Petrochemical companies in Europe and Asia are struggling to stay afloat as an oversupply in China and rising energy costs have squeezed profit margins for the past two years. This intense pressure has forced many firms to consolidate operations, shut down older plants, and retrofit facilities to cut costs.
Consolidation and Cost-Cutting in Asia and Europe
The global petrochemical industry, once a robust profit engine for the oil sector, is now grappling with the challenge of declining margins as the energy transition dampens demand for traditional transportation fuels. The glut in supply, primarily driven by years of capacity expansion in China, has created a difficult environment for petrochemical producers, particularly in Asia and Europe.
Major players in these regions are being pushed to the brink. In response, companies are selling assets, closing older plants, and retrofitting facilities to use cheaper raw materials like ethane instead of naphtha. Despite these efforts, the outlook remains bleak, with oversupply expected to persist due to ongoing capacity additions in the Middle East and China. This continued expansion, coupled with weak demand in China, has created a perfect storm for the industry.
According to consultancy Wood Mackenzie, around 24% of global petrochemical capacity could face permanent closure by 2028 due to weak margins. The industry is likely to see more consolidation in the coming years, particularly in Europe and Asia, where producers face the toughest market conditions.
Asia’s Struggles and New Market Pursuits
Asian petrochemical producers, already grappling with declining margins, face an even tougher challenge as some plants are tied to larger refinery operations. This integration makes it difficult for companies to shut down or sell loss-making units without impacting overall operations. Despite the losses, South Korean and Malaysian producers continue to operate at high capacity due to these constraints.
In Taiwan, Formosa Petrochemical has temporarily shut down two of its three naphtha crackers, while Malaysia’s PRefChem has kept its cracker offline since earlier this year. However, the broader Asian market remains under pressure, with margins for propylene production expected to turn negative in 2024.
As production continues to rise in the Middle East, China, and the U.S., Asian producers are increasingly looking to new markets such as India, Indonesia, and Vietnam to offload surplus supply. India, with its growing demand for polymers and chemicals, is emerging as one of the most attractive markets for petrochemical companies seeking to boost their margins.
In addition to exploring new markets, some Asian companies are turning to niche projects that focus on low-carbon and recyclable plastics. These greener products are expected to fetch higher prices as global demand for sustainable materials increases.
European Producers Adapt to High Costs
European petrochemical producers are also feeling the heat, with companies like Saudi Arabian Basic Industries Corp (SABIC) and Exxon Mobil Corp announcing plans to shut down plants due to high costs. SABIC is also retrofitting its European facilities to process cheaper feedstocks like ethane, which is priced relative to natural gas and is more affordable than naphtha.
Despite these efforts, the European market remains challenging, with poor demand and high production costs continuing to weigh on profit margins. LyondellBasell, a major player in the industry, recently sold its U.S. ethylene oxide and derivatives business and is exploring options for its European operations.
As the petrochemical industry navigates this challenging landscape, the focus is on survival. Companies must adapt to the realities of oversupply, high costs, and shifting demand if they are to remain competitive in the global market.
Source: Reuters
