(The following statement was released by the rating agency)
May 16 - Shale gas is proving a boon for US chemical companies, but is
making life difficult for their European counterparts, Fitch Ratings says. A
likely prolonged cost disadvantage for European companies will exacerbate
expected pressure on cash flow and margins, especially for petrochemical
The European industry finds itself at a cost disadvantage in terms of both
energy and feedstock prices. Energy costs can represent over half of the
production costs of chemicals companies, making it one of the most
energy-intensive industries in Europe.
US wholesale electricity prices are around a third lower than in 2010, and
natural gas prices at a 10-year low are a key contributor. Henry Hub gas prices
are USD2 per million British thermal units (mmbtu), compared with around
USD10/mmbtu for European gas. Pressure is mounting for Gazprom, Europe's main
supplier of natural gas, to break the link between its long-term contract prices
and oil. However, with no competitive pressure probable from US natural gas
exports before 2015, the differential between US and European prices is unlikely
to reduce materially in the short term.
The cost disadvantage is exacerbated by unfavourable feedstock economics for
European petrochemical companies, which produce primarily from oil-based
derivatives such as naphtha. These have now been pushed to the less competitive
portion of the ethylene production cost curve. This is illustrated by the
contrasting performances of LyondellBasell's regional olefins and polymers
operations in Q112. The EBITDA margin increased yoy to 17.9% from 13.5% in the
US segment and contracted to 2.7% from 8.4% in the Europe, Asia and
In the short term, and at the time when growth prospects are defined by non-EU
markets, European producers' reduced competitiveness will hurt exports. US
chemicals' favourable shift on the cost curve could also lead to more
competition in Europe as low-cost Middle Eastern producers are deterred from
exporting to the US and seek other markets. Non-integrated crackers are likely
to become uneconomic and face closure.
In the longer term there is a danger of a glut in supply of commodity chemicals
driven by higher US capacity. By 2015-2017 we expect announced capacity
increases from the likes of Dow Chemical, Chevron, Westlake Chemical and Nova
Chemicals, including various ethylene cracker projects, to come on line. This
will turn the US into a net exporter of ethylene and could depress global
derivative prices and displace higher cost European production.
The shale gas industry is unlikely to develop in Europe in the short term. This
is due to strong government opposition to shale gas in several EU countries,
environmental pressure, population density and geological differences between
Europe and the US in terms of shale formations, which make extraction more
difficult and costly.
We expect European producers to maintain or increase focus on value-added
chemicals and move away from bulk chemicals towards solution-driven innovations
and services in areas where they remain competitive.
(Caryn Trokie, New York Ratings Unit)