(EnergyAsia, March 11 2011, Friday) — For 2011, the petrochemical industry faces the threats of rising oil prices and global economic uncertainties, according to the Petrochemical Profitability Forecast prepared by energy solutions consultants Nexant Inc.

The report said that while petrochemical profitability improved considerably last year, the outlook for the sector depends on many factors beyond the control of producers.

Global demand will be weighed down by crude prices at more that US$100 per barrel, high unemployment and mounting deficit in national accounts.

The San Francisco, US-based consultants predicts that in the short term, the markets will face additional supply as major new capacity is commissioned in Asia and the Middle East.

Crude oil projections

The report said crude oil prices and the global economic outlook have the greatest influence on the petrochemical industry. Oil prices directly affect the majority of petrochemical feedstocks while strong economic growth stimulates consumption of petrochemicals, increasing demand and allowing producers to raise prices and support higher margins.

Given the extreme volatility and uncertainty in crude oil prices, the report presents three scenarios: a low case with oil prices at US$45 per barrel, a medium case at US$70 per barrel, and a high case close to the 2009 peak at US$110 per barrel.

While the global financial crisis caused the world economy to contract for the first time in more than 30 years in 2009, most economies swiftly resumed growth in 2010, with restocking along the supply chain supporting firm growth.

Nexant’s revised growth outlook sees major markets achieving only flat growth in 2011 as short term benefits of restocking elapse.  Economic growth forecasts project an eight-year economic cycle with the next peak not expected until 2013.

Supply demand outlook

The report said the global economic downturn in 2008 depressed demand for principle olefins (ethylene and propylene) by almost nine million tons, when tight credit markets delayed some investment in new capacity and distressed markets prompted some closure of high cost capacity. However, an average of five million tons per year of new olefin capacity still entered the market in 2008 and 2009.

Nexant predicts that capacity addition will continue to exceed incremental demand growth through 2011, with major capacity developments in the Middle East and petrochemical projects in Asia coming onstream over the next few years.

The report said that operating rates will remain heavily depressed in the near term due to the considerable cumulative excess capacity built since 2008.

Profitability projections

Nexant said profitability suffered in 2008 as producers were exposed to record high feedstock costs and demand slumped in recession-hit western economies. Average production rates dipped below 75% at the end of 2009 and the extremely long market depressed profitability to its lowest for more than two decades in 2009.

Despite average margins improving steadily through 2010 with capacity rationalisation and firming demand, the report says average production rates remain well below the long term average.

Nexant predicts many petrochemical producers will be exposed to lengthy markets and depressed margins in the near term, with global ethylene operating rates set to remain below 90% until 2015. Western producers will face the dual pressures of low cost imports from the feedstock advantaged Middle East, and considerable erosion of historic export opportunities in Asia.

The report showed how linear low-density polyethylene (LLDPE) prices eased from a peak in the mid-1990s as lengthening markets depressed margins, bottoming out in 2002 amidst growing competition from Middle East producers.

Prices then increased steadily through to 2004 as firm demand lifted margins to a peak, rapidly escalating in the latter part of the decade to a record high in 2008.

A swift erosion of margins and costs then reduced prices from their peak in 2009.

Nexant predicts costs to remain at the upper end of their historic range, and explains that the outlook for prices will be determined by the rate of recovery in profitability.