Abstract
The deepening global economic downturn continues to batter the UK chemicals
industry, with BMI' s
latest UK Petrochemical' s Report anticipating
volatile market conditions in 2009 as the global recession
deepens.
Producers are feeling the impact of customers destocking amid a climate of a
consumer
downturn. UK petrochemicals firms are still feeling the ripple
effects of this shockwave of slackening
demand, and have idled plants and
announced plans to cut back investments. BMI expects the
challenging
conditions to persist through the year and for UK producers to report lower
cash flows in the
short to medium term.
The sector is suffering from
the shock of a dramatic fall in demand from construction, automotive,
textiles and other key markets. Consequently, producers are idling plants,
delaying new projects and
cutting back investments. As a result of the
market deterioration, high raw material costs and the
weakness of sterling
against the euro, a number of major petrochemical players operating in the
UK
reported weak results for Q109. In some segments such as PVC, firms
found it difficult to pass on rising
costs to consumers, in large part due
to over-capacity throughout Europe. However, the softening of
naphtha
prices in response to falling global oil prices has brought some relief,
particularly in segments
where the fall in price has not been as rapid as
the fall in costs. Moreover, for some majors Q109 saw
some modest
improvement on Q408 figures.
BMI believes that all the majors will see
their bottom lines adversely affected by the lower prices of
crude oil and
natural gas. Royal Dutch Shell (Shell) and BP both reported sharp declines in
profits for
Q109. With Brent crude averaging around US$44 per barrel (bbl)
in Q109 compared with US$97/bbl in
Q108, both companies attributed their
lower profits to the drop in crude prices. All the first-quarter results
reported so far, however, have exceeded analysts' expectations despite steep
falls in profits.
As part of its cost-cutting measures, BP intends to
reduce 2009 spending on petrochemicals. But it intends
to keep focusing
new investments in Asia, particularly China. Construction of a new joint
venture acetic
acid plant in Nanjing is expected to be completed in June
2009, with sales expected to commence in
Q309. Plans to add a new acetic
acid plant at a joint venture site in Chongqing are currently under review
due to market conditions. The plant was originally expected to begin operation
in 2011.
In the long term, UK producers are likely to face additional
pressure as an onslaught of new supply comes
online in the Middle East and
Asia. Asian markets are growing at a faster pace than European markets,
with new investments being targeted at China. Despite the predicted pick-up in
the economic situation
from 2010, BMI believes that the massive growth in
Asian and Middle Eastern petrochemicals capacity
will continue to depress
prices, possibly leading to the closure of some UK units.
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