OUTLOOK ’15: European chemical producers to fight hard for growth

By Nigel Davis

LONDON (ICIS)–Europe’s chemical producers will have to fight hard for growth in 2015 in an uncertain global economic environment.

The threat of stagnation in the eurozone is very real. The rebalancing of China’s economy is expected to continue to constrain chemicals demand growth and its need for imports.

Chemicals demand growth globally in 2015 is not likely to be as strong as was expected at the end of 2013.

The economic recovery in the EU that started in the second quarter of 2013 remains fragile and the economic momentum in many of the bloc’s member states is still weak, the European Commission said in its Autumn forecast on 4 November.

“Confidence is lower than in spring, reflecting increasing geopolitical risks and less favourable world economic prospects,” it added. “Despite favourable financial conditions, the economic recovery in 2015 will be slow.” The European Commission issues three economic updates each year.

The best it seems Europe can live up to is a “slow return of modest economic growth”. There is a clear divide between north and south in Europe in terms of the strength of growth and relative indebtedness of the EU members state economies. Private consumption is only expected to expand “moderately” in 2015 and 2016. In a time of austerity, “public consumption is expected to contribute marginally to growth”. Vitally important for Europe’s chemicals  industry, the European Commission expects only a moderate expansion of world trade.

The EU is a high-cost producing region and its chemical companies pressured by more competitive peers. Sector companies have enjoyed a healthy trade balance for years but that balance is under great pressure and particularly in petrochemicals.

Petrochemicals shrink, braking overall output growth

Sluggish growth for the EU chemicals sector in the first three quarters of 2014 was caused by further contraction in petrochemicals output, the European chemicals trade federation Cefic, said on 10 December. EU petrochemicals output was down 2.8% over the period, year on year.

“The decline was partially offset by 3.3% growth in specialty chemicals and 1.8% expansion in consumer chemicals. Polymers grew by 0.8%, whilst basic inorganics output added 0.3%. Chemicals production in the third quarter of 2014 was 6.7% below the pre-crisis level registered in the first quarter of 2008.

The 2014 data have shown that the petrochemicals net positive trade balance between the EU and the US is falling sharply.

A significant decline of EU chemicals exports to the US, made up of the drop in petrochemicals and in inorganics and specialty chemicals, accounted for 30% of the €2.4bn extra-EU decline in exports year on year in the first half, for instance.

Europe’s petrochemicals output fell by 6.5% in the first seven months of this year and was 19% below its peak in 2007, the Cefic analysis showed. Over the same period, the US chemicals trade deficit with the EU narrowed by €396m to €3.5bn.

It is the cost comparisons upstream in the sector between naphtha-reliant Europe and ethane-based North America that is putting such pressure on companies’ performance and impacting trade flows.

North America based producers processing ethane, other natural gas liquids or natural gas itself have been reaping the rewards throughout 2014. The feedstock cost advantage over naphtha for olefins production has been significant in a high oil price environment.

That situation may have changed markedly in the past few months but the ethane advantage – in terms of feedstock cost- persists to a great extent. The Henry Hub benchmark natural gas price in the US had fallen 13.5% year on year recently, the American Chemistry Council (ACC) noted in a 19 December economics report.

The ratio of West Texas Intermediate (WT) benchmark crude oil prices to Henry Hub prices was easing (16.3 that week from 17.3 a week earlier) and down from 25.8 a year earlier.

But as a rule of thumb, a ratio above 7 to 9 means that US Gulf Coast-based petrochemicals and derivatives producers are more competitive than players located elsewhere.

“The current ratio is favourable for US competitiveness and exports of petrochemicals, plastics and other derivatives but this competitiveness position is easing,” the ACC said.

How this plays out in a volatile oil and energy price environment at the start of 2015 remains to be seen.

Looked at from the production side – in terms of the sector’s output, the ACC has forecast a European chemical industry growth rate for 2015 of 1.9%. This compares with expected production growth of 1.4% in 2014 and an expected longer-term average of around 1.8%. These projections include pharmaceuticals.

Cefic has not yet made public its detailed economic forecast for 2015, completed in early November. It has said, however, that it expects chemicals output in Europe, excluding pharmaceuticals, to grow at a weaker pace than forecast earlier due to the weaker pace of European and global economic growth.

“We now expect EU chemical production to grow again by 1% in 2015, against 1.5% foreseen earlier,” it said. There is no publicly available segment breakdown.