Grangemouth’s impact on European ethylene sector

The Grangemouth site is one of Europe’s largest ethylene cracking facilities which process approximately 4% of total European capacity and 1/3^rd of Ineos’ European capacity. The closure of the cracker will be very significant for the industry however, Moody’s does not expect it to be enough to recover sector wide utilisation rate which have been in the low 80% range. This is a sustained negative credit trend for the European ethylene industry and a reverse is not expected by Moody’s any time soon.

European ethylene sector
The European ethylene sector is struggling with overcapacity and growing international competition which is exacerbated by the European producers’ cost disadvantage. European ethylene producers predominantly use higher priced naphtha feedstock, while competitors in the Middle East and North America use cheap ethane. Divergence in feedstock costs accounts for the much lower profitability of European crackers. Moody’s expect US ethane prices and related feedstocks to remain at or near present low levels for the next several years, and for European feedstocks to remain severely disadvantaged and generate weak profitability. Exports into Europe from the Middle East and North America are also expected to increase, putting more pressure on European cracker operating rates.

Also, on the back of strong performance, ethylene producers in the US are executing plans to add approximately 3 million t of ethylene capacity via expansion in 2013 – 2015, and further build close to 9 million t new capacity by 2017 to exploit their sustainable cost advantages. These plants are largely export oriented, and will add to the pressure to rationalise capacity in Europe.

Cracker closures
The Ineos decision brings the share of European ethylene capacity scheduled for closure to 7.5%. Other closures include Total SA’s cracker facility in Carling, France by 2015 and the earlier closure of its Antwerp, Belgium facility. Also a subsidiary of Italy’s ENI SpA has closed the cracker at the Porto Torres near Versalis.

More adjustment will be needed and oil companies will need to support the rationalisation effort in the industry. This is going to have to occur as they own a number of relatively small crackers in Europe, which tend to have lower economies of scale and have lower profitability. These crackers represent approximately 9% of total European ethylene capacity.

Despite low profitability, it is unlikely that oil companies will shut down smaller crackers in the next two years. The decision to close these facilities relies on the integrated cracker/refinery economics, rather than being driven by the economics of ethylene production alone, as was the case at Grangemouth. Negotiations with the labour force that typically precede any decision to close a chemicals facility in Europe Add another important dimension that could delay or forestall future closings.

Feedstocks
Many European producers are now apparently examining alternative feedstocks to improve the competitiveness of their crackers. In 2012, Ineos invested in the LNG terminal in Antwerp to supply its Cologne cracker. This year it has also entered in to a series of commitments to invest in the necessary infrastructure to secure shipping arrangements for ethane feedstock to its cracker in Norway from 2015. Ineos also, reportedly, considered an investment to allow import of ethane at the Grangemouth facility to secure its future.

These agreements are positive for the Norway and cologne crackers, however Moody’s think shipping alternative feedstock is unlikely to offer a universal solutions for the whole European industry and will depend on he economics of required investment at each cracker.

The cost of shipping ethane to Europe will substantially reduce the feedstock cost advantage. European ethylene crackers facilities are predominantly naphtha based, with only 3% having ethane cracking capability, so a decision to switch to alternative feedstock will require a substantial investment outlay to modify the facility. Depending on the cracker, such investments may be difficult to justify.

Adapted from press release by Claira Lloyd

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