FEATURE: European ethylene derivative producers mothball plants on untenable margins

European ethylene derivative producers have started to mothball plants to manage regional oversupply, a weak market and wafer-thin or negative margins, while enabling the industry to manage rising electrochemical unit and feedstock costs.

The pessimistic mood in the market was cemented in the third quarter as oil prices jumped towards the $100/b mark amid OPEC production cuts, pushing upstream naphtha and ethylene monomer prices higher, while demand remained subdued in a cost-of-living crisis, high inflation and rising interest rates, squeezing margins further. The closure of derivative plants seemed like a desperate last straw by European plastics producers.

European polyethylene terephthalate producer Jbf Global Europe is the latest to begin a temporary shutdown of its nameplate 430,000 mt Laakdal plant in Belgium, blaming high production costs and weak global demand, the company said in an Oct. 16 letter to customers.

"This decision was taken due to circumstances outside its control, including, amongst others, unsustainable market conditions caused by high imports into Europe from Asia," JbF said in the letter.

The plant would likely close from November, once its feedstock and production commitments in October were completed.

"We are stopping by the end of this month, temporarily until the market picks up. When PET is profitable," a JbF source said Oct. 20.

"The company believes that this measure is necessary to safeguard its long-term position as a leading European producer of PET resin," JbF said in its letter. "Therefore, it was decided to temporarily cease operations for an indefinite period of time until the industry shows signs of recovery."

This followed Dutch chlorine producer Nobian, which shut its Bitterfeld chlorine plant in Germany over Oct. 9-14 amid reduced or negative margins, a company source said Oct. 17. The plant restarted in the week of Oct. 16.

"The electrochemical unit demand is stuck at a very low level and chlorine gets worse, while caustic is more or less stable," the Nobian source said. "From our side, we had to shut down our plant in Bitterfeld for one week driven by low chlorine demand, while other sites are running extremely low."

Chlorine production costs are typically measured in terms of electrochemical costs. Electricity accounts for more than 50% of the cost of producing chlor-alkali, or the kick-starting of the production process that leads to chlorine, caustic soda, ethylene dichloride and vinyl chloride monomer. Both VCM and ethylene then go into the manufacture of polyvinyl chloride.

Unsustainable chlorine operating rates

In explaining the issue affecting production further down the supply chain, industry sources pointed to recent plant operating rates.

A chlorine/PVC trader said the problem was that operating rates were too high.

A chlorine producer said: "Given the fixed cost, they cannot go on like this into 2024. I expect [other major producers] to announce plant closures in a few days/weeks."

"We are struggling to get the margins to survive," another chlorine producer said. "At the moment we have to take decisions, and [a temporary shutdown] is for sure on the table. We have been studying it. I don't know the cost and how long to restart. and this not a reality as the costs are really high.

Covestro, which started production at its new chlorine plant in Tarragona, Spain in February, was expected to continue running given that any closure would be costly from a fixed cost perspective.

"Our chlorine plant in Spain is in operation and we currently don't have plans to suspend the local production in response to market conditions," a Covestro spokesperson said.

Derivative prices rise but entrenched at historic lows

Spot prices for a variety of ethylene derivatives remain at historically low levels, but ethylene prices surged between June and September, moving monomer producers to pass on the higher cost down the supply chain.

"Ethylene contract prices increased in September and October, close to Eur140/mt more and this with higher raw materials results in a lack of competitiveness," a third chlorine producer said Oct. 23. The October ethylene contract settled at Eur1/260/mt FD NWE.

The Platts-assessed upstream naphtha spot prices increased a total $207.75/mt between June 26 and Sept. 19, S&P Global Commodity Insights data showed, before retreating to $667.25/mt CIF NWE Oct. 20. The three- to 30-day forward free-delivered Northwest European ethylene spot price was assessed at Eur744.50/mt Oct. 20.

Net contract prices for virgin polyethylene terephthalate have fallen dramatically in 2023 from Eur1,480/mt in October 2022 to their lowest point at Eur1,030/mt in July amid lackluster appetite for virgin PET.

PET contract prices have risen in recent months resulting in a current price of Eur1,100/mt for October. However, the increase in contract price was not paired with climbing demand, with producers placed between higher costs and weak demand.

Feedstock MEG contract prices have also increased Eur40/mt at Eur730/mt since July due to firmer upstream feedstock costs, according to S&P Global data.

Platts assessed European chlorine at Eur224/mt FD NWE Oct. 17, up Eur48/mt from Sept. 26, the last assessment in September. Caustic soda prices were assessed at $380/dmt FOB NWE, up $30/mt from Sept. 26, while PVC contracts in October were assessed at Eur1,170/mt FD NWE Oct. 18, up Eur20/mt from Eur1,150/mt FD NWE Sept. 27.

Platts assessed key chlorine derivative caustic soda down $995/mt from $1,375/dmt FOB NWE Nov. 14, 2022, S&P Global data showed, while PVC contract prices were down Eur885/mt from the Sept. 9, 2022, level of Eur2,055/mt.

MEG is an intermediate chemical used to make PET, which in turn is used to make plastic bottles, food packaging and polyester fiber.

Caustic soda is a key component in the production of paper pulp, water treatment and cleaning products, while PVC is used mainly in construction applications. The demand weakness in PVC is particularly sensitive to a worsening macroeconomic picture and surging inflation, with consumers and governments hit by high borrowing/financing costs, according to market sources.