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Chemicals business is recovering but fears over profits remain

The chemicals business cycle edged upwards in 2013 and there are hopes for more progress this year

The worldwide chemicals business is continuing its recovery, with the contraction of 2012 seen to be a wobble and not the start of a new downward phase of the chemicals cycle. But, with many economies remaining weak, there is a risk that profits could be pinned down by growth in chemicals demand falling short of growth in worldwide capacity.

Petroleum Economist’s latest analysis of the business, based on the results of the large chemicals companies and the chemicals subsidiaries of the major oil companies, shows that profitability overall increased from the 7.0% of 2012 to 10.0% last year. The upturn places the business back in up-cycle territory, recovering from the slump of 2008-09. 

In the notoriously cyclical chemicals business, identifying the position on the cycle can be the key to success because upturns and downturns are usually extreme. (The period of flat performance between 1998 and 2002, is explained by the extensive restructuring which occurred then, in response to growing exports of ethylene products from the Middle East.) Building new capacity during the down-cycle has been proved to be a successful strategy, for operators with steady nerves. 

Up-cycles and down-cycles are made more extreme by the industry’s stock strategies. In a business in which materials pass along a chain of operators from cracker to final consumer, stocks are built or shed throughout the chain in anticipation of a rise or fall in consumer demand. That alone can give a big push to the demand pendulum. 

Stock strategies provide an explanation for the 2012 downturn. After the 2008-09 depression, stocks were re-built in 2010-11 and the cycle moved rapidly upwards. But the anticipated rise in demand from the final consumer – of, say, a new car or a new house, both of which use large volumes of plastics – fell short of what was hoped for. Stocks were trimmed and the business cycle turned down as a consequence, perking-up again last year as prospects improved. 

On the basis of first-quarter results, 2014 should see a move further up-cycle. Most companies posted encouraging-to-good results with sales rising in volume terms, although in some cases rising less in financial terms. General themes were improvements in the agricultural and performance materials sectors, with US and China showing strong growth for most firms. 

This year’s survey shows that the major oil companies’ chemicals operations are continuing to out-perform the chemicals companies. The oil majors started to pull ahead in the early years of the century and have increased their return-on-chemicals-assets steadily, with only a dip in the recent recession, to reach 18.9% last year. The equivalent figure for the chemicals companies was only 5.5%. 

The oil companies mostly have strategies of co-locating their chemicals facilities with their refineries, allowing streams to be transferred readily from one to the other. Co-location gives the chemicals complex access to a range of cracking feedstocks, from light gases to heavy liquids, which can be switched in or out at short notice to take advantage of price opportunities.

The new cracker built by ExxonMobil in Singapore is the first in the world with the capability of processing crude oil directly, eliminating the refinery in the production of petrochemicals. The 1 million tonnes a year (t/y) cracker, built as part of a project to double the finished-product capacity of the firm’s Singapore complex, started-up last year but ExxonMobil only this year confirmed that it could run directly on crude oil feedstock. 

Direct crude cracking arrives

Direct crude cracking reduces feedstock costs, energy consumption and carbon emissions, while yielding “a richer mix of valuable by-products that you can further upgrade”, according to Stephen Pryor, president of ExxonMobil Chemical. The new cracker has the flexibility to process “an unprecedented range of feedstocks from light gases to crude oil”. 

ExxonMobil says converting crude directly into chemicals provides a cost advantage over naphtha feedstock, which is used by most crackers in Asia. Last year, the price of naphtha averaged $902/tonne while Brent crude, at an average of $108.81/barrel, was worth $816/tonne. 

Direct crude cracking has been the subject of research and patents since the 1970s, but until now its use has been blocked by the problem of optimising the conditions to crack the wide range of hydrocarbons in crude. ExxonMobil – which invented steam-cracking for chemicals in the 1940s – gives little information on its process but says the complex uses 40 proprietary technologies. 

Some of the new cracker’s products are sent to the adjacent refinery at present but more are due to be used for chemicals production. In March the firm said it will construct a butyl rubber plant to utilise C4 streams and an adhesive component plant to utilise C5 streams, both for completion in 2017.

Meanwhile, Saudi Arabia’s Sabic has plans for an oil-to-chemicals complex ten times as large. The firm said in May that it is in the final stages of a study into a chemicals facility based on 10m t/y of crude – equivalent to a 200,000 b/d refinery – which it plans to start-up in 2020. It is indicated that Sabic’s complex will split the crude into three streams – natural gas liquids, naphtha and fuel oil – which will be sent as feedstock to three separate crackers. 

Saudi Aramco has also been carrying out research into direct crude cracking. Utilising crude as a chemicals feedstock, instead of exporting it, accords with Saudi Arabia’s strategy of maximising value and employment within the country. It is also seen as reducing exposure to a long-term fall in crude prices, which might result if shale-oil production expands.

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