Market Report, "United Kingdom Petrochemicals Report Q2 2013", published

From: Fast Market Research, Inc.
Published: Fri Apr 19 2013

While the British petrochemicals industry is set to make a recovery in 2013, it will be from a low base and is likely to be lacklustre as the sector struggles with long-term capacity closure amid poor domestic and external market conditions. We believe that only the UK's external competitiveness will save the industry from a further contraction in 2013, but this will be dependent on a competitive exchange rate and continuity in the eurozone. Given the high degree of financial and trade interdependency with the eurozone, a failure among European politicians to resolve the debt crisis could lead to contraction in British chemicals markets.

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The British chemicals industry performed poorly throughout 2012 as it struggled with capacity cuts and poor domestic and export markets. Aside from an uptick in December, the trend was firmly on the downside, putting it in line with the general economic trend. However, the strength of the month-on-month (m-o-m) increase in December meant that chemicals growth for the full year was 5.7% - not as bad as the 7% BMI had forecast.

Not all producers are convinced of the UK's competitive strength. In Q113, Total indicated that it would close the UK's last polystyrene (PS) facility and would shutter 70,000tpa, a move that is bound to have a knock-on effect on styrene monomer demand. Ineos is also closing a 105,000tpa polyvinyl chloride (PVC) unit at Runcorn, focusing all UK PVC production at its Newton Aycliffe site. It is also reconfiguring its Runcorn VCM plant to produce ethylene dichloride (EDC) for internal use, according to reports in early 2013. Coupled with refinery capacity closure that will have an impact on domestic naphtha availability, there is a threat that the recession will have a long-term impact on the British chemicals industry.

BMI has revised the following forecasts/views:

* BMI believes there is some modest upside for growth supported by the depreciation of the pound sterling, which could be shored up by an improvement in industrial activity. Despite a still hefty 3.0% year-on-year (y-o-y) contraction in industrial production in October (down slightly from 3.2% y-o-y the previous month), the manufacturing Purchasing Managers' Index (PMI) hit 51.4 in December, marking the first time that the series has been in expansionary territory since April. Much will depend on exports as the UK market will perform poorly over the year, weighed down by a further expected contraction in construction and slack performance in retail.
* A collapse in the eurozone could wipe out any advantage in weakening naphtha feedstock prices, thereby hitting producers' bottom lines. Moreover, with upstream markets facing uncertainty and cracker margins still at historical lows despite the decline in naphtha prices, British producers are likely to be sceptical of any talk of a sustainable downtrend in feedstock costs.

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