Survival of the fittest: Petrochemical makers battle global glut

NEW DELHI/SEOUL, Aug 9 (Reuters) - Petrochemical producers in Europe and Asia are in survival mode as years of capacity build-up in top market China and high energy costs in Europe have depressed margins for two consecutive years, forcing firms to consolidate.

The sector's weakness is troubling for a global oil industry looking at petrochemicals to keep profits rolling in as transportation fuel demand falls in coming years with the energy transition.

Major producers in Asia and Europe are selling assets, shutting older plants, and retrofitting facilities to use cheaper raw materials such as ethane instead of naphtha to cut costs, industry executives and analysts say.

Producers will need to further consolidate ethylene and propylene capacity as oversupply is expected to persist for years with new plants still coming online in the Middle East and China, even as the Chinese economy sputters.

Ethylene and propylene, produced from petroleum products, are basic raw materials for making plastics, industrial chemicals and pharmaceuticals widely used in everyday life.

Consultancy Wood Mackenzie estimates about 24% of global petrochemical capacity is at risk of permanent closure by 2028 amid weak margins.

"We expect rationalisation in Europe and Asia to continue in this cycle," Eren Cetinkaya, a partner at McKinsey & Company said. He anticipates the current downturn will last longer than the typical five to seven years because of a prolonged capacity build-up, especially in China.

Asia's producers face the toughest outlook, with oversupply likely to persist as some companies are unlikely to curb output at new units and plants that are integrated with wider operations.

"Since 2022, however, a range of factors have made the business environment more difficult – including falling domestic demand, as well as a drastic oversupply on account of new production facilities launched in China and other parts ...
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