Analysis: Survival of the fittest: Petrochemical makers battle global glut

SUMITOMO CHEMICAL

09/08/2024 15:33

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      Asian petrochemical margins slide to losses in 2024
    

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      Europe, Asian plant consolidation underway
    

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      Asian output cuts limited by refinery ties 
    

  
 (Adds the U.S. assets that LyondellBasell has sold in paragraph
27)
    By Mohi Narayan and Joyce Lee
       NEW DELHI/SEOUL, Aug 9 (Reuters) - Petrochemical
producers in Europe and Asia are in survival mode as years of
capacity build-up in top market China and high energy costs in
Europe have depressed margins for two consecutive years, forcing
firms to consolidate.
    The sector's weakness is troubling for a global oil industry
looking at petrochemicals to keep profits rolling in as
transportation fuel demand falls in coming years with the energy
transition.
    Major producers in Asia and Europe are selling assets,
shutting older plants, and retrofitting facilities to use
cheaper raw materials such as ethane instead of naphtha to cut
costs, industry executives and analysts say.
    Producers will need to further consolidate ethylene and
propylene capacity as oversupply is expected to persist for
years with new plants still coming online in the Middle East and
China, even as the Chinese economy sputters.
    Ethylene and propylene, produced from petroleum products,
are basic raw materials for making plastics, industrial
chemicals and pharmaceuticals widely used in everyday life.
    Consultancy Wood Mackenzie estimates about 24% of global
petrochemical capacity is at risk of permanent closure by 2028
amid weak margins.
    "We expect rationalisation in Europe and Asia to continue in
this cycle," Eren Cetinkaya, a partner at McKinsey & Company
said. He anticipates the current downturn will last longer than
the typical five to seven years because of a prolonged capacity
build-up, especially in China.
    Asia's producers face the toughest outlook, with oversupply
likely to persist as some companies are unlikely to curb output
at new units and plants that are integrated with wider
operations.
    "Since 2022, however, a range of factors have made the
business environment more difficult – including falling domestic
demand, as well as a drastic oversupply on account of new
production facilities launched in China and other parts of
Asia," Mitsui Chemicals said in a statement in April.
    Asian propylene production margins are expected to slide
into the red this year, with losses expected to average around
$20 per metric ton, consultancy Wood Mackenzie said.
    In Europe, profit margins are forecast to edge up from last
year to close to $300 a ton in 2024, but that is 30% lower than
two years ago. 
        In contrast, U.S. propylene margins are expected to rise
25% to about $450 per ton in 2024. U.S. producers are insulated
from the margin crunch by an abundant supply of domestic
feedstocks derived from cheaper natural gas liquids, like
ethane, WoodMac analyst Kai Sen Chong said.
    
   
    
    ASIA PRODUCERS CHASE NEW MARKETS
    In Asia, Taiwan's Formosa Petrochemical  6505.TW  has shut
two of its three naphtha crackers for a year, while Malaysia's
PRefChem, a tie-up between Petronas and Saudi Aramco  2222.SE ,
has kept its cracker shut since earlier this year.
    However, producers in South Korea and Malaysia are keeping
run rates high despite losses, as their plants are integrated
with oil refineries. That makes them unable to shut or sell
loss-making petchem units without affecting the output of other
products, industry sources said.
    "Most companies' portfolios are integrated and balanced. If
you want to consolidate them, you have to either kill the
strengths of one company or get rid of the strengths of the
other company," an official at a large South Korean state-run
integrated refiner said.
    "But I don't think it will be easy for Korean firms to do it
without clear gains," said the official, who spoke on condition
of anonymity.
    As production and exports from the Middle East, China, and
the U.S. grow, companies are exploring growth markets such as
India, Indonesia and Vietnam to sell their surplus supply.
    Fewer capacity additions and growing appetite for polymers
and chemicals would make India one of the most attractive
markets globally, Navanit Narayan, chief executive officer of
India's Haldia Petrochemicals, told Reuters.
    Besides finding new outlets, Japanese and South Korean
petrochemical makers are exploring niche projects to boost
margins by producing low-carbon and recyclable plastics that
could fetch higher prices as demand for greener products grows.
    Mitsubishi Corp  8058.T  is working with Finland's Neste
 NESTE.HE  to develop renewable chemicals and plastics. Sumitomo
Chemical wants to make products using polymethyl methacrylate
recycling technology to make plastics that have less carbon than
traditional products.
                
    EUROPE CONSOLIDATION PICKS UP
    Consolidation is underway in Europe, where Saudi Arabian
Basic Industries Corp (SABIC)  2010.SE  and Exxon Mobil Corp
 XOM.N  announced plans to permanently shut some plants due to
high costs. 
    SABIC is also retrofitting facilities in Europe and the UK 
to process more ethane, which is cheaper than naphtha, Olivier
Gerard Thorel, SABIC's executive vice president, chemicals, 
told Reuters in May.
    Ethane, which is priced relative to natural gas, is
typically cheaper than naphtha produced from oil. SABIC owns
flexible-feed crackers that can use naphtha, ethane, and
liquefied petroleum gas (LPG) as feedstocks.
    WoodMac's Chong said the shift is mainly driven by high
energy and production costs and poor demand in the region amid
weak economic growth over the past few years.
    Houston-headquartered giant LyondellBasell sold its U.S.
ethylene oxide and derivatives business in May. 
    In Europe, the company said it was exploring all options
when Reuters asked whether it plans to exit the petrochemicals
business in the near term. 
    "Market conditions in Europe are anticipated to be
challenging for the long term," a company spokesperson said.    
    

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Global propylene margins    https://tmsnrt.rs/4d6D3of
Global ethylene margins    https://tmsnrt.rs/3LR24ru
FACTBOX-Global petchem firms shape up in oversupply crisis   
 ID:nL4N3JS0E8 
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 (Reporting by Mohi Narayan in New Delhi and Joyce Lee in Seoul,
additional reporting by Yuka Obayashi in Tokyo; Editing by
Florence Tan and Sonali Paul)
 ((Mohi.Narayan@thomsonreuters.com; https://twitter.com/_mohi_;))