Petrochemical Industry Faces Challenges in Europe and Asia

By Mohi Narayan and Joyce Lee

NEW DELHI/SEOUL (Reuters) – Petrochemical producers in Europe and Asia are in survival mode as years of capacity build-up in the top market, China, and high energy costs in Europe have depressed margins for two consecutive years, forcing firms to consolidate.

The sector’s weakness is troubling for a global oil industry looking at petrochemicals to keep profits flowing as transportation fuel demand falls in the coming years with the energy transition.

Major producers in Asia and Europe are selling assets, shutting older plants, and retrofitting facilities to use cheaper raw materials such as ethane instead of naphtha to cut costs, according to industry executives and analysts.

Producers need to further consolidate ethylene and propylene capacity as oversupply is expected to persist for years with new plants still coming online in the Middle East and China, even as the Chinese economy stutters.

Ethylene and propylene, produced from petroleum products, are essential raw materials for making plastics, industrial chemicals, and pharmaceuticals widely used in daily life.

Consultancy Wood Mackenzie estimates that about 24% of global petrochemical capacity is at risk of permanent closure by 2028 amid weak margins.

“We expect rationalization in Europe and Asia to continue in this cycle,” stated Eren Cetinkaya, a partner at McKinsey & Company, anticipating that the current downturn will last longer than the typical five to seven years due to prolonged capacity build-up, particularly in China.

Asia’s producers face the toughest outlook, with persistent oversupply as some companies may not curb output at new units and plants integrated with broader operations.
“Since 2022, however, a range of factors have made the business environment more challenging – including falling domestic demand and drastic oversupply from new production facilities launched in China and elsewhere in Asia,” Mitsui Chemicals said in a statement in April.

Asian propylene production margins are expected to slip into the red this year, with a projected loss around $20 per metric ton, according to Wood Mackenzie. In contrast, profit margins in Europe are forecasted to rise slightly from last year to close to $300 a ton in 2024, although that still represents a 30% decrease compared to two years ago.
Conversely, U.S. propylene margins are expected to rise by 25% to around $450 per ton in 2024, insulated from margin challenges due to abundant domestic feedstocks derived from cheaper natural gas liquids, like ethane.

ASIA PRODUCERS CHASE NEW MARKETS

In Asia, Taiwan’s Formosa Petrochemical has shut two of its three naphtha crackers for a year, while Malaysia’s PRefChem has kept its cracker closed since earlier this year.
However, producers in South Korea and Malaysia maintain high run rates despite losses, as their plants are interlinked with oil refineries, making it challenging to shut down or sell unprofitable petrochemical units without affecting other product outputs.

“Most companies’ portfolios are integrated and balanced. If you want to consolidate them, you have to either kill the strengths of one company or eliminate the strengths of the other company,” an anonymous official from a large South Korean state-run integrated refiner noted.

“But I don’t believe it will be easy for Korean firms to do so without clear gains,” the official cautioned.

With increasing production and exports from the Middle East, China, and the U.S., companies are seeking growth markets like India, Indonesia, and Vietnam to sell their surplus supply.
Fewer capacity additions coupled with the rising demand for polymers and chemicals makes India one of the most attractive global markets, according to Navanit Narayan, CEO of India’s Haldia Petrochemicals.

Besides seeking new outlets, Japanese and South Korean petrochemical manufacturers are exploring niche projects to enhance margins by producing low-carbon and recyclable plastics, which may be priced higher due to rising demand for sustainable products.

Mitsubishi Corp is collaborating with Finland’s Neste to develop renewable chemicals and plastics. Sumitomo Chemical aims to utilize polymethyl methacrylate recycling technology to create plastics with lower carbon footprints than traditional options.

EUROPE CONSOLIDATION PICKS UP

Consolidation is happening in Europe, where Saudi Arabian Basic Industries Corp (SABIC) and Exxon Mobil Corp have announced plans to permanently close specific plants due to high costs.
SABIC is also retrofitting facilities in Europe and the UK to process more ethane, which is cheaper than naphtha, according to Olivier Gerard Thorel, SABIC’s executive vice president for chemicals.

Ethane is generally less expensive than naphtha, which is derived from oil, due to its pricing being linked to natural gas. SABIC operates flexible-feed crackers capable of using ethane, naphtha, and liquefied petroleum gas (LPG) as feedstocks.

Wood Mackenzie’s Chong noted the shift stems primarily from high energy and production costs coupled with slowed demand in the region against a backdrop of weak economic growth over the past few years.
Houston-based LyondellBasell recently sold its U.S. ethylene oxide and derivatives business in May. In Europe, the company is assessing all options regarding its potential exit from the petrochemicals sector.
“Market conditions in Europe are anticipated to remain challenging for the long term,” a company spokesperson remarked.