US shale revolution puts squeeze on European chemicals groups

The recent rapid expansion of the US natural gas sector is edging European producers out of the market and forcing them to focus increasingly on speciality products to stay afloat.  With the cheaper US produce, European businesses and operations will have to be creative and focusing downstream.

The US shale gas revolution is forcing a redoubling of efforts by European chemical producers to move away from low-margin petrochemicals and focus on higher margin speciality products.

European petrochemical makers risk being squeezed between low-cost producers in the Middle East and a resurgent chemicals industry in the US, where feedstock and energy prices have plummeted following shale gas discoveries.

After a decade of almost zero capacity expansion in US petrochemicals, shale gas has prompted the likes of Dow Chemical, LyondellBasell, Chevron Phillips and ExxonMobil Chemical to invest billions of dollars in ethane cracker capacity on the US Gulf Coast.
Fresh US supplies of petrochemicals – primarily ethylene derivatives such as polyethylene and PVC – will hit global export markets in coming years. Meanwhile, Middle Eastern chemical companies that have long had a big feedstock and energy cost advantage over Europe may struggle to export to a more competitive US and seek European customers instead.

Environmental concerns and greater population density have so far prevented Europe developing its own shale gas reserves, which threatens to leave European chemical producers at a competitive disadvantage in the near term. Natural gas prices in the US are roughly a third of the Europe price.

In Europe, petrochemical companies tend to run costly, crude oil-derived naphtha crackers. Although some economists believe that crude oil and natural gas spreads will eventually narrow, US companies are cashing in.

Bernstein Research estimates that the combination of high oil prices and cheap gas has boosted the profits of US chemical companies running ethane crackers by an annual $6bn, or roughly 14 per cent of the entire US industry’s profits in 2011.

Paul Hodges, chairman of industry consultancy International eChem, says there is “a real fight to the death going on in core [petrochemical] export markets such as PVC between US and European producers”.

“US producers have grasped they have a cost advantage, and being good Americans they are running as hard as possible with it.”

Standard & Poor’s says European producers would “need to respond to this change in industry dynamics with a range of decisive measures aimed at improving production efficiency and improving their cost positions”.

Belgian-based Solvay is dealing with US competition and weak demand in Europe’s polyvinyl chloride (PVC) market by folding its PVC assets into a joint venture with those of rival Ineos. Solvay plans to exit the agreement in a few years.

Jean-Pierre Clamadieu, Solvay chief executive, said the move partly reflected the “competition coming, especially from North American producers, which are benefiting from very privileged access to energy and raw material.”

Germany’s Lanxess is set to cut 1,000 jobs by the end of 2015 in response to a fall in demand for synthetic rubber from the automotive industry. About 40 per cent of the company’s sales are linked to the automotive and tyre industries.

“Lanxess is suffering at the moment from the temporary market weakness in tyres and more broadly in automotive,” Axel Heitmann, chief executive, tells the FT. “We’re focused more than ever on technology and innovation because high-end products are less cyclical and less affected by pricing pressure.”

However, the rise of Middle East and Asian rivals over the past decade long ago convinced European chemical companies that they cannot succeed in commodity chemicals.

That triggered years of restructuring and careful portfolio management that continues to this day to counter the challenge from Chinese companies that are striving to make more complex intermediates rather than just basic chemicals.

“Most have moved downstream in Europe to protect their position. They’re moving into speciality areas which are much more technology and customer focused,” says Anton Ticktin, partner at Valence Group, the specialist chemicals advisory firm.

In an example of such customer focus, BASF recently struck a partnership with Adidas to supply special foams with a unique particle structure that helps a running shoe absorb impact and give it spring.

Kurt Bock, chief executive of Germany’s BASF, believes the world’s biggest chemical maker by sales will remain competitive in spite of shale developments as it has largely exited ethylene-based chemicals.

Still, European chemical producers know they cannot ignore developments in the US and all insist Europe must do something about its competitive position in energy or risk investments going elsewhere.

Energy costs can account for more than half of the production costs of chemical companies. Ineos’ ChlorVinyls plant in Runcorn, for example, uses as much power as the neighbouring city of Liverpool.

Tata Chemicals in October said it would shut a soda ash plant in Northwich in the UK, with the loss of 220 jobs after energy prices more than doubled in the past few years.

However, European chemical companies are not leaving their US rivals to enjoy all the benefits from low feedstock and energy prices

BASF is converting a naphtha cracker in Port Arthur, US to run on ethane. Meanwhile, Linde, the German industrial gases company, is to invest $200m at a site in Texas to create the world’s largest natural gas based gasification complex for syngas chemicals.

Moreover, the jury is still out on whether the huge expansion of US chemical production will pay dividends in the long term.

“My outlook for European chemical industry is not terribly depressed as I don’t believe there is any sound fundamental reason for the divergence between natural gas and crude oil prices,” Mr Hodges, the consultant, said.

“The US is adding 10m tonnes of export-orientated ethylene capacity . . . But who are they going to export it to? I believe they are doomed to fail as there is no market for it.”

By Chris Bryant of the Financial Times

The full article is visible via the link below – Pankaj Oswal


Article: Sasol, Ineos say forming JV to produce HDPE in North America

Two major companies, Sasol and Ineos, have formed an unlikely partnership that will see the businesses develop 426,000 mt/year high density polyethylene plant in the United States, according to a report from Platts.  The reason this is so compelling is that due to the abundance of shale gas and the competitive advantages that come with the resource in the US; European and Middle Eastern businesses will have to drastically reduce prices to remain competitive as a new price equilibrium evolves, with more and more HDPE plants being established across the Atlantic.  This is a real threat to business models and continues a clamour for reevaluation of HDPE facilities across the globe.

South African-based Sasol and Switzerland-based Ineos will team up to produce high density polyethylene in the US, the companies said Wednesday, announcing plans for a joint venture which would include a 426,000 mt/year HDPE plant.

“This partnership will leverage the expertise of two global players in the chemical market. Together we will develop a world-scale HDPE plant which will allow us to monetize ethylene and supply a high quality product,” Andre de Ruyter, Sasol Senior Group Executive for Global Chemicals and North American Operations, said in a statement.

“The joint venture expands on our greater North American strategy and will complement the products produced from the ethane cracker and derivatives project in southwest Louisiana.” A final investment decision is expected to be made in the first half of 2014 with start-up of the plant expected at the end of 2015, the companies said.

Sasol has previously announced plans to build a 420,000 mt/year low density polyethylene plant, and a 450,000 mt/year linear low density polyethylene plant in Lake Charles, Louisiana.

Ineos already operates a 794,000 mt/year HDPE plant in LaPorte, Texas.

The new plants comes amid HDPE closures in Europe. Austrian petrochemical company Borealis will cease HDPE production at Burghausen, Germany, by the end of 2014 due to challenging business conditions for HDPE, a company spokeswoman said last week. The company has a one HDPE plant of 175,000 mt/year capacity at the site. Borealis’ announcement of the HDPE plant’s closure mirrors similar steps taken by Dow Chemical in Tessenderlo, Belgium, LyondellBasell in Wesseling, Germany and Total in Antwerp, Belgium in the past few months.

According to Booz analysis, given the abundant supply of cheaper feedstock, the US can price HDPE in the short term at $1,210/mt FD NWE with a 10% margin. The competition it will create will lead to a reduction in Middle Eastern margins by 48% and possibly prompt Europe producers to close marginal capacity until the average falls to $1,210/mt FD NWE.

The disparity in the North American and European markets, mainly brought about by the former’s feedstock shale gas advantage, will further drive downsizing in the latter’s HDPE assets, many sources said.

Ineos, which operates both in the US and Europe, said it is considering selling its HDPE plants in Rosignano, Italy and Sarralbe, France, producing 200,000 mt/year and 195,000 mt/year, respectively it said last year.

Ineos has yet to find new owners for the plants, though Tom Crotty, the group director, said May to Platts that the company is not rushing to sell and will rather continue operating them as normal if it failed to find a suitable buyer.

Article by Chris Ferrell and Nandita Lal

Edited by Dan Lalor

The full article is visible below – By Pankaj Oswal