European markets see plant closures: Is it the tip of iceberg?

The news that major producers including Sabic and ExxonMobil announced their plans to shut their crackers and downstream units last month in Europe was no big surprise to many players; however, it has triggered the questions of whether it is just the tip of iceberg and whether energy crisis along with economic slowdown will accelerate the process of rationalization or not.

Producers faced strong margin losses in the post-pandemic period, driven by higher production costs and a collapse in consumption. A quick return to the pre-pandemic norms is out of discussion. Hence, facilities suffering from low profitability have to go through industry consolidation and rationalization to adapt to the “new normal” considering new capacities and lethargic demand. Expectations call for more closures in the longer run as trimming run rates appears to have failed to pay off.

Producers strive to increase operating efficiency

Two major petrochemical producers – ExxonMobil and Sabic – decided to shut some of their facilities during 2024. Accordingly, a cumulative ethylene capacity of nearly 1 million tons/year will be phased out infinitely.

That will put pressure on operating rates at crackers inside Europe, which have been lowered a long while ago. To fill the gap left by closures, the utilization rates at European crackers may go up in the coming term. That is to say, more capacities should be shut permanently for other crackers to be able to ramp up to full rates.

But why are regional suppliers inclined to rationalize?

The announced closures of ExxonMobil’s steam cracker in France, and one of Sabic’s two crackers in the Netherlands in early April have not evoked a strong response in the market, while it set the stage for expectations that more consolidation or plant closure news may ensue. Unpromising growth expectations in Europe may even accelerate decisions for the consolidation of unprofitable assets.

The rationalization has been on the agenda for so long, considering old plants in Europe and high production costs, which have been exacerbated by the historically high energy prices amid geopolitical tensions and the COVID-19 pandemic. Supply glut from the US and China also contributed to the need for rationalization in Europe as imports have been providing a much more competitive edge. Europe is in a disadvantageous position in terms of feedstocks as it uses high-cost naphtha as the main feedstock against its competitors in the Middle East and US using ethane. Ethane crackers in the US provide cost advantage to PE producers, while Europe remains the most challenged with low ethylene margins and disappointing derivative demand.

Naphtha-based operators have been posting declines in margins more than their competitors using liquefied petroleum gas or imported ethane. It seems that high operating costs in Europe will lead to more closures of old and small-sized crackers.

“Our quarterly results indicate sharp losses in the polymer and base chemicals segments, even though overall earnings increased thanks to the strength of our integrated business model,” a market source reported.

Other closure news from the market

Some downstream units will also be shut permanently. Apart from its ethylene cracker, ExxonMobil plans to close its derivative units, PP and PE, at its Gravenchon site in Port-Jérôme-sur-Seine, France within 2024.

LyondellBasell will shutter its PP line in Italy, while Trinseo already shut its styrene units in Germany and the Netherlands.

Indorama and BASF are also among producers who are evaluating the closure of their upstream units amid low profitability and heating competition. They will shutter feedstock production in Europe and import them from Asia instead.

Is rationalization inevitable?

Having old crackers or downstream plants is high maintenance and does not comply with carbon emission reduction targets. The commission’s current targets are to reduce emissions by at least 55% from 1990 levels by 2030. Modernizing existing plants to meet market expectations is a lot costlier than the closure, while running old plants also raises production costs.

A major market source remarked, “It’s been well known that the time of the closure of ageing plants in Europe will come. Phasing out these capacities over the years had been planned nearly a decade ago as running plants built back in 1970s increases costs and puts a burden on producer margins. Producers face many glitches during restart processes, which makes it hard for them to resume operations shortly.”

Demand to provide the catalyst for a faster transformation

Looking from a broader perspective, weak demand for polymers and petrochemicals as a result of slow economic conditions was another culprit behind what is unfolding in the regional markets. Murky demand projections show that demand will provide the catalyst for more rationalization, although some argue that the Red Sea crisis and longer transit times from Asia and the Middle East may slow this process to some extent.

Meanwhile, there has been a shift in buying behaviour of European buyers, who increased their purchasing amounts from the import market in recent years. A player highlighted, “European customers were a bit conservative when it comes to procurements as they used to stick to the contract market. But this has changed since 2022, with non-European material offering a competitive edge amid energy crisis and economic slowdown. One can see that clearly from the import statistics.”

Another market source reported that demand shrank by 50% in 2023, while a recovery is not expected before 2025.

Europe relies on imports increasingly

The European Union has been a net importer for all polymers since 2016, while its dependence on imports will continue to rise, with the local production buckling under continuing macro headwinds and energy cost disadvantages of European plants vs. other areas.

As for the longer run, players shared no concerns about a tighter supply outlook as the gap will be filled with imports, considering excess capacities in global markets and their competitive power. Indeed, integrated producers having access to cost advantaged feedstocks outside Europe will export polymers into the bloc.

Some participants reported to have received PPH offers from the US plant. Confirming that lost capacities will be compensated by imports, a producer source said, “The world doesn’t rely on Europe for polymers. Market needs will be met from plants in the US, Mid-East, North Africa and South Korea.”

“Petrochemical production in the EU will fall obviously. The EU will buy polymers from Saudi Arabia and the US,” a trader opined.