"RESILIENT" IS the word to best characterize the global petrochemical industry. The sector had a solid 2007 despite major headwinds, but the down cycle will start to manifest itself in 2008 and beyond.
In the US, sales by major chemical firms, as reported by the American Chemical Society (ACS) were about $176bn (€113bn), up by 9.9% over 2006. Earnings of nearly $15bn were up by 12%.
Nexant's cash margin index for US petrochemicals and polymers held steady through 2007 at about 70 and in Europe at 180 (1984 = 100).
Indeed, the indices have been at these levels since the industry recovery from the last recession, at the beginning of the decade.
The industry's performance has been noteworthy at a time of unprecedented and inexorable feedstock cost increases, especially those related to crude oil, such as naphtha.
Crude oil prices averaged just $66/bbl in 2006. Prices paused briefly in early 2007 as winter demand eased, and then increased to close out the year in triple-digit territory.
The 2007 average is a breathtaking $73/bbl. That the industry could maintain profitability throughout 2007 in the face of these price movements is a testament to its importance to customers and its skills in passing through cost increases.
Profitability in the critically important olefins and aromatics areas was strong. Cash cost margins for ethylene from natural gas liquids (NGL) in the US held up very well in 2007, yielding pretax returns on investment in the range 25-35% - well into reinvestment territory if companies were so minded.
By contrast, ethylene margins from naphtha in the US, Europe and Asia were one third of NGL-based margins, reflecting the comparative cost advantage that US ethane and propane have had over globally priced oil-based naphtha.
In aromatics, benzene continues to present problems, with prices that depressed extraction returns.
In the US, sales by major chemical firms, as reported by the American Chemical Society (ACS) were about $176bn (€113bn), up by 9.9% over 2006. Earnings of nearly $15bn were up by 12%.
Nexant's cash margin index for US petrochemicals and polymers held steady through 2007 at about 70 and in Europe at 180 (1984 = 100).
Indeed, the indices have been at these levels since the industry recovery from the last recession, at the beginning of the decade.
The industry's performance has been noteworthy at a time of unprecedented and inexorable feedstock cost increases, especially those related to crude oil, such as naphtha.
Crude oil prices averaged just $66/bbl in 2006. Prices paused briefly in early 2007 as winter demand eased, and then increased to close out the year in triple-digit territory.
The 2007 average is a breathtaking $73/bbl. That the industry could maintain profitability throughout 2007 in the face of these price movements is a testament to its importance to customers and its skills in passing through cost increases.
Profitability in the critically important olefins and aromatics areas was strong. Cash cost margins for ethylene from natural gas liquids (NGL) in the US held up very well in 2007, yielding pretax returns on investment in the range 25-35% - well into reinvestment territory if companies were so minded.
By contrast, ethylene margins from naphtha in the US, Europe and Asia were one third of NGL-based margins, reflecting the comparative cost advantage that US ethane and propane have had over globally priced oil-based naphtha.
In aromatics, benzene continues to present problems, with prices that depressed extraction returns.
On the supply side, China continues to develop its petrochemical industry, although its investment program is meeting domestic demand growth and not leading to import substitution.
In the next two years, China will bring online about 1.5m tonnes/year of new ethylene capacity, an increase of 15%.
Over the same time frame, Middle East capacity is projected to grow by 8.2m tonnes/year - an astonishing 60%. New capacity in Iran, Saudi Arabia and other countries will therefore be entering Asian and European markets. Other potential markets will undoubtedly be targeted.
With moderating US GDP growth, Nexant forecasts global ethylene demand growth at 4.2% in 2007-2008 but then at a more constrained 3.7% in 2008-2009.
As a consequence, we forecast global ethylene operating rates to ease from 92% in both 2007 and 2008, to 89% in 2009, with some consequent reduction in margins. We project a continuation of the slowdown already apparent in the last months of 2007.
In the next two years, China will bring online about 1.5m tonnes/year of new ethylene capacity, an increase of 15%.
Over the same time frame, Middle East capacity is projected to grow by 8.2m tonnes/year - an astonishing 60%. New capacity in Iran, Saudi Arabia and other countries will therefore be entering Asian and European markets. Other potential markets will undoubtedly be targeted.
With moderating US GDP growth, Nexant forecasts global ethylene demand growth at 4.2% in 2007-2008 but then at a more constrained 3.7% in 2008-2009.
As a consequence, we forecast global ethylene operating rates to ease from 92% in both 2007 and 2008, to 89% in 2009, with some consequent reduction in margins. We project a continuation of the slowdown already apparent in the last months of 2007.
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