The title of the article may leave an
attentive reader thinking why Asia and FSU – after all, there are other regions
that house petrochemical production.
Firstly, we picked FSU for our review
since it is the region in which Euro Petroleum Consultants (EPC) has been successfully
providing consulting services for over 20 years now. The local petrochemical companies
approach EPC when they are looking to improving implementation standards for their
revamp projects as well as achieving operational excellence – over time EPC has
gained in-depth understanding of local industry subtleties.
Secondly, we selected the Asia
region for its importance as a major Petrochemical hub and also for the fact
that EPC will be holding in October the 5th Asia Technology Forum for Refining& Petrochemicals, this time in Bangkok.
In addition to this there is one
thing that these two regions have in common in terms of petrochemical industry
– namely, the type of feedstock used. In both regions, the majority of plants process
liquid hydrocarbon feedstock (LPG, naphtha) rather than gaseous feed (ethane).
Recently we have seen, that petrochemical
producers that use liquids as their feed, have entered a sort of Renaissance
era. It all began in the middle of 2014 when price of oil, that had stayed high
for about ten years reached an interim maximum of 115 $/bbl and then started
plummeting with Brent prices hitting unprecedented low levels.
It was only natural that the slump in
oil price caused petrochemical product prices to erode also, albeit not as dramatically:
while Brent prices went down by more than 70% in the period from 2014 to
January 2016, petrochemical product prices only fell by 40% - the estimate
based on movement of Global IPEX, the index that ICIS calculates based on a
basket of 12 essential petrochemical products.
Consequently the petrochemical
producers working on liquid feed enjoyed a cost advantage so high that it
became possible for them to grasp leadership from their gas processing competitors.
Taking a look at the Petronas Chemical
Group (PCG) with 25 member-companies and total combined production capacity of
over 10 million tpa of chemical products. For the purposes of our analysis it is
most interesting to focus on results demonstrated by Olefins & Derivatives
(O&D). It is represented by two integrated petrochemical complexes in
Malaysia: an ethylene production facility (steam cracking of liquid feed) with
capacity of 1 million tpa and a propylene facility (propane dehydrogenation) with
capacity of 0.3 million tpa.
The first thing that is brought to
our attention is the increase in capacity utilization that occurred right after
oil prices went down: thus in the first six months of 2014 capacity utilization
amounted to 81%, while in the second six months of 2014 and through 2015 the
indicator amounted to 93%. It is also worth mentioning that EBITDA margin went
up quite substantially – previously in the 26-31% range in the first six months
of 2014, while in Q3 of 2015 it reached 39% – a peak value since 2011 (see
Figure 1.)
Figure 1 – Quarterly financial performance indicators of PCG O&D in
2014-2015
Source: company data.
FSU petrochemical market players are
also part of the trend. Naphtha and LPG being conventional feedstock for the
local petrochemical producers, everybody expected them to benefit from the fall
in oil prices – and indeed they did! To bring just one example, let us have a look
at PJSC Nizhnekamskneftekhim, a major petrochemical producer with a broad
product range that includes plastics, rubbers, organic chemicals, etc. and the
core of petrochemical production – the 0.6 million tpa ethylene facility.
Figure 2 - Quarterly financial performance indicators of PJSC Nizhnekamskneftekhim
in 2014-2015
Sources: company data, ЕРС analysis.
In analysing financial performance of
Nizhnekamskneftekhim (see Fig. 2) one should notice how rapid is the growth in
return on sales: in early 2014, when oil prices were still high, it amounted to
8-9%, in 2015 this indicator reached 18-20%. Another observation: despite the fact
that the global markets saw a decrease in price for petrochemical products, the
company’s revenue and operating income keeps growing. This comes as a result of
national currency devaluation – Russian ruble depreciated more than two times.
These, however, are results of 2015.
How are the markets evolving for petrochemical industry in 2016?
Firstly, feedstock prices have stabilized: after a brief period of lowest price levels – less than 30 $/bbl – seen in January and February of 2016, Brent prices have started to recover – all through Q2 of 2016 Brent traded at 40-50 $/bbl.
Firstly, feedstock prices have stabilized: after a brief period of lowest price levels – less than 30 $/bbl – seen in January and February of 2016, Brent prices have started to recover – all through Q2 of 2016 Brent traded at 40-50 $/bbl.
Naturally a similar progress was
observed in prices for petrochemical products. Yet, unlike the pattern seen when
prices tumbled in 2014, this time, since the beginning of 2016, prices for
petrochemical products have increased much less than oil price.
However, the price differential between
feedstock and products remained significant enough for petrochemical producers to
retain their financial performance indicators. Thus, in Q2 of 2016 PCG O&D hit
its own record in EBITDA margin – it now equaled 41%, while Nizhnekamskneftekhim
increased its return on sales in Q1 and Q2 of 2016 so that it amounted to 22% and
17 % respectively.
At that, Q1, as stated above, had seen
the lowest feedstock prices and thus turned out to be “golden” with quarterly operating
income of 8.5 billion rubles – more than 3 times higher than in Q1 of 2014.
Quite possibly, it was the success
of 2015 that provided these 2 producers with the necessary confidence to go on
with capacities development.
Thus, Petronas continues construction
of the $27-28-billion refining and petrochemical integrated development (RAPID)
complex at Pengerang in Johor, Malaysia.
According to Colin Wong Hee Huing,
Petronas senior vice-president and chief executive of Petronas Refinery &
Petrochemical Corp. Sdn. Bhd. in June 2016: “We are now at the midpoint of the
project schedule and are on track towards achieving the overall [RAPID] startup
in the first quarter of 2019."
Upon startup of RAPID complex, O&D
segment of PCG will grow its production by 3.5 million tpa and thus gain
leadership position among polypropylene and MEG producers of South-East Asia.
As for Nizhnekamskneftekhim, in
November 2015 the company announced that it had entered the detailed design
phase for a petrochemical complex that would require, according to the latest
estimates, investment in the region of $8 billion. The project is to be realized
in two stages: the first stage consists in constructing a 600 ktpa ethylene
production complex to be launched in production before 2020, the second stage
is construction of a similar capacity complex before 2025.
The plan for the first stage is to produce
300 ktpa of polyethylene, 180 ktpa of polypropylene, 200 ktpa of polystyrene
and 270 ktpa of other derivatives.
Upon completion of the second stage it
is suggested to produce 600 ktpa of polyethylene, 180 ktpa of polypropylene, 200
ktpa of polystyrene, 93 ktpa of MDI and 155 ktpa of propylene derivatives.
The current macroeconomic environment
is undoubtedly very favourable for petrochemical producers operating on liquid feed,
yet one should bear in mind that the environment may well change time and again:
nobody knows what the future holds in terms of feedstock prices, how the
product prices would respond to global excess in capacity and global economy
slow-down, etc.
Since all these uncertainties are potential
challenges, they should prompt the producers to work on boosting their competitiveness
not just through capacity expansion but also through operational excellence,
which will also be discussed at our upcoming Asian conferences in Bangkok.
Valentin Kotlomin
Director, Strategic Studies & Downstream Economics,
Euro Petroleum Consultants
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