The emerging energy framework driven by shale oil and gas in North America is changing the competitive dynamics of the worldwide petrochemical industry, leaving regions such as Europe at a disadvantage. However, Europe may have fewer reasons to fear low-cost petrochemical exports from the United States than some industry observers assume, said Michael Smith, vice president at IHS Chemical, in a presentation to an IHS Chemical seminar, held today at the European Petrochemical Association (EPCA) annual meeting in Vienna.
Europe’s petrochemical industry “learned a lot” from the last big build-up of advantaged petchem capacity in the Mideast, which had threatened to unleash a tsunami of cheap products into the European market, Smith said. “The tsunami did not come—a lot of Mideast plants were delayed by 1-2 years, operating rates at the new plants were low initially, and sanctions reduced exports from Iran,” he said. “So Europe’s polyolefin imports increased but we had more time to adapt.”
Smith also does not expect a shale deluge in Europe, partly because the US capacity build-up is concentrated on the ethylene value chain. “Not all commodity petrochemicals are in danger because it’s all about ethane,” he said. “US exports will also be mainly directed to developing markets.”
IHS Chemical forecasts that the cost of producing ethylene in the United States from ethane will be $1,000/m.t. lower in 2023 than the cost of producing ethylene in Western Europe based on naphtha. However, naphtha will remain an important feedstock because of the many value chains that stem from naphtha cracking. IHS forecasts that in 2023 naphtha will still account for 39% of the worldwide olefin feedslate. “Naphtha is not going away,” Smith said.
North America also cannot produce all of the additional ethylene that the world will need during the next decade. “We need 6 million m.t./year of new ethylene capacity to keep up with demand going forward,” considerably more than the announced capacity additions in North America, Smith said.
Europe’s chemical industry can, meanwhile, protect itself by continuing to develop specialty products and grades, and niche markets, for which energy prices are often less of a determining factor for competitiveness, Smith said. Europe’s chemical sector also has certain structural elements that act as a barrier to imports. “About 74% of all sales by Europe’s chemical industry are inside the European Union—that helps to protect Europe,” Smith said. Europe is also protected by import duties and tariffs, the exchange rates of the various European currencies, and delivery times from North America. “There are lots of barriers to entering the European market,” Smith said.
Europe’s petrochemical industry is taking steps to enhance its competitiveness by increasing its ability to crack ethane imported from the United States. Borealis, Ineos, and Sabic have each announced plans to do this, and Total and Versalis are considering similar plans, Smith said. Handling and freight expenses reduce the expected cost advantage to about $400/m.t. for ethylene produced in Europe from US ethane compared with ethylene produced in Europe from naphtha, under certain conditions and assuming the difference between oil and gas prices stays broadly unchanged, Smith said. However, only certain ethylene plants in Europe have the potential to crack ethane imported from North America and so further rationalization of high-cost ethylene capacity in Europe is likely. “Importing ethane from the United States looks attractive. Lots of European coastal crackers could do it, but no inland crackers can do it,” Smith said. “We will see the closure of more old, uneconomical crackers in the coming years.” This needs to happen “in an orderly fashion,” he said. Imported ethane could eventually, beyond 2025, account for about one-third of the feedstock cracked in Europe, Smith said.
The rationalization process is nothing new for Europe’s petchem industry. “Europe is in a consolidation phase that started 20 years ago,” Smith said.
By Ian Young in Vienna
