Petrochemicals had passed a nadir in mid-2009, but BMI’s latest report forecasts that it will take some years for output to recover to pre-recession levels and during that time some plants will be permanently shut with potentially devastating consequences for entire production chains.
The chemicals and man-made fibres industries appeared to buck the trend in the three months to May 2009, according to the Office for National Statistics. While overall manufacturing dropped 1.2% compared to the previous three months, chemicals and man-made fibres recorded a 2.2% increase. UK manufacturing in April increased 0.2% month-on-month (m-o-m) driven by chemicals and man-made fibres, which represent about 11% of British manufacturing and increased 2.3%. Although output was still down compared to the previous year, the consistent upward trend in chemicals should serve as encouragement to UK petrochemicals producers. BMI attributes a large part of the increase in output to complete destocking by petrochemicals consuming industries.
Nevertheless, the gloom has yet to lift from the industry with the report expecting the challenging conditions to persist through the year and for British producers to report lower cash flows in the short to medium term. The effects of the recession could have a long-lasting impact on British petrochemicals with downstream producers severely affected by a reduction in UK-based feedstock. In July 2009, Dow Chemical announced it would close the UK’s only ethylene oxide/ethylene glycol (EO/EG) plant at Wilton on Teesside in January 2010. Dow’s other Teeside operations are unaffected by the EO/EG plant closure. The loss is expected to have a negative knock-on effect across the sector, prompting Croda to announce the shutdown of its speciality chemicals plants on Teesside in January 2010. Artenius and Petroplus could also cut back capacity. Already, Artenius’ 500,000 tpa PTA plant at Wilton has been idle since March 2009 and Petroplus announced in February it would sell its Teeside refinery. The decision could have implications for Sabic, which supplies ethylene to Dow from its Wilton cracker. The loss of supplies to Dow will be partly offset by Sabic’s 400,000 tpa LDPE plant at Wilton, which is due to come onstream in H209 and will eventually consume half the cracker’s nameplate capacity. However, the vertical integration of the Teesside chemicals industry, which made it highly efficient during the good times, is now faltering.
Orders are expected to be erratic as customers remain cautious amid the gloomy economy, which is likely to translate into lower utilisation rates. Well-capitalised companies are the best positioned to withstand this period of unpredictability, while those with high levels of debts could potentially face the threat of bankruptcy or become acquisition targets. The rest of the petrochemicals industry is facing the same challenges, but the outlook for UK producers is particularly grim as the UK does not appear to making much headway in jumpstarting its economy. We have revised down our UK real GDP forecast for 2009 from -3.5% to -4.2%, and have left our 2010 forecast at 0.0%. The dire Q109 numbers have been a major driver behind our revisions, and we also note the ongoing increase in the volatility of real GDP growth.
Manufacturing will be hardest hit, while the construction industry will contract markedly with the collapse of the housing market. We believe it will take until 2012 for the UK to post above-trend growth of 3.0%. The strongly pro-cyclical nature of the UK petrochemicals industry means that it could post a fall of 8-10% in production volumes in 2009.