- Fall in prices of the main inputs
- Robustness of US demand
- Specialty chemicals less dependent on the economic situation
- Strong dependence of base chemicals on the economic situation
- Overcapacity in China
- Increase in ethylene production capacity
Naphtha and ethane prices
Although they are still at relatively low levels, the prices of the main inputs used in the production of chemical products (Brent, natural gas, naphtha) recovered in the second half of 2016.
The low cost of the main raw materials is providing some relief for European producers, particularly the naphtha price. Activity nevertheless remains below the sector’s potential and has failed to reach the 2006 level, the record year for production and consumption.
US petrochemical producers have until recently been able to take advantage of their access to inexpensive and abundant natural gas. That is still the case, but the fall in crude oil prices has enabled European producers that use naphtha to get back on their feet. However, US producers still have this comparative advantage.
A low naphtha price also helps Chinese producers. Nevertheless, the development of olefins via coal, which is abundant and inexpensive, is very capital intensive and puts significant pressure on the environment, in a context of overcapacity in some chemical industry segments, such as PVC (polyvinyl chloride).
Low crude oil prices have improved the margins of chemical producers that use naphtha, but without eliminating the comparative advantage of natural gas-based chemicals.
In Europe, low oil prices could continue to benefit chemical production in 2017. As a result, prices of naphtha, a derivative of crude oil and an input predominantly used in Europe, will follow the same trend. In 2016, production declined by 0.3% at the end of August and over eight months, still affected by competition from products from North America and the Middle East. European prices of naphtha, which serves as a raw material in petrochemicals, picked back up in 2016. While the increase in the price of this input is expected to erode corporate margins, it remains relatively low in relation to the levels reached in 2014. However, the continual decline in producer prices is worrisome because it reduces margins equally. According to CEFIC (European Chemical Industry Council), production prices fell by 4.8% at the end of October 2016 (over 8 months).
In the United States in 2017, demand is likely to provide opportunities for US producers. The price of ethane, ex-pipeline in Mont Belvieu in Texas, was 19.75 cents/gallon in mid-November 2016, versus 13.63 cents/gallon in mid-January 2016, a 45% increase. However, US petrochemical producers remain competitive, especially in olefins. The ratio of crude oil (Brent) to Henry Hub natural gas began to recover in January 2016, amounting to 17.8, still to the advantage of US petrochemical producers, and is expected to remain stable in 2017. Nevertheless, the segment is performing well in the United States, as the American Chemistry Council’s activity index continues to growth, but at a slower pace. For 2017, the chemical sector should slow down slightly, but without deteriorating credit risk.
China is suffering from overcapacity in petrochemicals, even though year-on-year production in this country was up 6.3% at the end of September. That is the case for polyethylene, PVC (whose capacity utilisation rate is around 60%), and methanol. In the medium term, the increase in production capacity in olefins, produced via coal, may dent the profitability of producers. Moreover, this technology requires significant consumption of water and capital and, above all, puts severe pressure on the environment, a sensitive issue in China. In 2016, close to 3/4 of the ethylene produced in China came from naphtha. The fall in crude oil prices has in turn been passed on to it, giving a boost to margins. In 2017, the Chinese chemical industry will continue to suffer from overcapacity, resulting in weak profitability. These difficulties on the local market should drive producers to export, copying what has been done in the steel industry since 2015.
Global demand for chemical products is likely to grow moderately in 2017, driven by North America and Western Europe.
In Western Europe, there is uncertainty in the chemical activity, symbolised by sluggish European growth and the fear of political unknowns (Brexit and Donald Trump’s election). Local chemical industrial production is largely geared towards the domestic market (75%). It will continue to be driven by non-durable consumer goods in 2017, since we expect 2.8% growth. The automotive sector seems to be doing well, with 34 consecutive months of rising new vehicle sales (+9.3% at the end of September 2016 over one year). However, together with industry, household consumption is the sector’s main driver.
The demand for chemical products in North America is expected to grow moderately in 2017. Coface expects US GDP growth of 1.8% in 2017, affected by a slowdown in household consumption. On the manufacturing side, we expect a contraction (-0.5%) of the growth of new vehicle sales in 2017, explained by the Fed’s raising of interest rates and a level of sales higher than before the crisis. As for construction, private housing starts, which had increased 2% year-on-year at end-October 2016, will continue to slow down in a context of normalisation of monetary policy.
In China, the construction sector’s outlook is in conflict with the chemistry sector: annual real estate investment growth at the end of October 2016 rebounded to 6.6% according to the NBS, but prices on this market could decline over 2017, as this sector is in an overcapacity situation, given that many homes are vacant. The Chinese economy’s slowdown is putting pressure on chemical producers’ profitability. They are suffering from financial difficulties related to their debt, tightening credit conditions, but also longer payment times, according to Coface’s annual survey on payment practices in China.
Last update : December 2016