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Uneven progress for world chemicals business

The worldwide chemicals business is strengthening but Europe is lagging

For chemicals operators in the US, these are encouraging times: demand in consumer industries is buoyant while feedstock prices are competitive. Asian operators are seeing growth in demand, although they face feedstock headwinds. The main problem is Europe – home of much of the world’s chemicals capacity – where demand has been flat and feedstock costs are high.

Overall, the worldwide chemicals business had a better year in 2013 than in 2012, and the signs are that progress is continuing this year. But many operators say business is a struggle, with gains in volume sales being offset by cuts in prices. Manufacturing capacity for high-volume base and intermediate chemicals has increased significantly over the past two years, and the new capacity is chasing markets.

The new capacity has lifted worldwide output of chemicals. Production excluding pharmaceuticals increased by 4.6% in 2013, following growth of 2.9% the previous year. But in Europe there was no growth in output in 2013, while the previous year had seen a decline of 2.7%. 

The US showed a 3.2% increase in production in 2013 (following a 2.1% rise the previous year), while Asia excluding Japan showed growth of 8.5% (following 7.8%). Japan’s long-troubled chemicals industry saw growth in output of 1.8% in 2013 (after a 4.9% contraction the previous year), while in South America there was growth of 1.3% (against growth of 2.6% the previous year).  

Driving chemicals growth in the US is strong demand from the key user-industries, particularly car-building and construction. But in Europe these industries are struggling, with demand still pinned down by the stagnant economies of southern and eastern countries. 

According to Germany-based BASF – the world’s largest chemicals group – the outlook is for the world’s weaker chemicals markets to show some recovery in coming years. The firm is forecasting growth in Europe’s chemicals production of 1.1% this year, with Japan seeing 2.5% and South America seeing 2.4%. BASF is looking to the US for growth of 2.8% and for Asia excluding Japan for growth of 7.2%. Worldwide chemicals production is seen as rising by 4.4% this year, and by an annual 4.6% over the years to 2016. 

Chemicals performance, 1985-2013
Figure 1 - Chemicals performance, 1985-2013

Mixed-up chemicals

But even with a recovery in demand, Europe will still be disadvantaged compared with the US. The reason is feedstock. In Europe the main feedstock for the production of ethylene – the largest-volume chemical building-block – is naphtha, sold at prices which generally track Brent Blend crude. In the US the main feedstock for ethylene is ethane, extracted from natural gas, prices of which have fallen as shale-gas production has surged. 

Figure 2 shows how the prices have diverged. US gas prices reached a peak in 2008, the year the country’s gas production started its rise, and last year averaged $3.73/1,000 cubic feet (about $3.73/million Btu). Meanwhile, naphtha prices in Europe have increased in step with the rise in Brent prices from 2009, dipping a little to average $902/tonne last year. One consolation was that the price-range for 2013 was narrower than the wild swings seen in the past, although it was still large enough to cause problems: the high was $985/tonne in February, the low was $820/tonne in April. 

As a result of lower gas prices, “manufacturers can make ethylene in the US for less than half of what it costs in Europe, Asia and Latin America”, according to Stephen Pryor, president of ExxonMobil Chemical. The cost advantage has led to a surge in investment plans: according to the American Chemistry Council in June, there are 181 gas-linked chemicals investment projects under consideration in the US. Combined value of the projects is $116 billion, of which 62% will be direct foreign investment into the country. 

But new capacity is not being completed quickly enough according to Pryor, who says capacity shortages are resulting sometimes in ethane being left in the gas stream, instead of being extracted for use as feedstock. Chemicals capacity limitations explain the dip in US ethane production last year, when it lost 2.4% to average 951,000 barrels a day according to US Energy Information Administration statistics. From 2005 to 2012, ethane production had increased by 50%.

Pryor lays the blame on the regulatory process. “Permits for pipelines, plants and export facilities are being held up by a system that allows limitless challenges by opponents of development”, he says. There are also shortages of staff with chemicals-plant skills. Meanwhile, construction costs are rising: the cost of building a chemicals plant in the Gulf coast area has nearly doubled over the past 10 years, Pryor says.

The prize for the US producers is a rising share of world ethylene demand, which ExxonMobil forecasts to grow by 150% between 2010 and 2040, or about 3% a year – faster than growth in energy demand or growth in gross domestic product, the company points out. “After three decades in which 75% of chemicals capacity growth came from Asia and the Middle East, the US is back in the game as a low-cost supplier”, according to Pryor. 

US exports of the three largest petrochemicals products, polyethylene, polypropylene and paraxylene, could double by 2025, ExxonMobil forecasts. Chemicals trade between regions – equivalent to about 5% of worldwide production capacity 10 years ago and about 10% now – will double again. 

Ethylene feedstock prices, 2005-2013
Figure 2 - Ethylene feedstock prices, 2005-2013

European re-positioning

Naphtha-cracking Europeans will not be able to compete with the US producers on ethylene, but most have already re-positioned away from it. There were rising exports of gas-derived ethylene products from the Middle East in the 1990s and the Europeans responded, in the years around 2000, with heavy re-structuring programmes. 

They now focus on the streams which ethane-cracking gives in only minor quantities, where they have an advantage. Cracking yields vary considerably: while cracking ethane gives about 81% of ethylene, 2% of propylene, 3% of butadiene, 1% of mixed benzene, toluene and xylene (BTX) and 13% of other hydrocarbons, cracking naphtha gives much more of the heavier products. Full-range naphtha typically yields 25% of ethylene, 13% of propylene, 5% of butadiene, 11% of BTX and 46% of other hydrocarbons. 

The swing towards ethane-cracking in the US has opened up a substantial opportunity for the Europeans: 10 years ago about 30% of US ethylene was produced from naphtha and other heavy feedstocks, but that figure has now fallen to under 10%. Consequently, US capacity to produce propylene (used to make polypropylene plastic), butadiene (used to make synthetic rubber) and BTX (aromatics, used to make plastics) has declined. 

Prices have trended upwards, and have given a lift to naphtha-cracking margins – although naphtha’s price movements can absorb the gains. So far this year the price has crept upward, from the 2013 average of $902/tonne to $945/tonne in late-May. Naphtha prices tend to rise in the spring because of its alternative use in the refinery as a reformer feedstock, to make reformate for gasoline. 

As the Europeans concentrate on their naphtha strengths, Asia’s chemicals companies are looking vulnerable to the new US competition. As in Europe, naphtha-cracking predominates in Asia, but Asia’s operators are more focussed towards cracker products than on the downstream products made from them – of higher value. Production costs are said to be higher than in Europe and exports account for a larger proportion of output, so US competition will cause more pain.

For the Middle East producers, new US production comes at a time when their cost advantage is under challenge. For more than three decades, Middle East chemicals production has expanded rapidly on the strength of ethane feedstock, made available at low prices. But, apart from in Qatar, availability of gas for new ventures is now limited – and other industries and electricity generation have claims on new supplies.

Accordingly, Middle East countries are likely to look to naphtha instead of ethane for new chemicals ventures – as did Satorp, the Saudi Aramco-Total venture, whose new complex at Jubail uses refinery naphtha as feedstock for its chemicals units. The shift away from ethane will also help towards regional plans for a more diverse chemicals industry, benefiting from the higher value of products further downstream from the cracker. 

The problem is that – in contrast to surplus gas in the past – naphtha can readily be exported to capture its international market value. If it is made available to inland producers at a subsidised price, its value will be lost to the refinery. But if it is sold inland at the market price, companies buying it will be “among the highest cost producers in the world”, according to a study published in April by consultants McKinsey & Co.

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