemical and polymer producers maintained profitability at the highest since the opening quarter of 2005. A strong European economy and low inventories provided a platform for strong demand early in the year. European petrochemical production increased considerably as more abundant olefin feedstocks allowed derivative producers to raise operating rates to the highest for some years. West European producers achieved considerably stronger profitability than counterparts in United States and Asia for the second consecutive quarter. Average returns across the West European industry rolled over from the fourth quarter of 2006 at 18 percent.
Regional Cash Margin Index
The opening of 2007 delivered much less fortune for producers in the United States. Increased uncertainty over the fundamental strength of the United States economy reduced consumer confidence, thinning demand. Consumption of petrochemicals was particularly slow in the key automotive and construction industry sectors. Easing gas prices due to mild weather in the United States through January offered some relief of feedstock costs, before rising crude oil prices and a severe cold period swiftly eroded any gains through February. Average profitability of the United States petrochemical industry stalled in the first quarter of 2007, with average returns slumping to almost ten percent, lagging considerably behind competitors in Western Europe. Petrochemical prices in the United States continued to ease in the early months of 2007, falling below equivalent prices in Western Europe. The correction in prices in the United States over the last six months has increased competitiveness in export markets of Western Europe and Asia, partially offsetting the sluggish domestic demand situation.
Petrochemical producers across Asia had a steady start to 2007. Sound growth of the Japanese economy through 2006 contributed to revived petrochemical demand in Japan. Chinese markets lengthened considerably as delivery of large volumes of import cargoes coincided with slow demand around the Lunar New Year Holiday period. Commissioning of new capacity across Asia continued to weigh heavily on profitability. Profitability in Asian markets was dictated by the local supply demand balance. Japanese producers achieved a significant recovery in margins, whilst profitability in South Korea rolled over from the previous quarter. However Japanese producers continue to operate at the floor of global profitability.
The strong performance of the European industry over the last two quarters has been built on the exceptional performance of the base petrochemicals sector, most notably olefins and aromatics. Tight olefin markets across Western Europe propelled profitability of steam crackers to their highest ever in the last two quarters, with average returns for the last six months in excess of 30 percent. Cracker operators have claimed an increasing share of the margin available in the petrochemical value chain, bolstering margins of integrated producers whilst any non-integrated producers struggle on high olefin feedstock costs.
Petrochemical Industry Sector Cash Margin
(North West Europe)
Crude oil prices eased early in the year, with average Brent prices through February dropping to $55 per barrel, the lowest average price for two consecutive months since January 2005. Crude oil prices bottomed out in February as OPEC cut production quotas, restoring Brent prices above $60 per barrel in March. Refined product prices followed volatile crude oil markets, easing through January before rebounding rapidly through February. Global naphtha prices strengthened considerably relative to other refined products, supported by strong demand for imports into tight Asian markets. Slower seasonal demand for gasoline drove convergence of naphtha and gasoline prices, with naphtha commanding a rare premium to gasoline in Western Europe, depressing reformer margins to an all time low.
West European Petrochemical demand firmed in the first quarter. Fundamental consumption by the manufacturing sector benefited from continued strength of the European economy which grew at 3.3 percent in the fourth quarter of 2006. Inventories throughout the supply chain were low moving into 2007, following typical year end minimisation of converter stocks and production restrictions imposed by scarce olefins through 2006. Extensive cracker outages reduced production of ethylene in 2006 by two percent, the first drop in annual production since 1989. Demand was particularly strong through February as converters restocked in anticipation of imminent price rises as crude oil markets bottomed out. With more abundant olefins, petrochemical production increased in the first quarter of 2007, maintaining a balance to the strong demand. Average industry operating rates climbed two percent to 89 percent, the highest for many years.
European Olefin markets eased from the extremely tight position experienced through much of 2006 as the supply side improved with steady supply from crackers. First quarter olefin contracts settled down in December, following weaker crude oil sentiment and improved supply. Ethylene and propylene contracts fell €45 per ton while butadiene slipped just $20 per ton on strong demand from the United States. With steady feedstock costs, cracker profitability slipped from the record high posted in the fourth quarter of 2006. However, cracker profitability remains very favourable, with returns approaching 30 percent supporting strong margins for integrated producers. Reduced revenue of co-products hit the naphtha cracker particularly hard, restoring ethane as the lowest cost route to ethylene in Western Europe. Nexant's base petrochemicals margin index slipped 17 percent on lower cracker margins, yet remains at its second highest point since 1990.
The polymer sector generally achieved the strongest gains in profitability in the first quarter of the New Year. Nexant's polymer margin index climbed 60 points to its highest since mid-2005. Polyolefin producers achieved modest price gains against reduced monomer costs to bolster margins. HDPE was the most profitable polyolefin through February. Polystyrene producers maintained resin prices stable against easing costs of styrene monomer. Polystyrene margins strengthened, with the leader achieving cash cost breakeven, supported by consolidation in capacity in the second half of 2006.
Profitability of the West European Intermediates sector eased with slowing vinyls and polyester markets. Vinyls markets lengthened through the first quarter, as demand eased with the seasonal slowdown in the construction industry. Imports from the United States, where demand was particularly hard hit, contributed to lengthening European markets and depressed profitability. Slow seasonal demand for PET in the bottle sector depressed demand for polyester intermediates whilst a growing surplus of capacity in Asia, where many prices are set, contributed to weak market sentiment.
Nexant's "Quarterly Business Analysis reports" review regional trends in production economics for commodity petrochemicals and polymers in Western Europe, United States and Asia Pacific. The reports are published as part of ChemSystems/Petroleum and Petrochemical Economics Programme (PPE). Subscriptions to the programme are available from www.chemsystems.com. For further details please contact Andrew Powell at +44 207 950 1576 or email to apowell@nexant.com.
©2007 Nexant, Inc.
