By Mohi Narayan and Joyce Lee
NEW DELHI/SEOUL (Reuters) – Petrochemical producers in Europe and Asia are in survival mode as years of capability build-up in prime market China and excessive power prices in Europe have depressed margins for 2 consecutive years, forcing corporations to consolidate.
The sector’s weak spot is troubling for a world oil trade taking a look at petrochemicals to maintain income rolling in as transportation gasoline demand falls in coming years with the power transition.
Main producers in Asia and Europe are promoting belongings, shutting older vegetation, and retrofitting services to make use of cheaper uncooked supplies akin to ethane as a substitute of naphtha to chop prices, trade executives and analysts say.
Producers might want to additional consolidate ethylene and propylene capability as oversupply is anticipated to persist for years with new vegetation nonetheless coming on-line within the Center East and China, even because the Chinese language economic system sputters.
Ethylene and propylene, produced from petroleum merchandise, are primary uncooked supplies for making plastics, industrial chemical compounds and prescription drugs broadly utilized in on a regular basis life.
Consultancy Wooden Mackenzie estimates about 24% of worldwide petrochemical capability is liable to everlasting closure by 2028 amid weak margins.
“We expect rationalisation in Europe and Asia to continue in this cycle,” Eren Cetinkaya, a companion at McKinsey & Firm mentioned. He anticipates the present downturn will last more than the everyday 5 to seven years due to a protracted capability build-up, particularly in China.
Asia’s producers face the hardest outlook, with oversupply more likely to persist as some firms are unlikely to curb output at new items and vegetation which might be built-in 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 Chemical compounds mentioned in an announcement in April.
Asian propylene manufacturing margins are anticipated to slip into the purple this 12 months, with losses anticipated to common round $20 per metric ton, consultancy Wooden Mackenzie mentioned.
In Europe, revenue margins are forecast to edge up from final 12 months to shut to $300 a ton in 2024, however that’s 30% decrease than two years in the past.
In distinction, U.S. propylene margins are anticipated to rise 25% to about $450 per ton in 2024. U.S. producers are insulated from the margin crunch by an considerable provide of home feedstocks derived from cheaper liquids, like ethane, WoodMac analyst Kai Sen Chong mentioned.
ASIA PRODUCERS CHASE NEW MARKETS
In Asia, Taiwan’s Formosa Petrochemical has shut two of its three naphtha crackers for a 12 months, whereas Malaysia’s PRefChem, a tie-up between Petronas and Saudi Aramco (TADAWUL:), has saved its cracker shut since earlier this 12 months.
Nonetheless, producers in South Korea and Malaysia are maintaining run charges excessive regardless of losses, as their vegetation are built-in with oil refineries. That makes them unable to close or promote loss-making petchem items with out affecting the output of different merchandise, trade sources mentioned.
“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 big South Korean state-run built-in refiner mentioned.
“But I don’t think it will be easy for Korean firms to do it without clear gains,” mentioned the official, who spoke on situation of anonymity.
As manufacturing and exports from the Center East, China, and the U.S. develop, firms are exploring progress markets akin to India, Indonesia and Vietnam to promote their surplus provide.
Fewer capability additions and rising urge for food for polymers and chemical compounds would make India one of the vital engaging markets globally, Navanit Narayan, chief government officer of India’s Haldia Petrochemicals, advised Reuters.
Apart from discovering new retailers, Japanese and South Korean petrochemical makers are exploring area of interest tasks to spice up margins by producing low-carbon and recyclable plastics that might fetch larger costs as demand for greener merchandise grows.
Mitsubishi Corp is working with Finland’s Neste to develop renewable chemical compounds and plastics. Sumitomo Chemical needs to make merchandise utilizing polymethyl methacrylate recycling know-how to make plastics which have much less carbon than conventional merchandise.
EUROPE CONSOLIDATION PICKS UP
Consolidation is underway in Europe, the place Saudi Arabian Primary Industries Corp (SABIC) and Exxon Mobil Corp (NYSE:) introduced plans to completely shut some vegetation attributable to excessive prices.
SABIC can be retrofitting services in Europe and the UK to course of extra ethane, which is cheaper than naphtha, Olivier Gerard Thorel, SABIC’s government vp, chemical compounds, advised Reuters in Might.
Ethane, which is priced relative to pure gasoline, is often cheaper than naphtha produced from oil. SABIC owns flexible-feed crackers that may use naphtha, ethane, and liquefied petroleum gasoline (LPG) as feedstocks.
WoodMac’s Chong mentioned the shift is especially pushed by excessive power and manufacturing prices and poor demand within the area amid weak financial progress over the previous few years.
Houston-headquartered large LyondellBasell, which bought its U.S. petrochemical belongings in Might, mentioned it was exploring all choices in Europe, when Reuters requested whether or not it plans to exit the petrochemicals enterprise within the close to time period.
“Market conditions in Europe are anticipated to be challenging for the long term,” an organization spokesperson mentioned.