Read part one of this article here.
Impact per petrochemical and per region
However, when one applies the lens to specific petrochemicals and their behaviour in different regions, the general assessment no longer applies in equal terms to all of them.
Specifically, feedstock advantaged regions such as the Middle East and the US are getting the biggest hit as the new prices eat their margins. This is particularly applicable for products based on the C2 value chain, where feedstock advantage is more strongly decoupled from the naphtha based price setting mechanism; ethylene and methanol, for instance. Companies located in feedstock advantaged regions will continue to be the cost leaders and will continue to be more profitable than their peers in other regions such as Europe or Asia, however their extraordinary margins obtained in previous years will not be sustained at the same levels in a scenario of lower oil prices. If one looks at the average spread between spot prices and cash costs for ethylene, it can be seen that while in 2014 it reached a value of US$900 - 1000/t, it was significantly reduced in January 2015 to an estimated spread of US$550 - 650/t; this represents a reduction of more than a 35% of the cash margins obtained by these assets.
On the other hand the low prices also reduces (in the C2 chain) the ‘gas liquids gap’ and naphtha based regions such as Europe enjoy a temporary ‘relief’; however this mitigation, from the authors' point of view, does not fundamentally alter the big picture, it rather ‘buys some time’ for Europe based plants and firms to carry out the necessary restructuring.
As is well known, there is a huge difference in the cash costs of producing ethylene in the Middle East and North America versus the rest of the world. Specifically, European and Asian steam crackers remain in the high cost end of the supply curve. The difference is obviously driven by the access to cheap ethane feedstock and its impact is so large that it minimises the effect of other key factors such as scale of the plants or integration with downstream plants.1
When one fasts forward and looks at the same supply curve but with the price sets of early 2015, the picture is quite different. The supply curve merit order remains basically the same, except for some very concrete changes, namely the worsening of the competitive position of some specific technology regional pairs such as mixed feed and naphtha based steam crackers in the Middle East and North America, as well as coal to olefins plants in China. This is driven mostly by the lower revenue credits of byproducts such as methane rich gas or pygas in the first case, and the worsening of the relative price of coal versus naphtha in the case of China's coal to olefins plants.2
The big difference, one that specially affects the feedstock advantaged regions, can be seen in the compression of the supply curve. While the relative competitiveness for the majority of regions and plants has not changed materially, it is very clear that the cash margin of the feedstock advantaged regions has been eroded. They remain in case much better than that of its peers in Europe or Asia, however the expected cash flow from investments in these plants will remain more challenged. A similar picture can be seen when one looks at the integrated margin view of C2 derivatives, including PE3 or ethylene oxide. This might slow down the development of new capacity in such regions, and does indeed give some limited respite to the European and Asian based assets.
However, when one looks at the behaviour of other petrochemicals, such as those on the aromatics or the C3 and C4 value chains, the regional differences are not that relevant anymore. In the case of the propylene supply curve, regions do not play as an important role on competitiveness as was the case for ethylene. In fact, both in North America and in Asia there are plants on the top quartile as well as in the bottom quartile when it comes to cash cost competitiveness. The recent changes in oil prices has again compressed the supply curve, but has not had a differentiated impact on a region by region basis. So, all in all, a very different behaviour vis à vis the C2 value chain. A similar story can be said about aromatics such as benzene and its derivatives.
The reason behind this different behaviour rests in the fact that what really drives cash cost competiveness in C3s is the technology employed to produce the molecules and not so much feedstock advantage. If one looks at the most important sources of propylene, it can be seen that the real differentiator in competitiveness is whether the molecules are produced in an FCC, a mixed feed steam cracker, a propane dehydrogenation plant, a naphtha fed steam cracker or a metathesis process.4
Action plan for petrochemical companies
With a long term perspective, not much has changed when it comes to strategic options for petrochemical companies. Of course key macroeconomic and pricing hypotheses need to be developed to evaluate investments and annual plans, but the core of how to create value in the sector remains the same and can be grouped in two set of actions.5
Maximising the value of existing assets
Petrochemicals companies should strive to enhance operational efficiencies; realise synergies, both upstream and downstream, available through improved integration; and optimise commercial strategies with regard to products, channels, and clients. In an industry of thin margins like petrochemicals these actions are mandatory, but even more so important in regions without feedstock advantage. According to The Boston Consulting Group's experience, these actions, if properly executed, can bring additional variable margin north of US$200/t.6
Restructuring the plant portfolio
Petrochemicals players should also continuously examine their plant portfolios to ensure that they are at an appropriate scale, are making the right products, and have the right regional presence. They should consider consolidating and further integrating their assets into advantaged networks, as well as engaging in cross regional networks for their petrochemical and steam cracker assets through alliances, joint ventures, or mergers and acquisitions (M&A). The evolving markets means that assumptions must be continuously reevaluated.
Written by Udo Jung, Jaime Ruiz-Cabrero and Asheesh Sastry, The Boston Consulting Group. This is an abridged version of an article taken from the July 2015 issue of Hydrocarbon Engineering.
- When comparing European or Asian plants among themselves, these factors are critical to ensure acceptable margins and a comfortable position in the supply curve.
- This would be the same for plants that use the methanol to olefins the route.
- LDPE, LLDPE or HDPE alike.
- List not exhaustive. The same can be said for Benzene, where the real cost competitiveness is determined by the technology used and not by the region where the pants operate (reformate extraction, coke oven light oil, HDA, TDP or extraction from pygas).
- For more details please refer to 'The future of Petrochemicals in Europe: Continuous retreat or rising profitability?', Udo Jung, Jaime Ruiz-Cabrero and Alex de Mur, which can be found at www.bcgperspectives.com.
- Figure based on BCG's successful application of its lean petrochemicals methodologies in multiple petrochemical plants across various regions.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/06072015/the-domino-effect-part-two-1025/