German petrochem industry will continue to struggle, but expects a return to growth in the medium-term

The German petrochemicals industry will continue to struggle against a lingering economic headwind with key petrochemicals consuming industries such as automotive production and construction underperforming in 2010, but the latest Germany Petrochemicals Report by Business Monitor International (BMI) expects a return to growth in the medium-term. In 2009, the German petrochemicals industry had olefins production capacities of 5.75 mln tpa ethylene, 3.95 mln tpa propylene and 850,000 tpa butadiene. In the aromatics segment, Germany has plants with combined capacities of 2.83 mln tpa benzene, 845,000 tpa toluene, 1.02 mln tpa cumene and 585,000 tpa xylenes. These aromatic compounds are used to manufacture intermediate petrochemicals products, with Germany hosting 1.11 mln tpa ethylbenzene (EB), 1.21 mln tpa styrene monomer (SM) and 85,000 tpa terephthalic acid. These feed polymer plants with combined capacities that include 530,000 tpa polystyrene (PS), 390,000 tpa polyethylene terephthalate (PET) and 475,000 tpa polycarbonate. In the styrenics chain, Germany also has capacities of 240,000 tpa styrene-butadiene rubber and 80,000 tpa acrylonitrile-butadiene-styrene copolymer. In the polyethylene segment, Germany has capacities totaling 1.79 mln tpa high density polyethylene (HDPE), 1.13 mln tpa low density polyethylene (LDPE) and 810,000 tpa linear low-density polyethylene (LLDPE). In the vinyl chloride chain, the country also hosts 2.84 mln tpa ethylene dichloride, 2.02 mln tpa vinyl chloride monomer (VCM) and 2.14 mln tpa polyvinyl chloride (PVC) capacities. In the fertilizer sector, Germany possesses 3.27 mln tpa ammonia and 2.15 mln tpa urea. BMI expects little in terms of expansion of these capacities over the medium-term, but believes there is a significant risk of plant closures. BMI envisages no increase in ethylene capacities over the next five years, which will restrict scope for further downstream development. We also see little scope for Germany to increase its oil refining capacity from the current 2.39 mln b/d. Further upgrading should take place, but the medium-term implication is one of refined products imports rising steadily. The German petrochemicals industry was showing signs of bottoming out amid modest growth in demand in H209, although plant capacity utilisation stood at 76.8% in Q3. While this was an improvement on the 72% seen in H109, it still well below the 80-85% rate BMI judges to be essential to break even. In Q3-09 chemicals output grew 4% q-o-q, with basic chemicals up 6%. But in comparison with Q3-08, output was down 11.5% and prices were 4.3% lower. Sales in the quarter were up 5.5% y-o-y in the quarter. The Verband der Chemischen Industrie (VCI, Chemical Industry Association) estimated in November that chemical production for the year would drop 10% and sales would decline 12%. BMI believes this was optimistic, particularly given the anticipated drop-off in demand from the automotive sector following the end of national car scrappage programmes designed to stimulate the market. We believe that production for the year was down 11.5%, with sales down 12.5%, based on our belief that the market will bounce along the bottom until mid-2010 at the earliest. PVC and PP have been particularly badly hit by the sharp downturn in the construction, automotive and consumer durables industries and saw declines of around 20% in 2009. The difficult situation will be compounded by large increases in capacity in the Middle East and Asia, with producers in the Middle East enjoying significant feedstock cost advantages. Consequently, BMI is forecasting long-term annual growth of around 2%.