EU petchem the next victim of cheap US gas
London, December 5, 2013
By Simon Falush
Europe's petrochemical industry will face a competitive assault as US rivals emerge with cheap feedstock from the shale gas boom. It can look to the refining industry now for a taste of what is to come.
Refinery closures have cut an estimated 10 per cent of European capacity since 2008, according to consultant Damian Kennaby. Those still in operation are struggling with losses or razor-thin margins as US refiners flood Europe with cheap fuel made from low-cost shale oil and gas.
The same forces are expected to hammer its petrochemical plants within two to three years as new US petrochemical capacity comes on line.
"Refining responded quickly as there was under-utilised capacity in the U.S. Other industries will take time to build the required infrastructure, but those build-outs are underway, and the pain for European petchems is coming," Seth Kleinman, head of energy research at Citi, said.
With access to cheap natural gas and power, U.S. plants can produce low-cost ethane and ethylene, basic building blocks for a wide range of plastics and chemicals.
"The cost of ethylene in Europe is $1,200 per tonne, while in the United States it's $500 per tonne," Tom Crotty, director at Ineos, one of the world's largest chemical companies said.
"There will be quite a shake-out, and over the next two or three years we could see three or four plants close," he estimated.
French oil major Total said in September it planned to close its last ethylene-making unit at its Carling site in eastern France from the second half of 2015.
Ineos has closed the naphtha, benzene and butadiene cracking facilities at its Grangemouth plant in Scotland, saying they were not competitive.
Instead it is investing heavily, both at Grangemouth and at its plant at Rafnes in Norway, to build capacity to be able to bring in ethane from US shale gas for processing into ethylene and other products.
European chemical companies have directed new investments to the United States at the expense of spending at home or in Asia, Lars Hettche at German bank Metzler in Frankfurt, said.
"Europe's bigger chemical companies are spending up to 25 per cent of capital expenditure in North America compared with around 10 per cent around four or five years ago," he said.
Lower investment will put jobs at risk in a sector that employs about 115,000 people directly and up to 460,000 indirectly, according to the European Chemical Industry Council.
Based on announced projects, ethylene capacity in North America will increase by close to 13 million metric tonnes, or about 40 per cent, between 2012 and 2018, said Oliver Schwarz, an analyst at Warburg Research in Hamburg.
"The US is in a unique position as there's a large customer base in terms of end-users, and there's cheap feedstock," Schwarz said.
Europe has the customer base but not the cheap feedstock, while the Middle East has the feedstock but a limited local market.
Petrochemical plants in the United States are already reaping the benefit of cheap feedstock.
Earnings have increased for Dow Chemical's performance plastics business, its largest unit, driven by an abundance of cheap ethylene. Its Ebitda (earnings before interest, taxes, depreciation and amortisation) shot up 32 percent in the third quarter.
European plants that produce polyethylene are the most susceptible to increased U.S. competition, because gas rather than oil is used to make them.
The big players in this market include Total, Saudi firm Sabic, LyondellBassell and Ineos, Warburg's Schwarz said.-Reuters