Europe chemicals at historic turning point
Europe’s chemical markets are at an historic turning point, with record energy prices hitting downstream demand and forcing millions of tonnes of production offline while easing logistics bottlenecks increase the odds of a flood of cheap product from Asia.
Throughout 2021 and the first half of this year, prices and margins for many European product groups were robust, with delayed and expensive logistics from Asia, plus persistently strong demand, contributing to tight market conditions and healthy financial results.
But with no end in sight to Russia’s war in Ukraine, energy and food prices have contributed to soaring levels of inflation and expectations of a severe economic slowdown or even recession towards the end of the year or into 2023.
Economic activity in the eurozone edged further into contraction, hitting an 18-month low in August, according to the latest Purchasing Managers’ Index (PMI) data.
As we head toward the final quarter of the year European chemicals are already in turmoil, and the situation is likely to get worse if demand falters further and costs continue to rise.
With signs of downstream demand collapsing, buyers are now unwilling to purchase agreed contract volumes and are switching to the cheaper spot market.
In August ICIS has recorded examples of changing buyer behaviour in Europe acrylonitrile (ACN), melamine, base oils, phthalic anhydride (PA) and epoxy resins markets.
Meanwhile European polyethylene (PE) and polypropylene (PP) players, desperately looking for ways to trim costs, have resorted to abandoning parts or the entirety of their 2022 contract agreements.
Buyers, who are suffering from a loss of downstream demand, are keen to reduce their requirements and if it is mutually beneficial, sellers are not holding them to their minimum contracted volumes for the remainder of the year.
European producers have cut PE production as margins have been completely eroded. These players are producing nothing for spot and keeping purely to contractual obligations.
In a sign that oversupply in PE may be a global phenomenon, Dow in August told customers it is cutting PE operating rates across its asset base, temporarily lowering global nameplate capacity by 15%. It blamed elevated inventories at key ports and “dynamic” market conditions in Europe.
Other global PE and PP producers are likely to be facing the same pressures.
Almost every day, ICIS learns of more fertilizer and chemical capacity closures in Europe linked to record gas prices.
So far in Europe at least 17.4m tonnes of fertilizer and chemical capacity has been shut down or is run at reduced rates, representing up to 63% of regional capacity for the worst-affected products.
Since late 2021, the ICIS TTF benchmark price of gas in Europe has detached from historical averages, rocketing to record highs and putting the region’s fertilizer and chemical sector under extreme cost pressure - especially where gas is used as a raw material.
The elevated prices have put European producers at a severe cost disadvantage to competitors in other regions, leading to a string of capacity closures or reductions.
These extreme market conditions are being compared with the financial crisis of 2008/9 and the immediate aftermath of the first Coronavirus outbreak in early 2020. In both cases a demand shock led to a collapse in chemical prices, margins and production.
The weekly ICIS Petrochemical Index (IPEX) shows the sharp downturn in prices in 2008/9 and 2020 as well as plunging values in recent weeks.
According to ICIS head of editorial strategy, Katherine Sale: “The last time we saw global chemical producers cutting production on this scale was 2008. This was also the last time we saw buyers walking away from contracts and taking their chances on the spot market as they are now.”
ICIS data shows that global chemical industry operating rates fell to 69% in June 2022, the latest available month. They are likely to have fallen further since then. In 2020 they fell as low as 67% while in December 2008 they plummeted to only 60%.
China, the world’s largest chemical market, is suffering from stagnant growth as its zero-COVID policy triggers continuing waves of lockdowns. The country’s overly-indebted property sector, which accounts for around one third of economic activity, is also contracting, adding further downward pressure to the country’s economy.
At the same time, China has been adding significant volumes of chemical capacity, leading to overcapacity, low operating rates and imports while turning the country into a net exporter for some products.
Polypropylene (PP) net imports have collapsed from 6.1m tonnes in 2020 to 3.4m tonnes last year and likely around 2.4m tonnes this year. PP exports likely to reach 1.7m tonnes in 2022 from 1.2m tonnes last year and only half a million tonnes in 2020.
China has swung from being a net importer to net exporter in purified terephthalic acid (PTA), polyethylene PET resins and polyester fibres (in PET resins and polyester fibres, China's become the world's biggest exporter).
Prices have also fallen significantly in Asia, while snarled up logistics on container routes from Asia to Europe stifled exports, leading to unprecedented price differentials between the regions.
Now there are signs that the logistics crisis is easing, opening up Europe to more cheap imports from Asia, putting downward pressure on regional prices.
In polyethylene (PE) markets, for example, Europe price premiums over China are falling fast from record-breaking levels in May 2021.
John Richardson, ICIS senior consultant for Asia said: "I believe that eventually, because of the demand destruction caused by inflation, China/east Asia container rates will fall much closer to pre-pandemic levels, thereby allowing Asian and Middle East PE exporters to relieve oversupply in the China market by shipping more resins to Europe."
Dow’s letter to customers on slashing polyethylene (PE) operating rates is a clear sign of weakening global demand and oversupply of the polymer, along with persistent logistics constraints.
Commenting on Dow’s operating rate cut, Brian Pruett, senior vice president and partner at CDI, part of ICIS said: “It is kind of like stating the obvious. CDI and ICIS consultants have been stating to clients for 2-3 months that PE operating rates needed to and will come down at least 10 percentage points. This letter simply reflects market conditions, which globally for PE are very long due to weak demand and excess supply."
Author:
EPCA’s 56th annual meeting
Reconnect in Berlin at the ICIS seminar on 3 October 2022
Join the highly anticipated seminar on 3 October where ICIS experts will host a discussion about the changing energy landscape and the impact that carbon emissions will have on Europe’s chemical industry.
Date: Monday 3rd October 2022
Time: 15:00 CET
Location: Sheraton Berlin Grand Hotel Esplanade
Related content
Speak with ICIS
If you would like to find out more about how we can work together to bring you actionable insight to support quality decisions, get in touch with us today. Fill in your details, submit the form and a member of our team will contact you.