Quarterly Business Analysis Quarter 1 2009
PETROCHEMICALS PRESSURED ACROSS THE VALUE CHAIN
The Petrochemical Industry has suffered as feedstock costs strengthen, while demand for petrochemical products remains weak - Industry profitability levels are approaching record lows.
The deepening downturn has taken its toll on the petrochemical industry. Demand for most petrochemicals remains severely depleted, as manufacturing activity has waned. Operating rates are greatly reduced, placing mounting pressure on fixed costs of production. Meanwhile, prices of key petrochemical feedstocks, including naphtha and LPG, have increased considerably through the quarter, despite crude oil prices maintaining their lowest level for some five years.
The squeeze on margins which hit petrochemical derivatives from the middle of 2008 has intensified and spread to include upstream cracking operations in quarter one 2009. The impact on the industry has been so intense that Western Europe has been forced (temporarily) to abandon its long running tradition of quarterly pricing, with monthly olefins pricing settled in quarter one and anticipated for quarter two.
Demand for petrochemicals has been very subdued through the quarter, even after contracting sharply towards the end of 2008. Few regions have been spared from the grasp of the deepening economic downturn. The European Union member states suffered its largest ever contraction in GDP in the fourth quarter of 2008, dropping 1.5 percent. Meanwhile the United States economy has collapsed into recession, suffering a massive drop of 6 percent in GDP in the closing quarter of 2008. Asian economies have faired little better, with the Japanese economy suffering a trade deficit for the first time in 13 years as exports contracted sharply.
Domestic consumption of petrochemicals remains under intense pressure as a result of production restrictions in the automotive industry and a lack of activity in the construction sector. Car sales in the United States are reported to be down forty percent, year on year, prompting major manufacturers to cull production of new vehicles. Non‑durable applications such as food packaging have provided some modest support to petrochemicals demand, as did some restocking as prices bottomed out in January after falling dramatically in the second half of 2008.
Crude Oil and Petrochemical Feedstock Prices
(Western Europe Monthly average)
The stabilisation of crude oil prices in the first quarter of 2009 is the only good news for petrochemical producers. Brent crude oil prices generally traded in a narrow band between $40 and $45 per barrel, and less than two thirds of the peak set in the middle of 2008, marking the lowest level for crude oil prices in some five years. However, the cost of key petrochemical feedstocks, including naphtha and LPG has increased considerably through the first quarter. European naphtha prices surged from an unusual 14 percent discount to crude oil in the closing quarter of 2008 to a 13 percent premium in the opening quarter of 2009. Propane and butane prices meanwhile extended their premium over naphtha on robust demand in seasonal heating applications. Tight naphtha supplies in Asia, after extensive refinery run cuts, has lifted the region’s premium to record high over Middle East values.
The weak market situation and the growing strength of many petrochemical feedstock prices relative to crude, have taken a severe toll on petrochemical margins. Average industry margins in Western Europe and South Korea slumped to their lowest since the early 1980’s downturn. Meanwhile, United States industry profitability has reduced to levels sustained in the trough at the start of this decade.
Regional Petrochemical Industry Cash Margin Indices
(Petrochemicals and Polymers)
The rapid downturn in the fortunes of the industry tracks the sudden deterioration in the profitability of ethylene production. The squeeze in margins that had been evident in downstream sectors from the middle of 2008 has rapidly spread upstream to include cracker operations at the start of 2009.
The relative competitiveness of alternative cracker feedstocks has moved appreciably in the first quarter, with ethane restored to the lowest cost source of ethylene in most regions. The economics of heavier feedstocks, including naphtha and LPG has been impaired by the dramatic reduction in the value of propylene, C 4 and aromatics co-products.
United States Ethylene Production Costs
(Leader cash cost Q1 2009)
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Nexant’s “Quarterly Business Analysis” reviews 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 or by emailing ChemSystems@Nexant.com . For further details on the analysis presented here please contact Andrew Powell at +44 207 950 1576 or email to apowell@nexant.com.
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