United Kingdom Petrochemicals Report Q3 2012

Includes 3 FREE quarterly updates

The Q312 UK petrochemicals report assesses the impact of the eurozone crisis and the domestic economic slowdown on the British chemicals and petrochemicals industries.

The report also examines whether producers will be able to defend margins and maintain competitiveness in the face of surplus European capacity and increased competition from Asia and the Middle East.

Furthermore, BMI analyses the growth and risk management strategies being employed by the leading players in the sector, as they respond to capacity cuts in refining and volatility in naphtha feedstock supply.

As a key supplier to the domestic industrial sector as well as to the eurozone, British chemicals and petrochemicals producers face growing uncertainty as 2012 progresses. In 2011, the industry reported a recovery from the declines seen in 2010l; however, Q112 saw an overall decline in chemicals and petrochemicals output, mirroring overall trends in manufacturing, and exports point to a slump in growth over the rest of the year. This points to a contraction in 2012. The impact of a downturn on the chemicals industry will depend on the strength of the pound sterling and the weakness of export markets. With surplus capacity likely to be a feature across Europe in 2012, the UK’s competitiveness will determine the size of contraction.

We believe there will be scope for petrochemicals producers to maintain profitability and sustain volumes even after they cut product prices in an effort to respond to an increasingly volatile market. The extent to which they will be able to find a balance will be determined by relative exchange rates as well as the rate of decline in demand growth and inventory build-up. A collapse in the eurozone could wipe out any advantage in weakening naphtha feedstock prices, thereby hitting producers’ bottom lines.

Over the last quarter BMI has revised the following forecasts/views: We have revised our forecasts from last quarter (when we anticipated growth of 0-1%) and now expect the chemicals industry to suffer a double-dip recession in 2012, in line with broader economic trends. BMI does not preclude the possibility of a return to 2010 rates of output, with the recovery witnessed in 2011 now set to be wiped out.

Cracker margins are likely to hold up if naphtha values hold at the levels seen going into Q212. Weakening oil prices are being passed on through the downstream value chain, although benefits could be eroded by any strengthening of the US dollar relative to pound sterling.

The UK scores 72.0 points in BMI’s latest Western Europe Risk/Reward Ratings (RRRs), a score that is unchanged since the previous quarter. The country remains in fourth place in the ratings, coming in 0.4 points behind the Netherlands and 1.0 point ahead of Belgium.