What is the future of Europe’s Petrochemical industry?

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Ian Young:

There's a real risk of de-industrialization in petchems in Europe and lost investment if nothing happens. But unfortunately, many of the challenges are outside Europe's control. For example, the massive capacity buildup in China regulation is sort of outside the industry's control, but it does have some influence. And of course, there's the overall economy which is causing the current weak demand. The way out is clearly restructuring innovation and finding some sort of long-term vision for where the industry is headed.

Rob Westervelt:

Hello and welcome to the Chemical Week Podcast by S&P Global Commodity Insights. I'm your host, Rob Westervelt. And today, we delve into the European petrochemical markets following the recent European Petrochemical Association meeting in Berlin earlier this month. As the sector confronts unprecedented challenges and navigates a very complex strategic landscape, we'll look at what's happening and what's next for European petrochemical markets.

And joining us today are Aleksandra Zhagrina, who is Aromatics Editor with S&P Global Commodity Insights, Daniel Pelosi, who is Editor for the propylene value chain for S&P Global Commodity Insights, and Ian Young, Executive Editor, Chemical Week. Aleksandra, Daniel, Ian, thank you so much for joining me today to take a look at Europe. Let's start the discussion here around some of the key takeaways from EPCA. Daniel, why don't you lead us off? What are your key takeaways from the meeting?

Daniel Pelosi:

Sure thing, Rob, and thanks for having us today. So unfortunately, the main takeaway and talking point of the conversation was a general negativity that I would say underpinned discussions. Particularly from an olefins and polymers perspective, a muted rebound to the summer season has really clipped any positive sentiment heading into the second half of the year proper, as participants have returned from summer holidays across September.

And on my markets, for example, this has been reflected by generally weak trading activity. I would say during the conference, we didn't see the flurry of activity or completed deals on markets like propylene that I've seen in previous years, for example. And this is really just reflecting the conditions that we've seen across the year of weak demand, oversupply, and structural weakness in market conditions which continue to dog the industry and really weigh heavily on participant sentiment.

Otherwise though, I think the other key takeaways were really just a reflection on the conditions across the year. Some of the volatile periods that we've seen due to supply tightness on the crackers. So for example, following the Red Sea security issues, which were followed by quite strong force majeure activity in early Q1. And then, the resulting lull that we've seen is a variety of these production facilities came back online and generally swayed conditions back into the weakness that's dominated most of the year.

Rob Westervelt:

Right. Aleksandra, what do you see in aromatics markets?

Aleksandra Zhagrina:

Yeah. Thanks, Rob. I think it's very similar to what's happening in Daniel's market which I generally see that the sentiment is something close from neutral to negative and the market participants are general did not anticipating any improvement going into end of 2024, 2025. And despite increases in interest rates, longer term outlook in my markets is not expected to get any better. Downstream sectors is still under pressure, mainly for automotive and construction. And of course, rationalization is a big topic at the moment and everyone is just guessing what's going to happen in the European markets which is quite not competitive with the US market at the moment, for instance.

Rob Westervelt:

Ian, what did you pick up?

Ian Young:

Well, thanks, Rob. And hello, everybody. My takeaways really are from the conference presentations that I attended and other conversations that I had with the petrochemical company executives during EPCA, but I'm afraid I'm not able to be any more optimistic. I mean, clearly, the European petrochemical industry is in a deep crisis and it's looking for a way out.

It's saddled with weak demand, high costs, a heavy regulatory burden, and overcapacity. So it's looking for direction and looking for solutions to these challenges. And there's a real risk of de-industrialization in petchems in Europe and lost investment if nothing happens. But unfortunately, many of the challenges are outside Europe's control. For example, the massive capacity buildup in China. And just to provide some context, China is going to add 5 million metric tons a year of ethylene capacity next year and another 5 million metric tons in 2026. So that's outside Europe's control.

Regulation is outside the industry's control, but it does have some influence. And of course, there's the overall economy which is causing the current weak demand. The way out is clearly restructuring innovation and finding some sort of long-term vision to where the industry is headed. But will those things happen? It's hard to tell.

Rob Westervelt:

That's an interesting comment to hear and let's... For now, let's do a deeper dive on what's going on in the markets for what we're picking up for the current market conditions and the near-term outlook. And then, we'll take a look at some of the longer trends and some of the steps that are needed. Daniel, what did you pick up about current and near-term market trends across the olefins chain?

Daniel Pelosi:

Yes. On the olefin side and the respective value chains, it's really a case of consistent quiet market conditions as we begin Q4 and this was reflected by discussions throughout the conference. So it's really been a tale of the end user derivative industries. Especially sectors like construction and automotive, which have rebounded very quite slowly and quietly from that summer slowdown period that I mentioned previously.

So the recent cuts in interest rates across Europe and the UK have generally been welcomed by the sector, but are seen as insufficient in buoying market conditions across 2024. So as a result on the olefin side of the industry, at least, we're expecting and market participants were corroborating quiet market conditions across the final quarter of the year.

Lots of players have a firm eye on Christmas the period where demand tends to slow even further. And hold quite strong concerns that being caught with high inventories during that period, especially amidst the weak macroeconomic backdrop, could be quite a mistake given the current state of the industry.

The other side is just, at least from the olefin perspective, we have had quite a heavy turnaround season in terms of cracker maintenances throughout the last couple of months. In terms of the near-term outlook on this residual supply type or reduced access to material from olefin's consumers in Europe, generally, at EPCA, the feeling was that no impact had been seen from the variety of maintenances that have been reported on over the last couple of months. So it's really, if anything, driven prices wider as demand continues to wane and sources continue to keep a close eye on those stock levels in a period of such weak demand.

Rob Westervelt:

Right. And Aleksandra, what stands out on the aromatics side for you?

Aleksandra Zhagrina:

So in the aromatics in general, we do see quite subdued demand at the moment. But going into my value chain for benzene, we are expect seeing a little bit of relief going closer to Q4 2024. At the moment, we also saw very low contract price settlement for benzenes. Some benzene exports were hedging to the US and the number was something about 20 KT at the moment and their arrival was November.

In terms of outlook, after 2025, market participants are really not expecting any support apart from slight uptick from construction sector. We do see some length at the market at the moment and it's probably not going to improve, because both styrene and phenol supply chains are also experiencing some length. And of course, demand from key industries, as Daniel mentioned, from automotive and appliances is also remaining muted. But yeah, potentially some very slight uptick closer to Q4 2024 and Q1 2025.

Rob Westervelt:

We're recording this in mid-October. Obviously, companies start to think about 2025 planning and scenarios. And Aleksandra, you touched a bit about what the first quarter looks like in early 2025. But sticking with aromatics, for full year 2025, what's your sense of producers and consumers, how are they approaching 2025? What do they expect from the market over the course of next year?

Aleksandra Zhagrina:

Starting from benzene chain, the market at the moment is discussing mainly the aspect of rationalization, since Trinseo, this year, has stopped producing styrene in the European market and ADNOC has agreed to purchase Covestro's assets. So that's a question where this will bring the overall balances of benzene and styrene in Europe.

Additionally, of course, the market is experiencing difficulties amid Chinese capacities expanding. For instance, at the moment, acetone demand in China is growing. Capacity is also growing. But on a good note for the European producers, plant operating rates are expected to stay below 75% in China for acetone. So China is going to have to import the European materials [inaudible 00:09:03]. And of course, on the benzene side, whether you see that the US is consuming the European benzene. And in that sense, Europe is still competitive. But benzene and styrene markets are heavily volatile and that could change any moment.

Rob Westervelt:

Daniel, what does 2025 planning look like on the olefin side?

Daniel Pelosi:

So I think the main trend that I was picking up on in conversations during the conference was a relative amount of consistency on the year. So I think the key positive to take away for in terms of outlook for 2025 is that some of the volatility and uncertainty that's dominated the markets throughout 2024 has been played down slightly by market participants. So generally consistency in the trends of weak demand and limited consumption and reduced run rates across the value chain is expected to continue into the new year.

This is reflected in the indications that we received on contractual rebates for olefins products. So in my market, propylene, for example. Consistently, players in the market were quoting levels of double digits and consistency in terms of the levels that were reported for 2024. This suggests that any kind of longer term shock to the market or a glut of supply isn't anticipated, at least. And does speak to the broader consensus that's been developed in terms of outlook for the year ahead.

Otherwise, as Aleks mentioned, Chinese capacity expansion does remain a critical talking point for players across both intermediate and downstream polymer markets. But what I would say is that attention is also keenly focused on the shipping disruptions provoked by the geopolitical volatility in the Middle East. I think for as long as that remains a concern, imports are generally going to be a bit less attractive for European players and this does offer at least some short-term relief from some of the global overcapacity concerns that have been raised throughout the last 18 months.

Rob Westervelt:

Let's turn now to some of the strategic challenges ahead for the industry and the steps it needs to take to self-help in effect. Ian, what's your sense? What needs to happen to bring European markets and to better balance and how does that play out?

Ian Young:

Well, Rob, clearly there is a huge overcapacity problem for the European petrochemical industry and it can be addressed by plant rationalization and restructuring. That is something in the industry's power that it can do to mitigate the oversupply. I'm going to speak about ethylene in this context. Just to exemplify the issue, two plant closures have been announced in Europe this year by ExxonMobil at Notre-Dame-de-Gravenchon in France and by Sabic at Geleen in the Netherlands.

But these will only partially offset plant expansions of ethylene capacity in Europe, because we've got INEOS starting up 1.4 million metric tons a year of ethylene capacity at Antwerp at the end of 2026 and they reconfirmed that to me in the last few months. ORLEN in Poland is also planning to expand capacity. Although, this project apparently is under review but not canceled yet.

Now, according to my colleagues, the analysts at S&P Global Commodity Insights, any recovery from the two closures that have been announced will stall towards the end of this decade around 2027, 2028 because of the new capacity and the cracker operating rates are currently averaging 75% in Europe, which is really low. And they're only forecast to go up to 85% in about 10 years time with the current state of affairs. So clearly, what can make a difference to this is more ethylene plant closures.

And Commodity Insights estimates that an additional 1 to 2 million metric tons a year of ethylene capacity closed in Europe would push operating rates closer to 90%, which is a bit more profitable.

So the big question is, "Which steam crackers in Europe will close?" Well, none of my colleagues will be drawing on this. It wouldn't be right. And nobody in the industry has said anything yet. You could argue that ExxonMobil and Sabic have done their part, so who will be next? The age profile in Europe's olefins industry is high. The average cracker age in Europe is 40 years old, which is much higher than the global average which I think is 25 years old. Ethylene plants in Europe are also relatively small. They are 25% smaller than the global average. Therefore, less competitive, less efficient. And half the crackers in Europe are in isolated locations which makes their logistics costs relatively high. There's no shortage of candidates for closing. But it's like a poker game, who will blink first? And that we haven't had any sign of that yet.

Rob Westervelt:

Yeah. Obviously, we don't want to name names. Daniel, have anything to add here? I mean, is this discussion happening in your sense? Obviously, Ian, you laid out the situation quite well there and producers obviously know that as well. Do either of you have a sense? Daniel or Ian, are these discussions happening and are companies willing to take these steps to bring the markets into balance?

Daniel Pelosi:

Well, one of the key talking points, there was a lot of players reflecting on some of the sites that at least have been identified as areas for review. LyondellBasell have announced six facilities, five of which are within their olefins and polymers division. That will be under strategic review across the year ahead and this could potentially result in rationalization at some of these facilities.

Additionally, another area of discussion that was quite heavily leaned on was there was a similar review that was announced by BASF at their Ludwigshafen facility. There's some inklings, and at least speculation within the market, if this could lead to further rationalization. But generally speaking, I would say the market reflects the views of our analysts that things are rather up in the air. But certainly, more capacity does need to be taken offline. So the question, as you kind of alluded to, Rob, is really surrounding where not if further capacity will be rationalized.

Rob Westervelt:

Ian, anything more to add there?

Ian Young:

I've heard that there are pockets of Europe where the ethylene balances with derivatives doesn't bode well for continued production and the UK is one of those. There's a couple of crackers here at Grangemouth and Mossmorran and apparently, that those plants are not operating at high capacity. At the moment, not high operating rates. Does that mean either of those will close? It's very hard to say. And also, in certain parts of Europe like Southern Europe, France, Italy, places like that, there are more complicated social issues with closing a huge petrochemical complex. It's hard to negotiate the layoffs of a lot of workers and create unemployment in an area. So it's not just an economic decision in some parts of Europe, it's a social decision too. So that complicates any rationalization plans.

Rob Westervelt:

Where can Europe compete and grow over the long-term? As companies lay out their longer-term strategies, where are they going to place their bets, so to speak? Ian, any thoughts there?

Ian Young:

Clearly, renewable and circular products are a huge innovation opportunity and the petchem industry realizes this. Obviously, there wouldn't be an energy transition without a petrochemical industry to invent and supply the products that can enable it. But it's a question of spending heavily on R&D during a big crisis. Where will the money come from? And Europe doesn't have a good track record of commercializing its innovation. Something like 70% of the chemical plants using clean technology are in Asia, but 70% of the R&D that went into developing those technologies was in Europe. So Europe needs to up its game in terms of commercializing its technological breakthroughs. But yes, looking to the future, renewable and circular products are the big opportunity for Europe.

Rob Westervelt:

Aleksandra, on the aromatics side, is there any hope, so to speak? Where are the aromatics chain? Are there areas where Europe can be competitive-

Aleksandra Zhagrina:

Well-

Rob Westervelt:

... and even possibly grow over the longer term?

Aleksandra Zhagrina:

Yeah. I think, interestingly, we don't... It's quite an outback situation at the moment, because we recently saw that some restrictive regulatory measures we're taking in Northwest Europe, to be more precise in Amsterdam, Rotterdam, Antwerp region, where Belgium gasoline blending regulation was implemented following Netherlands.

They put a cap on benzene content at 1% for West African exports and it's an opportunity at the moment. And traders and vendors are just discussing where potential shifts could happen in trade flow. Some of the locations that are named are Spain, Malta, Cyprus, but there's also Eastern Europe. So it's very much in progress. There is nothing clear at the moment. It means that the European benzene market is experiencing high volatility. And additionally, Dan got the refinery starts in operation. So it's a pretty unclear situation for the European benzene value chain and we're yet to see what's going to happen.

Rob Westervelt:

Daniel, I was [inaudible 00:17:49] discuss here around circularity and sustainability. I mean, what's your view? Is that a competitive advantage that can be exploited in Europe?

Daniel Pelosi:

I think it certainly is. And not just at the conference across the year, quite a lot of conversations with sources have been focused on the ways in which Europe can push this drive towards sustainability. It typically is seen as the region which is the furthest ahead. I was having a conversation with one seller of intermediates material who was saying that the only region they can move circular intermediates into is Europe.

There certainly are areas there that allow for increased competitiveness or advantages in what is quite a difficult environment. I think the key issues here for European players specifically, really is affordability and scalability. Quite a common comment we have is that demand for such materials is not an issue. The issue is the supply of such volumes on the market, the ability to provide consistent and non-variable qualities of these materials on a reliable basis to consumers who desire such product. But also, affordability. We continue to see bio-based materials quoted at up to two to three times the price of their fossil-based counterpart. And until that happens within the current economic environment, simply speaking, affordability concerns are going to be the main focus of the consumer and that prevents any wholesale commoditization of the sector as a whole.

Rob Westervelt:

Ian, we'd stick with this point. What are you seeing? You mentioned the level of investment needed. Are companies start to take those steps around looking to sustainability and circularity as a competitive advantage in Europe?

Ian Young:

Well, Robert, I think they're doing it where they can. I think they're doing it where they can afford to. At the moment, the technologies are new and the volumes are pretty low. So there's a long way to go for these new products, even if it's recycled plastics, to make inroads into the markets. And a lot needs to change. For example, with plastic recycling, Europe needs a sufficient supply of plastic waste to scale up production and this involves regulatory changes at the EU level, for example, to take a mass balance approach to recycling.

And also, just for the cross-border shipments of plastic waste which are not permitted right now, I understand, even within the EU. And so, sustainability is a double-edged thing. The industry is very concerned. It's a big opportunity, but the industry's concerned that the weight of European sustainability regulation is making Europe even less competitive. There's the European Green Deal and the linked EU chemical strategy for sustainability, which is going to cost the EU chemical industry billions to comply with. And it also threatens the phase out of production of certain chemicals in Europe, because they're considered too hazardous or they're overregulated. There are two sides to the sustainability coin for European companies: the opportunity and the cost.

Rob Westervelt:

And as we start to wrap it up, I'm curious, from each of you, what stood out from the meeting or what surprised you? Daniel, what stood out for you as your takeaway from the meeting?

Daniel Pelosi:

Yeah. For sure. I think to end on a slightly more positive note, what really stood out was the consensus on outlook across market participants. So I think back to the conference in Vienna last year where we saw real divergence in forward-looking market interpretations, some were suggesting a recovery was imminent in six months or so. Others were suggesting that we'd be looking to the end of the decade or questioning the long-term viability of the European industry. This time around, I think there was much more agreement and realistic interpretations of the year ahead. Generally, as mentioned before, consistency on the year, ongoing difficulties with supply and demand. But more so, a clearer roadmap for recovery for the industry as a whole within Europe. And I think that's certainly a positive that a lot of players can reflect on and take into 2025 as the markets continue to evolve.

Rob Westervelt:

And Ian, what stood out for you?

Ian Young:

On a more optimistic note, I sensed to a greater willingness within the industry to collaborate and cooperate, along and across value chains, to address these massive challenges that the industry faces. I think the industry's known for a long time that the old ways of operating just won't work in the new climate and I sensed that just a greater acceptance that this has got to happen. The industry has finally recognized that not one company can do it all alone.

And I think there's also some hope that the EU, the European Commission, is listening to the industry, listening to its concerns. We had the Draghi report recently on European competitiveness and there was the Antwerp Declaration earlier this year. The Antwerp Declaration for an industrial strategy in Europe that was accepted by Ursula von der Leyen. I think there is some hope that there may be recognition on the part of the EU authorities that the industry needs some sort of regulatory support if nothing else. But these are early days, there's a brand new European commission. So we'll see how they'll view the chemical and petrochemical in industry in Europe and its value going forward.

Rob Westervelt:

Aleksandra, what was your big takeaway?

Aleksandra Zhagrina:

I guess on my side from aromatics, the topic of regulation is also quite big. For instance, we recently heard about EU voting in favor of increased tariffs on China-made electrical vehicles and its imports. And at the moment, we see kind of a mixed use on this implementation because some sources are saying that the industry is really dependent on free trade and producers could anticipate countermeasures that could harm their sales in China. While others say that it's potentially a positive kind of measure, a productionist measure, and could bring some positive sign of recovery for the automotive industry in Europe.

Rob Westervelt:

Aleksandra, Ian, and Daniel, thank you for sharing your insights on Europe at this critical time for the sector. And for up-to-the-minute insight from S&P global Commodity Insights on what's happening in Europe and across the global chemical sector, you can always access the latest pricing, news, and analysis on the web at Platts Connect as well as chemweek.com. I'm Rob Westervelt for The Chemical Week Podcast. Thank you for listening and joining us today.