The permanent shutdown of Versalis' naphtha-fed steam cracker in Porto Marghera, Italy, again highlights the struggle non-flexible European crackers face in an environment of cheaper propane and butane feedstock.
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Versalis announced the permanent shutdown of the northern Italian cracker last week. It was shut in February for what was supposed to be six months, with the company citing a downturn in the market, and it was not restarted.
The Porto Marghera steam cracker was 100% naphtha based and this contributed to its recent closure, sources say. The unit was at an economic disadvantage compared with mixed-feed crackers, as it was unable to capitalize on the recent fall in lighter feedstock prices.
Naphtha, propane and butane are the primary feedstocks for European crackers.
The fall in lighter feedstock prices has been due to increased supplies from the US. Typically, a mixed-feed cracker uses propane and butane when they are at a 10% or greater discount to naphtha. This discount has been at 13.4% for butane to naphtha and 16.4% for propane to naphtha this year. The 2013 discounts were 7.7% and 12%, respectively.
In short, the transition to lighter feeds has boosted the margins of European producers with mixed-feed crackers. However, those unable to take advantage of the drop in light feedstock prices have continued to struggle in an environment plagued by both rationalizations and competition from overseas.
Porto Marghera has followed a trend that has plagued Europe over the past few years.
According to the Association of Petrochemicals Producers in Europe, crackers representing about 1 million mt/year of capacity, or 3.7%, in Western Europe closed from 2008 through 2012.
European crackers continue to struggle with excess capacity of about 10% and crackers with capacities of less than 500,000 mt/year are said to be particularly vulnerable to closures.
"The issue related to Porto Marghera is connected with the strategy to re-focus on higher added value products, reducing the capacity," said analyst Andrea Scauri at Italian investment bank Mediobanca.
Wholly owned by Italian oil and gas major Eni, Versalis has been rationalizing its ethylene capacity since 2007-08 when it shut its 245,000 mt/year Gela cracker. Its 250,000 mt/year Porto Torres cracker was shuttered in 2011 and capacity at Priolo was cut 50% to 380,000 mt/year last year.
"I would say it is the results of years of a dire market environment for Eni's petrochemical business," Giuseppe Rebuzzini, an analyst at equity brokerage firm Fidentiis, said Tuesday.
Another factor contributing to the closure of Porto Marghera was the absence of downstream integration and the recent closure of the upstream refinery.
"Porto Marghera was not physically integrated, and this clearly played a part in the closure," Giorgio Biscardini, partner and vice president of PWC Strategy&, said Wednesday. "The site required massive investment but it was difficult to invest because of the location, and with an industry already characterized by overcapacity."
The decision to permanently close the Porto Marghera cracker follows Eni's shutdown of its 80,000 b/d refinery there in the second quarter of last year, a victim of the European refining capacity glut.
Excess refinery capacity has been particularly true in Italy, where there has been a recent spate of refinery closures, as falling demand has hampered margins in an industry exacerbated by international competition. Refineries in Rome, Mantova, Marghera and Cremona have been either closed or converted to logistics hubs, while other plants have halted production temporarily or cut runs.
The conversion of the Porto Marghera site into an environmentally friendly hub is part of a strategy which includes a focus on "products destined to high value-added applications such as detergents and bio-lubricants," Versalis said when announcing the permanent shutdown.
The focus on specialty products is a consequence of increase in commodity chemical capacity in all other geographies except Europe, which is on the high end of an investment curve.