Quarterly Business Analysis Quarter 4 2011
Economic uncertainty blights global petrochemical industry profitability at end of 2011.
ChemSystems QBA Q4 Petrochemical Profitability Report
The deteriorating economic climate across the globe took a heavy toll on the performance of the petrochemical industry at the end of 2011. Margins fell heavily across the globe, accelerating losses made in the third quarter. Demand stalled as many consumers lost confidence in the outlook for the global economy and heavily reduced their stocks at the end of the year. Despite extensive cuts in operating rates towards the end of the year, many markets remained lengthy. The cost of acquiring petrochemical feedstocks remained a major burden on most producers as average crude oil prices proved reluctant to ease despite the weakening economic outlook. However, petrochemical prices continued to fall from their mid-year peak .
Frail demand at the end of 2011 blighted the performance of the petrochemical industry. Consumption of petrochemicals has recently been depressed by sluggish economic activity across the globe. The Euro zone economy grew by just 0.2 percent in the third quarter and slow activity in some of the industry sectors which typically lead petrochemical consumption give little cause for optimism. Output of the construction sector grew by just 0.4 percent over the last year, and registrations of new cars were reported to be down more than one percent in the first three quarters of the year. Estimated growth of the United States economy was recently revised down sharply to an annual rate of just 1.8 percent in quarter three. Although many Asian economies continue to achieve stronger growth rates than their Western counterparts, recent tightening in monetary policy in China and India and reduced exports of finished goods to the West has slowed economic activity.
The high cost of feedstocks remained a major burden to many producers, as crude oil prices stayed stubbornly firm. Brent crude oil prices averaged $110 per barrel through October and November, falling only $3 per barrel from the third quarter. Global naphtha prices eased ahead of falling crude price, on reduced consumption in the petrochemical sector. Both propane and butane remained at a discount to naphtha, with butane providing the lowest cost route to ethylene for those producers with feedstock flexibility.
European petrochemical producers saw an acceleration of the downwards trend that began in the previous quarter, with average profitability across the industry dropping to its lowest since the economic slowdown at the beginning of 2009. Nexant’s petrochemical and polymer margin index plunged more than forty percent from the third quarter to 16 (Q1 1984=100). West European petrochemical demand stalled in the final quarter of 2011, as mounting concerns about the economic environment in Western Europe eroded consumer confidence. Average operating rates across the industry were cut to just 75 percent, the lowest since the global financial crisis at the end of 2008, in a bid to maintain markets in balance with the frail demand. Prices for most products were reduced, in order to maintain competitiveness following sharp falls in other regions.
Regional Petrochemical Industry Profitability
(Cash Margin Index Q1 1995=100)
The United States petrochemical market continued to weaken in the closing quarter of 2011. The supply side lengthened as most plants operated reliably approaching the end of the year. Operating rates were trimmed as the fragile demand caused large inventories to build at producers. Reported propylene stocks were at a record high in December. Prices collapsed form the record highs achieved in the middle of the year, as producers looked to liquidate excess stocks. Propylene prices fell almost fifty percent from their May peak. Average industry margins fell for the second consecutive quarter, dropping almost 15 percent to a two year low.
Asian petrochemical markets weakened appreciably towards the end of 2011 as demand slowed. Tightening monetary policy in China and India impacted their economic growth, restricting consumption in the key automotive and construction sectors. In addition, a disastrous flood in Thailand adversely impacted manufacturing activity. Meanwhile, demand for exported goods to Western markets was weak, amid uncertainties in the global economy. Margins stalled as the supply side became increasingly lengthy, prompting many producers to restrict operating rates.
Profitability of petrochemical production in the Middle East fell considerably at the end of 2011, after maintaining a broad peak through the first three quarters of the year. Petrochemical prices fell across most export markets amidst frail demand. Nexant’s Middle East petrochemical cash margin index tumbled twelve percent from the previous quarter to settle at 135 (Q1 1995=100). This is the weakest performance for a year. Margins on petrochemicals sold into Western Europe were hit hardest as demand faltered amidst mounting fears over the strength of the Euro currency. With Asian petrochemical markets lengthening, margins on petrochemicals sold into Asia also eased, albeit by a lesser extent. Netbacks on sales into both regions converged, after Europe had offered stronger netbacks for much of the year. Despite large losses, Middle Eastern producers continued to hold a strong cost advantage over other regional producers.
Profitability of all sectors of the petrochemical industry was under intense pressure in the closing quarter of 2011. Olefins producers were particularly hard hit as weakness in derivative markets, which was apparent in the third quarter, propagated upstream. Cracker margins stalled as olefin supplies lengthened. Crackers processing heavy feedstocks, including naphtha, were particularly disadvantaged by the sharp fall in butadiene and propylene co-product values, alongside the easing ethylene price. The cost of ethylene sourced from heavy feedstocks increased as co-product revenue fell sharply, cancelling any saving in the cost of acquiring feedstock.
Profitability of the polymer sector remained depressed in the fourth quarter. Many convertors destocked inventories and were reluctant to return to purchase resin as the economic outlook deteriorated. Nexant’s European polymer industry margin index remained at its second lowest rating in the last two decades.
In the aromatics sector, benzene prices collapsed driven by extremely weak demand. Profitability of toluene conversion units (including hydrodealkylation and disproportionation) plunged, as benzene prices tumbled below toluene. Nevertheless, reduced naphtha prices meant reforming margins remained unusually strong. Reformate extraction units back integrated to naphtha continued to offer a more profitable route to produce xylenes.
Nexant's Quarterly Business Analysis reports review production economics for petrochemicals in regional markets, and justify trends form underlying market developments. The QBA programme now includes monthly average production economics in the principle markets of Western Europe and the United States, where monthly contract settlements heavily influence industry profitability. The reports are published as part of ChemSystems Petroleum and Petrochemical Economics Programme (PPE). Subscriptions to the programme are available from http://www.chemsystems.com/.
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