European petrochemical margins face grim outlook amid overcapacity

European petrochemical makers are expected to face more weak steam cracker margins in the months to come as they grapple with excess production capacity and a mixed manufacturing outlook.

Europe's oversupply of steam cracking capacity is reflected in average operating rates, which for ethylene are currently at around 70%-75% when typically the industry would expect these to be well into the 80%-90% range and above, said Andy Orszynski, Chemicals Director at S&P Global Commodity Insights in an interview on May 20.

Platts, part of Commodity Insights, assessed the Northwest European Cracker spot margin, a measure of profitability for ethylene-producing steam crackers, at $124.79/mt May 17 and a 2024 average of $112.96/mt to date. This is against a five-year average of $324.17/mt.

Ethylene is a key building block for a number of petrochemicals.

"The ethylene industry has overbuilt itself," said Tony Potter, Global Vice President of Chemicals at S&P Global, in a presentation March 20 at the World Petrochemical Conference in Houston. "Naphtha cracker margins in Europe and Asia will be below reinvestment levels in 2024 and 2025."

Cracker margins have failed to recover in the wake of the coronavirus pandemic. They flipped negative in August 2022 and from April 2019 until that point had averaged $494.94/mt, Commodity Insights data showed.

Industry data shows almost flat production growth in 2024. The European chemical industry's output grew slightly in the first two months of the year, up 0.4% year over year, according to the most recent Chemical Monthly Report of the European Chemical Industry Council (Cefic). This growth in volumes could "probably linked to short-term restocking" and should not be perceived as "good start of stabilized demand and ongoing recovery," Cefic said.

"The chemical industry in Europe is under cost and demand pressures, and certainly more than in the other competing countries in the world. Chemicals production in Europe faces more structural challenges rather than business cycle issues. The latest announcements on closure of crackers units in Europe underpin this," Cefic said.

A slew of closures in Europe has been announced for 2023 and 2024. This includes 2.785 million mt/year of aromatics capacity, 1.825 million mt/year of polymers capacity and 1.1 million mt/year of olefins capacity.

An anemic industrial production outlook does not auger well for petrochemical margins in 2024.

Industrial production output in the Eurozone is expected to show no growth in 2024, according to analysts at S&P Global Market Intelligence, but 2025 looks more bullish, when the Eurozone's industrial production output is forecast to rebound with a growth rate of 2.7%.

This comes as global industrial production is projected to increase by 1.9% in 2024 and increase by 2.8% in 2025, a fourfold increase on growth in 2023, the analysts said.

More, greener capacity clouds margins outlook

The chemical industry is implementing circa 1 million mt/year of ethylene capacity cuts in 2024 via announcements from SABIC and ExxonMobil, but there is up to 2 million mt/year of new ethylene capacity due to start coming online as of 2027-2028 from new crackers being built now by Ineos in Belgium and PKN in Poland, which will more than cancel out these cuts.

The Ineos project is the first new cracker in Europe in 25 years at Antwerp, with capacity for 1.45 million mt/year of ethylene and will be the largest olefins unit in Europe. The project resumed construction earlier this year after be stalled because of a campaign by environmentalists, but Ineos has not changed the plant's announced completion date of 2026.

The carbon emissions at the new ethane cracker will be three times less than those at an average European cracking facility and less than half the emissions of the top 10% best-performing crackers in Europe, according to Ineos.

The reductions in capacity announced by SABIC and ExxonMobil represent about a 4% decrease in current ethylene capacity but the 2 million mt of new additions from PKN in Poland and Ineos in Belgium mean an increase of about 10%, according to Commodity Insights data.

"We do not expect these projects to be shelved, and they sound like they are progressing well, although timelines can always change," Orszynski said. "This means the market will probably have to see this volume - and more - leave the market elsewhere in Europe," he added.

Multinationals like ExxonMobil, SABIC and Dow could use their cost-advantaged units outside Europe to import and maintain their market share on the continent. The already high living standards and low population growth in Europe will limit the growth, said Michael Liesfeldt, Director of Olefins and Derivatives for Middle East and Africa at S&P Global Commodity Insights .

Single facility operators are the more likely candidates to try and hold onto their position, Orszyinski said.

Industry concerns

This is ringing alarm bells in the industry. Eighty-five national and European packaging industry associations have signed a manifesto calling for the EU and national leaders to "relaunch competitiveness" for their products, the European Organization for Packaging and Environment said April 15.

In similar terms, Ineos Chairman Jim Ratcliffe has warned that the European petrochemical industry is sleepwalking towards offshoring its industry, jobs, investment and emissions.