Contraction of Europe s PVC market

Transcription

1 SPECIAL REPORT: PETROCHEMICALS Contraction of Europe s PVC market Europe s freshly consolidated PVC market is still facing major challenges September 215 Thomas Washington, Senior Specialist, Pricing Amar Carmody, Senior Specialist, Pricing

2 CONTRACTION OF EUROPE S PVC MARKET As Europe s polyvinyl chloride market undergoes unprecedented consolidation, several challenges remain for those that will continue to supply Europe s construction and packaging industries with PVC. Climbing energy costs, limits on what technology can be used to produce the polymer, and slowing demand are all set to take place against the backdrop of increasing imports from nations that have far cheaper feedstock and energy costs. Cracker margins by feedstock ($/mt) Propane Ethane/Propane mix Ethane N-Butane Light Naphtha North American ethylene produced from feedstock (%) Naphtha Ethane Propane Butane Gas oil Petrochemical Analytics North American ethylene produced from various feedstocks (%) 1 PVC is a polymer derived from both chlorine and ethylene. It is the third most widely used polymer after polyethylene and polypropylene. The main demand driver for PVC is the construction industry, which accounts for 6% of all demand globally. PVC is also used in health, transport, consumer goods and packaging industries. Global production capacity stands at over 5 million mt, of which Europe accounts for around 12%, North America 17%, China 45%, the rest of Asia 17%, with 9% left to others. Crude oil prices currently around $4-5/b have lessened fears that a tsunami of petrochemicals product will be heading to Europe any time soon. Naphtha, downstream of crude and the primary feedstock for ethylene production in Europe, has fallen closing the gap between it and cheaper alternative feedstock in the US and China. But the memory of oil prices that had been held above $1/b for almost all of the three years prior to 214, remains. At that time North American gas was trading at a third of the price of European gas, a dynamic that forced out high cost producers. July s merger between Switzerland-based Ineos and Belgium-based Solvay will create a PVC producer more than twice the size of its next biggest competitor, Kem One. The creation of Inovyn, as the newly formed company is called, is part of Ineos wider strategy to reintegrate fragmented parts of the petrochemical industry in a bid to drive down costs and become more competitive regardless of oil price volatility. While over the short term, Inovyn s access to cheaper raw materials and a wide distribution network will mean it can compete with imports from the US, it remains to be seen whether it is a long-term solution. In August, Ineos was one of a number of companies awarded licenses to explore for shale gas in the UK. It is clear this is a priority for the company as it seeks to mitigate future rises in oil prices by having its own access to low-cost domestically produced ethane. Later this year Ineos will become the first company to import ethane from the US into Europe when its first supplies from the US arrive. North American ethylene production (million mt) Naphtha Ethane Propane Butane Gas Oil 1 Naphtha Ethane Propane Butane Gas Oil Petrochemical Analytics Petrochemical Analytics PLATTS SPECIAL REPORT: PETROCHEMICALS 2

3 But two other challenges remain for Europe s PVC industry new rules that will soon ban mercury cell technology in chlor alkali units and ever-tightening EU environmental regulations that aim to cut Europe s emissions by 4% from levels in 199 by 23. CHEAPER GLOBAL FEEDSTOCK It may be hard to recall now just how great the impact was, but In North America the US shale gas boom was the beginning of a revolution, bringing petrochemical manufacturing back to the US with cheap ethane availability. Prior to 25, the majority of the feedstock slate in the US for ethylene production was naphtha complemented with natural gas liquids. Over the past few years, ethane has traded at roughly a third of the price of naphtha, a sharp discount that has triggered an investment boom as many of the world s biggest chemical companies sought to cash in by building steam crackers in the US. In North America, ethylene production during the next decade is expected to climb from 3 million mt in 214 to nearly 45.3 million mt in a 51% increase that threatens to disrupt traditional global tradeflows of the main building block for most modern plastics. But it s not just the US where cheaper feedstock costs could have an impact. Over the next 12 months the world s largest petrochemical complex Dow and Saudi Aramco s joint venture Sadara will start to fire up. The $2 billion project in Jubail, Saudi Arabia will start to pump out more than 3 million mt/year of petrochemicals. Added to that is an additional 1 million mt/year of ethylene capacity over the Middle East over the next 1 years. In Asia an approach to coal to olefins technology, will deliver ethylene to PVC producers. The CTO method involves a multi-step process where coal is first converted to syngas. Afterwards, the syngas is converted to methanol. And finally, the methanol can then be converted into ethylene or propylene MTO using proprietary technology. The investment is part of China s drive to be more self-sufficient in plastics. But questions remain as to how viable the economics of CTO/MTO is, particularly with crude oil trading around $4/b. But against an oil price of over $1/b it stands at a great advantage. Over the last few years around 6-8 projects have been announced either by China s government or developers. But very few have steel in the ground so far. A significant number of these will produce olefins for polymers, polyethylene and polypropylene, while the remainder will be geared towards others, which include PVC. Nevertheless, CTO and MTO is expected to satisfy more than 1% of Asia ethylene demand by 224. That is up from just 6% currently in Asia. US planned ethylene expansions based on shale gas Company C2 capacity Location Start-up ( mt) New crackers Chevron Phillips Chemical 1,5 Cedar Bayou, Texas Q1 217 ExxonMobil Chemical 1,5 Baytown, Texas Q1 217 Dow Chemical 1,5 Freeport, Texas Q1 217 Sasol 1,5 Lake Charles, Louisiana Q1 218 Formosa Plastics 8 Point Comfort, Texas Q1 218 Oxychem Ingleside 544 Ingleside, Texas Q1 217 Shell 1,4 Monaca, Pennsylvania 219 Axiall 1, Louisiana, Texas 22 Ascent Petrochemical Complex 1, Parkersburg, West Virginia 22 Expansions LyondellBasell 113 Channelview, Texas Q3 215 LyondellBasell 363 Corpus Christi, Texas Q1 216 Williams 272 Geismar, Louisiana 214 Ineos 21 Chocolate Bayou, Texas 214 Westlake Chemical 9 Calvert City, Kentucky 214 LyondellBasell 362 La Porte, Texas 214 Chevron Phillips Chemical 9 Sweeny, Texas 214 Westlake Chemical 113 Lake Charles, Louisiana 214 Dow Chemical Company 68 Plaquemine, LA 215 Petrochemical Analytics Closures Product Comapny Closure Total capacity (mt/year) PVC 62, Vinyls Italia, Italy May 29 Ineos, UK February 21 Ineos, UK July 213 Chlorine 649, Ercros, Spain February 213 Ineos, Germany July 213 Caustic soda 714, Ercros, Spain February 213 Ineos, Germany July 213 VCM 37, Vinyls Italia, Italy May 29r On the face of it, Europe s petrochemical industry is presented with tough choices consolidate, close or cut costs. Europe s PVC industry is doing all three. Inovyn s creation is just one of a number of mergers that have included OpenGate Capital s purchase of France s Kem One in January 214, the purchase of Germany s Vinnolit by the US s Westlake in May 214 and OpenGate s purchase of European PVC compounding business Benvic from Solvay. The third option cut costs relative to competitors is an ongoing exercise that later this year will see Ineos become the first company to import ethane from the US into Europe when its first supplies from 3 PLATTS SPECIAL REPORT: PETROCHEMICALS

4 Pennsylvania will arrive. Ineos bought the ethane at a discount to naphtha and forms part of its strategy to be the most efficient European producer. Other companies, including Austria s Borealis and Saudi Arabia s Sabic, have both said they will follow in moves that will see ethane cracked at Stenungsund in Sweden and Wilton in northeast England. The overall strategy is to diversify feedstock for its plants away from reliance on European-sourced liquid naphtha, which is closely tied to the price of crude oil, and towards United States gas, the price of which has collapsed in the past five years due to a supply glut caused by the fracking boom. While such imports are expected to pressure both olefins and polymers prices in Europe, they will at least streamline feedstock supplies in the continent. European countries cannot afford to keep themselves out of impacts of shale, a UK based polymers converter said H2 August. But importing shale, even for 15 years as is the case with Ineos, can be seen as a sticking plaster. The freight cost for ethane across the Atlantic will always be more expensive than freight for its derivatives, such as PVC and polyethylene, due to refrigeration costs. As such, North American exporters of PVC will hold a price advantage over their competitors, should demand slow there. And that s why Ineos aims to produce ethane in Europe. Ineos three shale gas licenses awarded by the UK government as part of the first announcement by the DECC from its 14th licensing round, cover an area of approximately 25 square km located in the East Midlands. It adds to acreage it already holds in Scotland and makes Ineos the third largest holder of such licenses. Before exploration can take place, local planning permission must be granted. And unlike in the US, where landowners own the right to minerals and resources beneath the land, in the UK those rights are held by the Crown estate, essentially the government. This means that landowners will not see as much of the benefit from large gas finds as they have in the US, a dynamic that does not encourage landowners to allow fracking on their land. Cracker margins by feedstock ($/mt) TIGHTER RULES In addition to feedstock costs, technology regulations and environmental rules may also play a part in choking PVC production in Europe. In December 217, the EU law will ban mercury cell technology in chlor alkali units, regulations that will impact a quarter of European chlorine production capacity. Those units will have to invest significant amounts of capital to either convert to more modern methods of production, such as membrane technology, or close. The combination of electrochemistry and legislation change in the EU will lead to higher chlorine prices and that will push up prices further down the chain, Markus Mayer, an analyst at bank group Helvea Baader, told Platts in August. Since the announcement December 213 there has already been consolidation Dutch chlorvinyls producer AkzoNobel and Germany s Evonik announced a joint venture to better manage the huge costs of switching mercury-based production to membrane based production. According to Helvea-Baader estimates, only 4% of mercury based chlorine production in Europe has changed its process to membrane. The bank does not expect all companies to make the transition, suggesting certain players will exit the market. Producers of chlorine and caustic soda in Central Europe are expected to see closures of around 5, mt/year in production capacity, while western Europe, which is more heavily impacted by the legislation, could see closures three times that size, according to Platts estimates. Meanwhile, since 29, Europe has lost chlorvinyls capacity including 62, mt/year of PVC, 37, mt/year of VCM, 649, mt/year of chlorine and 714, mt/year of caustic soda. The reduction in capacity had pressured prices. The PVC monthly contract price rose from Eur82.5/mt FD NWE in January 213, when Platts started the assessment, to Eur935/mt in September. Also underpinning chlorine production prices is higher energy costs in general. As chlorine is produced from electrolysis running electricity through salt water a large portion of the costs is the price of power. PVC susp FD Germany CP net weekly (Eur/mt) 15 1 Naphtha CIF NWE Cargo Close Purity ethane non-lst Mt Belvieu pipe Mo1 Close Dated Brent Close Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 PLATTS SPECIAL REPORT: PETROCHEMICALS 4

5 The terms Ineos and Solvay received approval June 9 from the European Commission to form Inovyn, a 5/5 joint venture. To help the deal get clearance, Ineos and Solvay reached an agreement in March with Luxembourg-based International Chemical Investors Group (ICIG) to acquire assets being divested by Ineos. The commission had concerns the transaction would remove Ineos strongest competitor, Solvay, from the suspension grade PVC market in Northwest Europe. As a result, the joint venture would have faced insufficient competition from the remaining much smaller players and would have been able to raise prices. Additionally, for the market for bleach in Benelux, the transaction would have created a company with a market share above 6%, with none of the remaining players able to sufficiently prevent the joint venture from increases prices for customers, the European Commission said in a statement June 9. Neither Ineos, Solvay, nor the Commission revealed the market share of Inovyn after the divestment. The assets subject to divestment include the chlorine plants and EDC/VCM plants at Tessenderlo, Belgium (excluding the chlortoluenes business that will remain with Ineos), the PVC plant at Mazingarbe, France, the PVC plant at Beek, the Netherlands, the PVC and VCM plants at Wilhelmshaven, Germany, the EDC plants at Runcorn, the UK. In addition, the membrane chlorine plant at Runcorn was placed in a 5/5 joint venture between Inovyn and Vynova. Solvay received an upfront cash payment of Eur15 million, subject to customary adjustments such as working capital levels. The Belgian company contributed its entire European chlorvinyl business and transferred liabilities estimated at Eur26 million into the JV, the company said in a statement in July. Solvay will exit Inovyn in three years time and receive an additional, performance-based payment targeted to be Eur28 million, with a minimum of Eur95 million. This will leave Ineos as the sole owner of the business. Ineos is fortifying its position in the petrochemicals market with a number of joint ventures, which will allow it to develop various market leading businesses, analysts at KPMG said in the 215 edition of its Clarity on mergers and acquisitions publication. As a result, the Swiss-headquartered company may enjoy easier access to feedstock, A key move that may enable Ineos to reduce its energy costs was purchasing the UK s Grangemouth power plant from Fortum, providing the group with easier access to imports of US shale gas and allowing it retire an older, loss-making ethylene cracker and butadiene plant, the analysts said. Germany Houston electricity costs ($/MWh) German year ahead Ercot Houston year ahead Europe already pays more for its electricity than most regions of the world. Electricity produced as a result of coal will be subject to additional fees. Under the EU s emissions trading scheme for each ton of carbon dioxide power plants emit they must buy a carbon allowance issued by the EU Commission. The current price of an allowance is around Eur8, but this is set to increase due to tighter EU rules to help the bloc meet its aim to cut emissions by 4% under 199 levels by 23. Carbon analysts widely expect the result of tougher environmental goals to see prices of allowances to increase up to Eur2 by 23, further pushing up the costs of electricity in Europe. In order to combat this, Germany aims to raise the share of electricity produced by renewables to 5% by 23. This already gone some way towards reducing electricity costs with wholesale power currently at its lowest level since 23, despite the introduction of carbon allowances. However, German power prices still look to remain at a premium to shale gas produced electricity for the foreseeable future. GLOBAL TRADE FLOWS PVC is made from 43% ethylene and 57% chlorine. US ethylene prices are considerably below European levels, the European spot price was Eur851/mt FD NWE, compared to 24 cents/lb [Eur46/mt] FD USG. Chlorine costs for September are similarly priced in both regions, at around $21/mt, but the cost of compliance with European legislation looks set to increase this for European producers. The result of a feedstock cost advantage in the US and Asia is a tilt in global trade flows. European polymer markets may see a strong pressure on prices in 218 and 219 if shale-based projects in the US begin exporting their products to the continent. Today the US is a net exporter of PVC, however, price ranges are not yet low enough to consistently undercut those of Europe. It is only when the US experiences a reduction in demand elsewhere does it shift larger volumes to Europe. At the moment Latin America and Asia are sluggish markets so US material can go to Europe. US material will compete with European producers in Europe as long as these markets are sluggish, Mayer said. Since 21 total European imports of PVC grew 4% to almost 35, mt, according to data from Eurostat. During that period, EU imports from the US actually fell 2% to 32, mt, while Mexican 5 PLATTS SPECIAL REPORT: PETROCHEMICALS

6 imports surged accounting for almost all of the increase by more than doubling to just over 2, mt. But while ethylene in the US is expected to grow sharply, so may its cost of electricity. As the EU aims to cut its emissions significantly, so does the US. Earlier this year President Obama passed his Clean Power Plant, which will seek to cut emissions 32% under 25 levels by 23. Currently power sector emissions are at around 2% below 25 levels as a result of a shift from burning coal to burning gas, increased renewables and a decline in overall demand from heavy industry such as petrochemicals. It is too soon to say what the cost will be on the US chemical industry as it is unclear what gains will be made in terms of energy efficiency, but it is widely thought the investment to generate clean power will increase electricity prices, limiting feedstock advantages. This may narrow the competitive edge US chlorvinyls have over European product on electricity, nevertheless US ethylene will remain cheaper and therefore US PVC producers will retain their advantage over European counterparts. In Mexico a similar dynamic is happening. The country announced earlier this year that it would cut emissions up to 4% from 213 to 23, much of these cuts are likely to be borne European PVC imports (ex-north America) ( mt) Source: Eurostat 211 Total imports Mexican imports US imports 212 Current polyethylene demand per capita Projected % CAGR ( ) Size of bubble indicates 214 market size in million mt PE consumption kg/capita (214) by sectors outside the electricity sector, such as forestry, leaving Mexico s role as a major producer to Europe unchallenged, at least for the short term. CONCLUSION A LEANER NEW WORLD The future PVC market in Europe favors big players. Access across the chain of production to cheaper feedstock will give some players an edge in a tough business environment, which is buffeted by high costs and a growing regulatory burden. European companies margins on the continent have been tightening because of high production costs compared with North American producers, leading to a contraction in PVC output. A more difficult business environment has been forcing mergers, and closures, in Europe. Legislation has exacerbated this, increasing the cost of chlorine. The survival of Europe s PVC industry will depend in part on its ability to cope with the ever increasing threat of imports and its ability to keep upstream costs down. Sources expect tighter European supply in the future, which could mean good things for the production facilities that have survived the latest wave of closures. However, they must now compete with lower costs overseas. In Asia the coal to olefins method process will deliver cheaper ethylene to PVC producers there. Should the ethane cracker build out in the US occur, it will also provide more competition and pressure prices in 218 and 219. Added to that is the continuing pressure from Mexican imports. For a long time producers have focused on driving down costs in Europe to make them more competitive, but a greater hope over the medium term could be an increase in Latin American demand over the next few years that will soak up increased monomer supply from North America. With ethylene consumption per capita under that of Europe, there is room to grow. However, that is unlikely to occur in the near term with emerging markets economic growth stalling, while Europe s continues to increase. Europe s per capita use of polyethylene, the primary ethylene based plastic worldwide, is expected to grow from 21kg per person to 28kg per capita, according to Platts Analytics. Forecasted polyethylene demand per capita Projected % CAGR ( ) Size of bubble indicates 225 market size in million mt PE consumption kg/capita (225) 38 India Africa Asia China Middle East Asia (excl. China and India) Europe Japan USA C. and S. America India Africa Asia China Middle East Asia (excl. China and India) Europe Japan USA C. and S. America Petrochemicals Analytics Petrochemicals Analytics PLATTS SPECIAL REPORT: PETROCHEMICALS 6

7 Primarily driven by growth in Eastern and Central Europe (including Russia). Central and South America s per capita PE demand is expected to grow from 13kg to 15kg between 214 and 225, an increase of 15.4%. This increase for the region could arguably be higher, but recent downgrades in economic growth in Brazil for example, has somewhat softened the estimate. Demand growth for Central and South America is estimated at 2.5% compound annual growth rate currently. PVC is consumed by a variety of industries including construction, health, transport and packaging, however with 6% of demand coming solely from construction it is this industry that dictates the market. And it is proving to be a mixed picture. The construction industry faced a downturn in Europe in 212 and 213 that saw demand for PVC fall drastically. This was reflected in prices, with PVC contract prices delivered in NWE, averaging Eur858/ mt in 213, to compare they were at Eur1,96/mt FD NWE 211. Falling crude prices in combination with low interest rates and a weak euro reignited growth in the economy in 214. However, looking ahead Europe has yet to reach economic output strength in line with 211. Construction investment looks to improve in 216. A year when the negative impact of the on-going adjustment in housing markets is less felt, the European commission said in its Winter 215, European economy forecast. Overall, recovery in Europe continues but remains slow. Declines in oil pricing that continue today improve outlook. A euro that continues to depreciate will increase the competitiveness of construction companies in Europe and gives hope to the European PVC industry. [ PETROCHEMICALS ] PLATTS POLYMERSCAN IS NOW ONLINE Access to the same great content just got even easier. Now get all of the great content in Platts Polymerscan on your desktop, tablet or smart phone, including global prices, market commentary and expert analysis. With our new online and mobile applications you re never more than a mouse click away from the polymer information you need. Polymerscan provides in-depth insight with: Exclusive content Comprehensive coverage of the global polymer markets bringing you daily industry news, commentary and analysis from our global editorial team, conveniently organized by commodity Benchmark price assessments Gain insight into key global polymer assessments access critical pricing information and track global polymer prices Access anywhere Keep up to date wherever you are access Polymerscan on your desktop, tablet or smartphone Personalized alerts Never miss out on what matters to you the most with briefings and news alerts Market insight Sophisticated charting tools giving you exclusive new analysis of key market trends Weekly reports & presentations Get our weekly market report access additional editorial presentations and reports on the global polymer industry Polymerscan helps you to: Understand the key drivers of feedstock and derivative prices Negotiate the best value and protect your margins with critical insights into price movements Understand the key issues affecting Asian petrochemical markets Make informed decisions based on critical pricing information Track production margins and gauge supply and demand balances Seize time-critical opportunities for long-term benefit Monitor prices for both domestic and export commodities Assess market evaluations by reviewing the latest trends and the latest deals Learn more at: 7 PLATTS SPECIAL REPORT: PETROCHEMICALS

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