The Struggle for Survival in the Petrochemical Sector

According to consulting firm Wood Mackenzie, inadequate margins could force the permanent closure of around 24% of the world’s petrochemical capacity by 2028.

Petrochemical producers in Europe and Asia are struggling to survive as years of capacity buildup in top market China and high energy costs in Europe have pushed margins down for two years in a row, forcing firms to merge.

The weakening of the sector worries the global oil industry, which is turning to petrochemicals to maintain profits as the energy shift reduces the demand for transportation fuel in the upcoming years.

Industry executives and experts report that major manufacturers in Asia and Europe are reducing costs by selling assets, closing ageing plants, and converting facilities to use less expensive raw materials like ethane instead of naphtha.

As new facilities continue to come online in China and the Middle East, producers will need to further concentrate their capacity to produce ethylene and propylene, as excess is predicted to last for years despite the collapse of the Chinese economy.

According to consulting firm Wood Mackenzie, inadequate margins could force the permanent closure of around 24% of the world’s petrochemical capacity by 2028.

The worst-off producers are those in Asia, where an excess of goods is expected to last because some businesses are unlikely to reduce production at newly constructed facilities or firms that are integrated with larger operations.

Wood Mackenzie predicted that this year’s Asian propylene production margins will become negative, with losses estimated to be $20 per metric ton on average.

Although profit margins in Europe are expected to slightly increase from the previous year to over $300 per ton in 2024, that is still 30% less than two years ago.

It is anticipated that in 2024, U.S. propylene margins will increase by 25% to approximately $450 per ton. According to WoodMac analyst Kai Sen Chong, the abundance of domestic feedstocks made from less expensive natural gas liquids, such as ethane, shields American producers from the margin squeeze.

In Asia, Malaysia’s PRefChem, a joint venture between Petronas and Saudi Aramco, has closed its naphtha cracker since earlier this year, while Taiwan’s Formosa Petrochemical has closed two of its three crackers for a year.

Because their facilities are connected with oil refineries, manufacturers in Malaysia and South Korea are managing to maintain high run rates even in the face of losses. According to industry sources, this prevents companies from closing or selling petchem plants that are losing money without impairing the production of other goods.

Companies are investigating developing markets like India, Indonesia, and Vietnam in order to sell their excess inventory as production and exports from the Middle East, China, and the United States grow.

According to Navanit Narayan, CEO of India’s Haldia Petrochemicals, fewer capacity increases and a rising demand for polymers and chemicals would make India one of the world’s most desirable markets.

In addition to seeking new markets, South Korean and Japanese petrochemical companies are investigating specialized initiatives to increase profits by creating recyclable and low-carbon polymers that may command higher prices as consumer demand for environmentally friendly goods rises.

Mitsubishi Corp. is collaborating with Neste of Finland to create polymers and chemicals that are renewable. Sumitomo Chemical aims to produce goods that use recycling technology for polymethyl methacrylate to develop plastics with lower carbon content than conventional goods.

Exxon Mobil Corp. and Saudi Arabian Basic Industries Corp. (SABIC) have declared plans to permanently close some factories in Europe as a result of excessive expenses, indicating that consolidation is taking place there.

According to Olivier Gerard Thorel, SABIC’s executive vice president of chemicals, the company is also renovating plants in Europe and the UK to handle more ethane, which is less expensive than naphtha, as he told Reuters in May.

When compared to natural gas, ethane is usually less expensive than naphtha made from oil. Flexible-feed crackers that accept LPG, ethane, and naphtha as feedstocks are owned by SABIC.

According to WoodMac’s Chong, the change is mostly caused by expensive energy and production costs, as well as low demand in the area due to the region’s recent lackluster economic growth.