Chemicals in Europe gain ground against US as crude and feedstock collapse

Plummeting feedstock costs have led Europe’s chemical sector to gain ground against the US, according to ICIS data. As rapidly falling crude oil values feed into lower naphtha prices, margins for European cracker operators increased sharply in the final months of 2014, whilst margins for US ethane-based operators have fallen.Though there is a time lag, chemical prices have fallen in tandem with falling crude, reducing the margins of US producers that use ethane feedstock. European producers, on the other hand, are benefitting – at least in the short term – from the steep fall in naphtha values. The global ICIS Petrochemical Index, or IPEX, was down 10% last month, following petrochemical price falls in the three main producing regions. It is down by about 23% from the middle of the year while oil and naphtha prices are more than 50% lower. This must be good news for European cracker operators which have fallen behind the US as the shale gas boom has resulted in abundant supplies of cheap ethane. Provided the lower oil price is sustained, the global competitive landscape for chemicals is changing once again as the US advantage wanes. The economics of these crackers relies on the US having a sustained feedstock advantage over other regions. Profitability and return on investment were planned at a time when global chemical prices were relatively high, based on a high crude oil price. Kevin Swift, chief economist of the American Chemistry Council (ACC) insisted that the US will retain its advantage despite falling oil, though it will erode. Although some projects are already underway, there is a realistic possibility that others could be delayed or cancelled. Could we also see a resurgence in Europe? If the region looks likely to become more competitive in the long term, companies could plan to rebalance their investment strategies. Europe’s chemical industry should also start to see some benefit from the prospect of falling gas and power prices. Gas prices are related to oil in Europe and electricity may also start to fall as generation costs decline. However, demand within Europe is not strong. The region’s economy has entered a period of deflation (-0.2% in December) and the European Central Bank may be forced into a phase of full blown quantitative easing to combat this. Economic growth is stalling and business confidence declining, not helped by the turmoil in Ukraine and the worsening Russian economy. Yet chemical producers are benefitting from the collapsing euro which has fuelled exports and cut imports of many commodities, particularly polyethylene and polypropylene. On the demand side, growth is forecast to be lacklustre. China is more focused on rebalancing its economy than growing it, and recovery is tailing off in Europe. The outlook for the US economy is better, but not spectacular.