Petrochemical producers grapple with global glut By Reuters

By Mohi Narayan and Joyce Lee

NEW DELHI/SEOUL (Reuters) – Petrochemical producers in Europe and Asia are in survival mode as years of capacity growth in top market China and high energy costs in Europe have squeezed margins for two straight years, forcing companies to consolidate.

The sector’s weakness is worrying for a global oil industry that is looking to petrochemicals to maintain profits as demand for transportation fuel declines in the coming years with the energy transition.

Major producers in Asia and Europe are selling assets, closing older plants and upgrading facilities to use cheaper feedstocks such as ethane instead of naphtha to cut costs, industry executives and analysts say.

Producers will need to further bolster ethylene and propylene capacity as oversupply is expected to persist for years, with new plants still coming on stream in the Middle East and China even as the Chinese economy grinds to a halt.

Ethylene and propylene, produced from petroleum products, are basic raw materials for the manufacture of plastics, industrial chemicals and pharmaceuticals widely used in everyday life.

Consultancy Wood Mackenzie estimates that around 24% of global petrochemical capacity is at risk of permanent closure by 2028 amid poor margins.

“We expect rationalization in Europe and Asia to continue in this cycle,” said Eren Cetinkaya, partner at McKinsey & Company. He anticipates that the current recession will last longer than the five to seven years due to prolonged capacity expansion, particularly in China.

Asian manufacturers face the toughest outlook, with oversupply likely to persist as some companies are unlikely to cut production at new facilities and factories that are integrated with wider operations.

“From 2022, however, a number of factors have made the business environment more difficult – including falling domestic demand as well as drastic oversupply due to new production facilities launched in China and other parts of Asia,” Mitsui Chemicals said in a statement. April statement.

Asian propylene production margins are expected to slip into the red this year, with losses expected to average around $20 per metric ton, consultancy Wood Mackenzie said.

In Europe, profit margins are expected to increase from last year to almost $300 per tonne in 2024, but this is 30% lower than two years ago.

In contrast, US propylene margins are expected to rise 25% to about $450 a tonne in 2024. US producers are insulated from the margin squeeze by an abundant supply of domestic feedstocks derived from cheaper liquids, such as ethane, said WoodMac analyst Kai Sen Chong.

MANUFACTURERS IN ASIA are eyeing new markets

In Asia, Taiwan’s Formosa Petrochemical shut down two of its three naphtha crackers for a year, while Malaysia’s PREfChem, a link between Petronas and Saudi Aramco (TADAWUL:), has kept his cracker closed since the beginning of this year.

However, producers in South Korea and Malaysia are keeping run rates high despite the losses as their factories are integrated with oil refineries. That leaves them unable to close or sell loss-making Petchem units without affecting production of other products, industry sources said.

“Most companies’ portfolios are integrated and balanced. If you want to consolidate them, you have to either destroy the strengths of one company or get rid of the strengths of the other company,” said an official at a large integrated center in the southern state of Korean. said the refiner.

“But I don’t think it will be easy for Korean firms to do it without clear earnings,” said the official, who spoke on condition of anonymity.

As production and exports from the Middle East, China and the US increase, companies are exploring growing markets such as India, Indonesia and Vietnam to sell their surplus.

Fewer capacity additions and growing appetite for polymers and chemicals would make India one of the most attractive markets globally, Navanit Narayan, chief executive of India’s Haldia Petrochemicals, told Reuters.

In addition to finding new outlets, Japanese and South Korean petrochemical producers are exploring niche projects to boost margins by producing low-carbon and recyclable plastics that could fetch higher prices as demand for the products increases. ecological grows.

Mitsubishi Corp is collaborating with Finland’s Neste 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.

THE CONSOLIDATION OF EUROPE RECOVERS

Consolidation is underway in Europe, where Saudi Arabian Basic Industries Corp (SABIC) and ExxonMobil Corp (NYSE: ) announced plans to permanently close some factories due to high costs.

SABIC is also upgrading facilities in Europe and Britain to process more ethane, which is cheaper than naphtha, Olivier Gerard Thorel, SABIC’s executive vice president for chemicals, told Reuters in May.

Ethane, which is priced relative to natural gas, is usually cheaper than naphtha produced from petroleum. SABIC owns flexible feed crackers that can use naphtha, ethane and liquefied petroleum gas (LPG) as feedstock.

WoodMac’s Chong said the shift is mainly driven by high energy and production costs and weak demand in the region amid weak economic growth over the past few years.

Houston-headquartered giant LyondellBasell, which sold its US petrochemicals assets in May, said it was exploring all options in Europe when Reuters asked if it planned to exit the petrochemical business in the near term.

“Market conditions in Europe are anticipated to be challenging over the long term,” a company spokesman said.