Abstract
Petrochemicals had passed a nadir in mid-2009, but BMI’s latest UK
Petrochemicals Report forecasts
that it will take some years for output to
recover to pre-recession levels and during that time some plants
will be
permanently shut with potentially devastating consequences for entire
production chains.
The chemicals and man-made fibres industries appeared
to buck the trend in the three months to May
2009, according to the Office
for National Statistics. While overall manufacturing dropped 1.2%
compared
to the previous three months, chemicals and man-made fibres recorded a 2.2%
increase.
UK manufacturing in April increased 0.2% month-on-month (m-o-m)
driven by chemicals and man-made
fibres, which represent about 11% of
British manufacturing and increased 2.3%. Although output was still
down
compared to the previous year, the consistent upward trend in chemicals should
serve as
encouragement to UK petrochemicals producers. BMI attributes a
large part of the increase in output to
complete destocking by
petrochemicals consuming industries.
Nevertheless, the gloom has yet to
lift from the industry with BMI expecting the challenging conditions
to
persist through the year and for British producers to report lower cash flows
in the short to medium
term. The effects of the recession could have a
long-lasting impact on British petrochemicals with
downstream producers
severely affected by a reduction in UK-based feedstock. In July 2009, Dow
Chemical announced it would close the UK’s only ethylene oxide/ethylene
glycol (EO/EG) plant
at Wilton on Teesside in January 2010. Dow’s
other Teeside operations are unaffected by the EO/EG
plant closure. The
loss is expected to have a negative knock-on effect across the sector,
prompting
Croda to announce the shutdown of its speciality chemicals
plants on Teesside in January 2010. Artenius
and Petroplus could also cut
back capacity. Already, Artenius’ 500,000 tonnes per annum (tpa) PTA
plant
at Wilton has been idle since March 2009 and Petroplus announced in
February it would sell its Teeside
refinery. The decision could have
implications for Sabic, which supplies ethylene to Dow from its Wilton
cracker. The loss of supplies to Dow will be partly offset by Sabic’s
400,000tpa LDPE plant at Wilton,
which is due to come onstream in H209 and
will eventually consume half the cracker’s nameplate
capacity.
However, the vertical integration of the Teesside chemicals industry, which
made it highly
efficient during the good times, is now faltering.
Orders are expected to be erratic as customers remain cautious amid the gloomy
economy, which is likely
to translate into lower utilisation rates.
Well-capitalised companies are the best positioned to withstand
this
period of unpredictability, while those with high levels of debts could
potentially face the threat of
bankruptcy or become acquisition targets.
The rest of the petrochemicals industry is facing the same
challenges, but
the outlook for UK producers is particularly grim as the UK does not appear to
making
much headway in jumpstarting its economy. We have revised down our
UK real GDP forecast for 2009
from -3.5% to -4.2%, and have left our 2010
forecast at 0.0%. The dire Q109 numbers have been a major
driver behind
our revisions, and we also note the ongoing increase in the volatility of real
GDP growth.
Manufacturing will be hardest hit, while the construction
industry will contract markedly with the
collapse of the housing market.
We believe it will take until 2012 for the UK to post above-trend growth
of 3.0%. The strongly pro-cyclical nature of the UK petrochemicals industry
means that it could post a
fall of 8-10% in production volumes in 2009.
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