Cautious optimism

It could, however, be a potentially pivotal year for the European chemicals industry, with lower feedstock costs in upstream petrochemicals, minimal inflation and increased competition driving down sales prices and allowing, in some areas, for the retention of higher margins.

It could easily be a make or break 12 months for Opec as it’s largest exporter Saudi Arabia battles to drive US shale producers out of business by keeping the crude oil production taps open to maintain its dominant market share of Opec output.

Crude oil prices slumped to their lowest levels for almost seven years in December 2015 following a fractious and largely inconclusive meeting of Opec oil ministers.  Not only did the world’s major oil exporting countries fail to agree individual production cuts in the face of a large oversupply of crude but for the first time in decades they abandoned even a nominal group output ceiling.

By ditching the widely flouted overall ceiling of 30m barrel/day (b/d), Opec effectively declared a free for all among its members, with predictable results.

In the run-up to Christmas, the spot price of Brent crude fell by around 5% to just under $40/barrel, its lowest level since February 2009 and almost 65% below the June 2014 peak of $115/barrel. West Texas Intermediate slumped by nearly 6% to just under $38/barrel.

Commodity traders warned that global oil storage was already near to capacity and short-sellers of crude were in abundance. They added that most of the signs were pointing towards further falls in oil prices as Iran was poised to add some 500,000 b/day to Opec output in 2016 when international sanctions against Teheran are due to be lifted. There is also another potential 1.5m b/day of Iranian crude to come before it reaches pre-sanctions level of 4m b/day.

Opec’s disarray and the continuing glut of oil on world markets prompted energy investment analysts at Goldman Sachs to predict that global crude prices could spiral down to $20/barrel in 2016. It pointed out that Opec members had already been pumping at least 1.5m b/day beyond their former ceiling.

Saudi Arabia and Iran refused to accept proposals for output cuts from Opec members like Venezuela and Nigeria that are desperate for much higher oil prices to repair ravaged economies and fulfill public spending commitments. Neither of the two Middle Eastern producers are prepared to lose market share, while Saudi Arabia’s oil policy is also driven by a desire to curb rising American oil and gas output by undermining the economics of fracking.

Lower energy prices have traditionally been viewed as good for world trade growth and, on balance, beneficial to petrochemicals demand and profit margins. But the further away from the barrel, the weaker the influence of cheaper crude, and the evidence of 2015 showed that cooling demand from China had almost as much influence on petrochemical prospects as cheaper feedstocks.

At the turn of the year, though, no-one was pressing the panic button. In it’s annual review and outlook just before Christmas, the American Chemistry Council (ACC) forecast world chemicals output including pharmaceuticals by volume will rise by 3.3% in 2016, up from an estimated 2.8% increase in 2014.

It sees global chemicals production accelerating by 3.7% next year before easing down over the following three years to an annual growth rate of 3.2% in 2020 and an average of 3% in 2021-2025.

All major chemicals segments are expected to share in the forecast growth in 2016 and over the following four years. Man-made fibres and plastic resins are forecast to lead the pack this year, with expected growth rates of 4.3% and 3.9%, respectively. Output of pharmaceuticals and bulk petrochemicals and organics is expected to grow by 3.5%. Not far behind will be specialties at 3.2%.

The ACC’s forecasts, finalised just ahead of the December Opec meeting, assume a 2.9% rise in world gross domestic product (GDP), a 3.1% increase in industrial production and a 3.4% growth in consumer prices in 2016.

Overall, US chemicals output is forecast to rise by 2.9%, compared with an estimated 3.6% increase in 2015. However, the ACC predicted  production will surge by 4.% in 2017 and continue to grow strongly to 2020.

‘With the development of shale gas and the surge in natural gas liquids supply, the US has moved from being a high-cost producer of petrochemicals and resins to among the lowest cost producers globally,’ said the ACC. It added that the shift in competitiveness was boosting export demand, driving significant flows of new capital investment towards the US and promising an increase in demand for new, high-paying chemicals jobs towards 2020. 

US chemicals exports by value actually fell slightly in 2015, to $185.9bn from $191.3bn in 2014, according to ACC figures. It blamed lower growth in export markets and the high value of the US dollar. However, exports are expected to jump by 5.4% in 2016 to $195.9bn and grow by almost 6% in 2017 to $207.4bn. The stronger dollar, though, was a factor in the 5% rise to an estimated $206.6bn in chemicals imports in 2015. The ACC expects US chemicals imports to grow at a similar rate in 2016, to $217.0bn.

Capital spending in the US chemicals industry was up a massive 18.4% at $39.58bn in 2015, according to ACC estimates, and is forecast to grow by 7.5% to $42.53bn in 2016.

‘These investments will capitalise on the profound and sustainable competitive advantage enabled by shale gas development,’ it added.

Among the new customers for US shale gas exports, of course, is Ineos. It expects to begin receiving tankers with liquefied gas supplies at its new Grangemouth, Scotland ethane import terminal towards the end of 2016. Ineos has pledged to invest some $450m at Grangemouth, much of it on the new terminal and preparing the huge KG ethylene cracker to run on fracked US gas and, in the much longer term, on fracked British gas from Ineos’s own onshore exploration acreage.

In November 2015, Ineos signed a long-term deal with Exxon and Shell to supply ethane to their Mossmorran, Fife ethylene plant.

The ACC forecasts output growth in all major chemicals producing countries this year and next, led, unsurprisingly, by China, India and the Asia Pacific region in general. Chinese chemicals production is expected to grow by 7% in 2016, up slightly from an estimated rise of 6.5% in 2015. India isn’t far behind, with production forecast to expand by 6.7% in 2016, from an estimated 4.9% last year. The Asia-Pacific region is forecast to grow output by 4.8% in 2016, up significantly from 3.3% in 2015. If Japan is excluded from the figures, however, the rate of Asia-Pacific growth will total 5.8%.

Although the ACC doesn’t provide a breakdown by individual country in Africa and the Middle East, it expects these regions to boost their combined chemicals output by 3.7% in 2016, down slightly on the estimated growth rate of 4.1% in 2015.

Chemicals production in central and eastern Europe grew strongly by 4.7% in 2015, thanks to a 7.5% surge in Russian output, according to the ACC. This year, however, Russian production is forecast to rise by just 2.2%, dragging down the overall pace of expected central and eastern European output to 3.1%.

The rate of growth in Western Europe chemicals production eased to 2.4% in 2015, compared with 3% in 2014, according to the ACC outlook. And output is forecast to rise by only around 2% in 2016, and for the following four years.

Belgium and Germany are expected to boost chemicals output–including pharmaceuticals – by 2.9% and 2.3%, respectively, in 2016, with France just behind on 2.1%. Germany’s BASF, the world’s largest chemicals company on most measurements, admitted that for much of 2015 growth in the global economy, industrial production and the chemicals industry remained considerably below its expectations.

In downgrading its expectations of full year group sales and income from operations before special items, BASF said the economic environment clouded over in important emerging markets, especially China.

ACC sees UK chemicals and pharmaceuticals production rising by only 1.6% this year, below the expected western European average of 2%. The UK Chemicals Industry Association (CIA) takes a rather more cautious view. Stephen le Roux, head of economics, said that the CIA expects UK chemicals output including pharmaceuticals to grow by only 1% in 2016, down from an estimated 2.5% in 2015. Most of the forecast growth will come from chemicals, where production is expected to rise by 2%, compared with just 0.5% in pharmaceuticals.

In 2015, British chemicals output surged by an estimated 5.5%, compared with 2014 but pharmaceuticals production growth was only 0.5%, according to the CIA.

However, as Steve Elliott, CIA chief executive, commented: ‘This was the first year we’ve seen growth in both chemicals and pharmaceuticals since 2008.’ The significant improvement in output in 2015 was achieved, to some extent, at the expense of weaker profit margins. UK chemicals exporters to Europe were obliged by the strong pound-to-euro exchange rate to trim margins.  The current exchange rate is seen as particularly detrimental to UK fine and specialty chemicals exports to the Eurozone. However, the strong dollar helped boost the UK chemical industry’s competitiveness in the US in 2015 and is expected to help fuel further export growth in 2016.

‘In 2016 we see many of the fundamentals that supported growth to remain in place but the risks that growth may underperform have increased,’ said the CIA.

Among these risks are a slowdown in emerging economies, including China and Brazil, that could limit expansion in key chemical customer sectors such as automotive, agriculture and personal care.

The CIA added that, despite broad but cautious optimism about the future among many of its members, continued expansion of the UK and European automotive industry, a large user of chemicals, was highly uncertain.

Concerns about economic growth rates and chemicals production in 2016 in China and Brazil are only partly reflected in the ACC’s outlook. It sees Chinese gross domestic product falling from an estimated 6.8% in 2015 to 6.4% in 2016. Output growth from the Chinese chemicals industry is forecast at 7.0% in 2016, against an estimated 6.5% rise in 2014. However, production growth is seen as falling to 6.6% in 2017 and slowly declining thereafter to 5.8% in 2020.

Brazil’s economic slump has serious implications for the agro and automotive chemicals sectors in particular. GDP was down 2.7% last year, according to ACC figures, and is seen as shrinking by another 1.2% this year. Given the further collapse in iron ore prices along with other key global commodities over the last few months, this forecast is likely to underestimate further Brazilian economic contraction.

Brazilian chemicals production, which shrank by an estimated 4.4% in 2015, according to the ACC, is forecast to grow by 0.8% in 2016 and achieve a substantial recovery to a growth rate of 2.9% in 2017.

On the political and legislative front, 2016 is likely to be dominated in the UK by negotiations over the terms of EU membership, energy costs and security of supply, better regulation and the industrial emissions directive.

The CIA has so far kept a very low public profile over the UK government’s efforts to renegotiate the terms of Britain’s EU membership and its plans to hold a referendum this year or next on whether it should remain a member. However, it said the referendum was a matter for government and individual citizens, adding: ‘For an internationally exposed industry such as chemicals, the free movement of goods and services, capital and people as well as proportionate regulation are critical success factors in terms of global competitiveness. Irrespective of the outcome of a referendum, these success factors remain constant.’

CIA’s Elliott wouldn’t be drawn any further into the debate over EU membership before the outcome of Britain’s renegotiations had been published. But most observers expect the industry’s traditional support for continued membership to find its voice once the referendum date is announced.