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Chemicals business lacking growth

The chemicals business cycle free-wheeled last year as capacity grew by more than demand

The worldwide chemicals business failed to grow as much as hoped for last year, owing to weak economies. First-quarter results point to improving prospects this year, but there is no prospect of a dramatic swing in the chemicals cycle.

Petroleum Economist’s latest annual analysis of the chemicals business, based on the results of the large chemicals companies and the oil companies’ chemicals subsidiaries, shows that average profitability declined marginally last year.

The sector achieved an average return on assets of 9.6% in 2014, against 10.0% in 2013 (see Table 1).

Last year’s result confirms the trend of recent years of relatively minor movements in the chemicals cycle, in contrast to the sharp climbs and falls of the 1980s and 1990s. Radical restructuring moves in the late 1990s – when operators exited from entire business sectors and were involved in large mergers and acquisitions – have left the industry in better shape. Accordingly, large operators are better able to withstand times of poor performance in world economies.

But the chemicals cycle is still a characteristic of the industry and recognising the high and low points of the cycle can be the key to success. In an industry in which one operator’s end-product is another operator’s starting-material, small changes in consumers’ demand can build into large rises or falls in demand for cracker products. Demand swings are magnified by stock-holding strategies: stocks are built or run-down throughout the chain if a rise or fall in consumer demand is expected, giving a large push to the demand pendulum.

Accordingly, building capacity during a downturn has often paid off for companies with a long-term view and steady nerves. With good timing (or luck), the new plant will start up just as the next up-cycle kicks off. Demand will rise rapidly, prices will climb – and more timid competitors will see their market shares decline.

However, the cycle is far from predictable. Over the past two years, a substantial volume of new capacity has come into operation, but demand in leading markets has failed to accelerate as hoped.

Indications for this year are positive, on the basis of first-quarter results. The European producers mostly sold more, although in some cases at the cost of lower sales revenues. Performance materials – chemistries used to drive new pharmaceutical, biopharmaceutical and electronics development – and agricultural products showed particular strengths. In the US, generally there were volume and margin improvements, although the strengthening dollar was bad for exporters.

The survey shows that the gap between European and US performance widened last year, with the European companies’ returns on assets declining to 4.3% while the US firms saw an increase to 6.5% (see Table 1). In view of the US producers’ feedstock advantage and the still-sluggish economies of Europe, the gap might continue to widen.

The survey also shows that the strength of the major oil companies’ chemicals operations continues, with an average return on assets – only slightly trimmed – of 18.7% last year. The majors’ profitability in chemicals has soared since 2004, with only a dip in the recession years of 2008-09, and their profitability substantially exceeds that of the chemicals specialists (5.0% last year). The major oil companies drew 11.4% of their profits from their chemicals operations in 2014.

The oil companies try to make the most of their feedstock strengths by building their chemicals facilities adjacent to their refineries, allowing streams to be transferred from one to the other at short notice to take advantage of price opportunities. Co-location makes a wide range of feedstocks available to the cracker, from gases to heavy liquids.

ExxonMobil, with operations almost as extensive as those of the large chemicals companies, forecasts that worldwide demand will go up by 50% over the coming 10 years. The company expects world demand to grow at an annual 4%, substantially exceeding growth in energy demand or gross domestic product. Driving the growth will be rising prosperity, particularly in Asia, and growing urbanisation, which will lift the consumption of packaged goods, domestic appliances, cars and clothing.

But while demand growth will be driven mainly by developing countries, supply growth will come from regions with advantaged feedstocks, particularly the US. Consequently, ExxonMobil sees inter-regional trade in chemicals doubling from today’s 10% of production to 20% by 2020. By 2015, North America could double its exports of the three highest-volume petrochemical products: polyethylene, polypropylene and paraxylene.

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