Quarterly Business Analysis Quarter 3 2007
West European Petrochemicals Maintain Peak Profitability, Defying Record High Feedstock Costs
The West European petrochemical industry continued to achieve a strong economic performance through the third quarter, despite ongoing pressure of high feedstock costs. Nexant's recently published Quarterly Business Analysis identifies that average industry margins over the last year have climbed to the second highest since the sharp peak of 1995. Average naphtha prices through July and August eased just $5 per ton from the record high set in the previous quarter. Demand for most petrochemicals remained steady, whilst the supply side contracted considerably due to numerous technical failures and a busy schedule of maintenance. Tightening European petrochemical markets supported the profitability of those producers who maintained reliable operations.
Petrochemical markets in the United States followed European markets tighter in the third quarter, primarily due to supply side restrictions. The tightening market offered producers the opportunity to increase profitability that had previously been lost to the run up in feedstock costs in the first half of the year. Demand remained fragile in the United States, as turmoil in the housing sector continued to depress consumer confidence. The start up of new capacity in Asia retained a more balanced market. Slow domestic demand and erosion of export markets has held the profitability of United States producers below the peaks achieved in Western Europe over the last year.
The West European petrochemical industry has achieved a consistently strong performance over the last year, sustaining Nexant’s margin index close to 200 for five consecutive quarters. This is the first time this has occurred since the sharp peak in 1996. Much of the margin recently made by the petrochemical industry has been concentrated in the olefins and aromatics value chains. This is reflected in Nexant’s base petrochemicals index, which has averaged a record high of 300 (Q1 1984 = 100) over the last year.
The polymer sector achieved modest gains in profitability, mainly driven by polypropylene. Nexant’s polymer margin Index climbed five percent for the second consecutive quarter. Polypropylene margins strengthened to their highest for more than two years, as markets tightened following the closure of units by Basell and Ineos. Laggard margins were restored above cash cost breakeven. Despite recent rationalisation of European capacity, polystyrene markets remained long. Polystyrene continued to be the least profitable commodity polymer, with Laggard integrated plants failing to cover cash costs of production.
Strong crude oil prices continue to weigh heavily on the production costs of petrochemicals in all regions. Brent crude oil traded at an average of $74 per barrel through July and August, a rise of eight percent from quarter two. Easing gasoline prices in the United States through August offered some relief to naphtha prices, though the average of July and August prices eased just $5 per ton from the all time high of $673 per ton achieved in quarter two. Moving into September, surging crude oil markets have pushed naphtha back above $700 per ton, despite the announcement of increased production quotas of OPEC members.
LPG prices strengthened considerably relative to naphtha after trading at a sizeable discount for the last few years. Increased consumption of LPG in the petrochemical industry adsorbed surplus supplies of LPG, supporting prices. Light gases remained the lowest cost route to ethylene, however the cost advantage compared to heavy liquids such as naphtha was substantially reduced.
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).
For further details please contact Andrew Powell at +44 207 950 1576 or email to apowell@nexant.com
©2007 Nexant, Inc.
