Thursday, 8 September 2016

Petrochemical Industry in Asia & FSU: Somebody Loses, Somebody Wins...

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.

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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