COVER STORY

European Petrochemicals

Battling to Stay the Course

An unprecedented run-up in feedstock and energy costs coupled with a worsening global economic slowdown, has dogged the European petrochemical industry in what should have been its last good year at the top of the cycle. Large, cost-advantaged, gas-based olefins and polymer capacity additions in the Mideast are the cause of the impending downturn. Nevertheless, European producers remain adamant that—despite the hard hits of 2008—foresight, integration, and careful cost-control will be a sufficient defense until global demand catches up with the new supply.

“We expect 7 million m.t.- 8 million m.t./year of new ethylene capacity to come online between now and this time next year,” says Geo roy Petit, senior v.p./strategy and services at Total Petrochemicals. In a world market that was 115 million m.t. last year, additions of this magnitude will a ect all regions, including Europe, Petit says. “ is capacity is largely based on advantaged feedstocks, so it will take its share in the global market,” he says.

A first wave of capacity is expected to begin hitting the market in earnest during the first and second quarters of next year, causing a profitability downcycle through 2011 for naphtha-based cracking in all regions, says Tony Potter, director/olefins, Europe, Mideast, and Africa at CMA5I (Düsseldorf). Europe’s olefins capacity is predominantly naphtha based.

Some Mideast capacity has already come online, and Iranian imports have started to depress ethylene markets in Asia, says Andrew Benson, analyst at Citi (New York). However, “market perturbations” in Europe over the past six months have been more about volatility in energy markets and demand-side upsets, says Graham van’t Hoff, v.p., global base chemicals, at Shell Chemicals. “The real impact from Mideast capacity is still to come.”

Oil and naphtha price volatility has taken a heavy toll on European producers, bringing into sharp focus the magnitude of Mideast companies’ cost advantage. European cracker margins were in the second quarter of this year at their lowest level since 2002, Benson says. Europe’s smaller crackers, with higher fixed costs, were selling product at a loss, he says.

Second-quarter olefin contracts settled in Europe at a time when naphtha prices were in the mid-$900s/m.t., van’t Ho says. “But by the third month of the quarter, naphtha prices were at $1,150/m.t.,” he says. “Naphtha cracking in Europe has been on a roller-coaster of margin volatility driven by the significant rise in naphtha and related energy volatility but stable quarterly olefin prices.”

As a result, some producers have revived attempts to switch from quarterly to monthly contract pricing of olefins. Ineos released a statement toward the end of July, saying that “the time is right” to move from quarterly to monthly pricing for ethylene and propylene in Europe. High and volatile oil prices are overshadowing supply and demand, causing “huge corrections” in ethylene and propylene prices that disrupt Ineos’s derivatives business, the company says.

Shell, for antitrust reasons, does not publicly discuss its position on monthly or quarterly pricing in Europe, van’t Ho says.

European cracker margins are currently good “because oil and naphtha have come o dramatically in the third quarter,” Potter says. “But margins