Petrochem plants under pressure to utilise capacity

Alamy/Ashley Cooper

• Operating at 80% capacity
• Prices unlikely to rebound
• Margins under pressure

Petrochemicals plants are currently operating at just over 80 percent capacity, rates which must increase for the sector’s margins and product prices to improve, analysts say.

Saudi Basic Industries Corp (Sabic) is the world’s seventh largest chemicals manufacturer by sales, while both the UAE and Qatar have invested heavily in creating homegrown petrochemicals industries.

Globally, petrochemicals plants are operating at close to historic lows, says Oliver Connor, vice president of energy equity research at Citi in London.

“To be a healthy environment, this needs to be in the high 80s or low 90s,” Connor says.

“The low utilisation rate and ongoing oversupply are why the recent jump in oil prices had little effect on petrochemical prices. The correlation of oil to petrochemical prices has weakened.”

Polyethylene is the Gulf’s most important petrochemical product in terms of volumes and sales revenue. Utilisation rates at polyethylene plants are in the low 80s, down from 85 to 90 percent in 2021, says Yousef Husseini, director of chemical equity research at EFG Hermes in Cairo.

Monoethylene glycol (MEG) is another major product for the Gulf petrochemicals sector. Utilisation at MEG plants worldwide tumbled to under 80 percent before starting to rebound this year.

“When you hit 80 percent utilisation or below, you’re generally in a trough pricing environment,” Husseini says.

“Utilisation needs to increase for margins and prices to improve further. When you get to 85 percent or slightly higher, it’s what we call mid-cycle.

“Any time utilisation is 90 percent or more, it’s an extremely tight market, as at these levels, any unexpected shutdowns would create shortages in the market once one takes required maintenance shutdowns into account.”

• Second-half slide expected for Saudi petrochemical industry

• Saudi petrochems profits could rise but margin pressures persist

• Sipchem to build new $189m Saudi petrochems facility

Polyethylene margins bottomed out last year but remain under pressure, Husseini says. Global polyethylene capacity will increase about 4 percent this year, while demand has grown by a smaller amount.

MEG production capacity expanded by double digits each year from 2020 to 2023, causing its price to fall as supply outpaced demand. A 3 to 5 percent annual increase is typical, so this year’s 1 percent capacity growth led MEG’s price to recover somewhat. 

“Next year, polyethylene prices could make a similar jump to those of MEG this year, because capacity additions drop to only 1 to 2 percent in 2025,” Husseini says.

Prices of polypropylene, Gulf producers’ third major product, are unlikely to rebound until 2026, because of further capacity additions next year, Husseini says.

The other two significant regional products, methanol and nitrogen fertilisers, are much more balanced from a supply and demand perspective, and so are closer to normal historic prices and margins, Husseini says.

“This year isn’t great from either supply or demand perspective for chemicals generally,” he says.

China remains the most important market for Gulf petrochemicals producers. However, China’s development of a homegrown petrochemicals industry and the increasing maturity of its economy has lessened the country’s demand for petrochemical imports.

After decades of huge infrastructure spending and a prolonged real estate development boom, “China is a different story now”, Connor says.

“China is still significant, but won’t have such a large weighting in terms of global petrochemicals growth, so new pockets of demand, such as India and Africa, will become more important,” he says.

Ethane and propane are Saudi Arabia’s two main petrochemical feedstocks. Producers buy ethane at a fixed, subsidised price of $2.50/mn btu  (million British thermal units). This has more than tripled from $0.75/mn btu in 2015. Propane’s price tends to track that of oil.

“In terms of feedstock costs, Saudi is probably slightly above US producers but is still in the bottom quartile of the cost curve,” Connor says.

Prolonged low margins affect European and non-Chinese Asian producers most acutely because of their higher feedstock costs. Currently, it remains cheaper for European petrochemical plants to operate at a loss than to cease production, for example, although if margins and prices fail to rebound then eventually such companies may be forced to close, Connor says.

That would reduce competition and so benefit Gulf producers.

“You can’t make losses for five or six years running,” Connor says.