BMI View: Most petrochemicals producers are now over the worst the economic crisis could throw at them, although the potential for economic shocks remains and BMI does not expect any strong growth in 2013. However, the process of consolidation and restructuring is not finished , even though it is unclear where the axe will fall next. It is hoped the industry might return to pre-recession operating rates in 2013, although it is clear that some old, inefficient and smaller facilities have now been taken offline. Many plants are too small to compete against new world-scale facilities in the Middle East and Asia, which have an advantage because they have access to cheaper ethane feedstock and enjoy lower operating costs. The decline in production will also be exacerbated by the long-term fall in demand from petrochemicals-consuming industries - notably the automotive sector, which is not expected to record pre-recession rates of production over the next five years.
|Western Europe Petchems Market Ratings|
|Country-Specific Scores (out of 100)|
Risk Remains The Main Determinant Of Ratings
As a mature market, Western Europe has relatively low capacity petrochemicals plants that often lack integration with feed sources and downstream consumers. This puts the region at a disadvantage in an increasingly competitive global market dominated by large-scale production facilities, particularly in the Middle East and Asia. Western Europe's strengths lie in diversity in high value and specialist products rather than basic chemicals. As such, a low petrochemicals score based on basic chemicals product volumes does not necessarily indicate a lack of competitiveness.
The West European regional ratings table is heavily influenced by modest changes to country risk factors, particularly financial, external and institutional risk. It is these scores that have had the biggest influence on BMI's petrochemicals ratings over the past year as markets have been exposed in varying degrees to the recession and the eurozone sovereign debt crisis.
According to the European Chemical Industry Council, labour account for 14% of the cost of chemicals production in the EU and this is a major competitive disadvantage . Countries such as China and India, where labour costs are far lower, will have a significant advantage unless European producers can use advances in technology to their benefit. However, political issues will make it more difficult for producers to restructure as aggressively as they would like, which could mean some loss-making plants remain operation al over the medium term. Meanwhile, there has been no new cracker construction in the EU for nearly 20 years and none is planned, which means the industry is, at best, treading water .
|Percentage Change In Risk Scores, Q213/Q113|
|Germany Makes Biggest Gain, But Belgium Is Biggest Loser|
Germany: The Undisputed Leader
This quarter, Germany has improved its standing as a result of the industry's relatively strong performance and ability to adapt to adverse circumstances. A high level of value added, sophistication and diversification ensure that chemicals producers based in Germany will continue to offset their sales losses with export growth outside Europe. Key growth drivers are high-end specification plastics and speciality chemicals. This should, in due course, spur investment into the expansion of existing capacity and boost research and development, with a focus on German operations. As a result, Germany's risk rating rose 1.4 points this quarter, leading to a 0.4 point increase in its overall petrochemicals rating.
Germany's robust and highly diversified petrochemicals sector and its economic strength ensure that its first-place position in the ratings will go unchallenged over the medium term. BMI believes that although Germany's score is unlikely to change dramatically (with no major basic petrochemicals capacity additions planned), as there is little new capacity coming onstream elsewhere in Western Europe over the forecast period, it should retain its lead.
France: Vulnerable To A Future Downgrade
Belgium and France are the most vulnerable because they lack diversification and value-added production relative to Germany and the UK. However, the main challenge for France will come from producers in Eastern Europe, particularly Poland, which enjoy lower costs and have undergone - or are undergoing - a period of healthy consolidation and restructuring. However, when infrastructure projects and investment in the polyester chain are complete, Belgium may yet recover its position in BMI's West European ratings table at the expense of France.
BMI believes that in the short term the French petrochemicals industry is set to enjoy some modest upside, with market conditions likely to prevent the kind of contraction seen in the UK - although they will not deliver growth. Consequently, France's risk score rose 0.7 points this quarter, causing its overall score to grow 0.2 points. The French petrochemicals industry is undergoing a process of restructuring, with producers streamlining production and closing small-scale basic chemicals and derivative plants that cannot compete with the world-scale facilities developed in the Middle East and Asia. Unless producers diversify, specialise and improve efficiencies, the country risks losing its third place position.
Suffering protracted economic stagnation, increased political uncertainty and further plant closures, the UK is the most vulnerable country, with its risk rating down 1.5 points and overall score having fallen 0.4 points. As such, it remains in fifth place, constrained by deteriorating market risk factors as well as the relatively poor long-term political and external risk ratings.
Suffering because of punitive austerity measures, last-placed Spain is also at risk of a downgrade, especially in the event of a debt default. However, it has managed to maintain its score this quarter. Although there has been a resumption of activity in the polyethylene terephthalate (PET) segment, the overall outlook is poor, as recovery will depend on the revival of external markets, a scenario that BMI thinks unlikely until H213 at the earliest.
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