New market study, "United Kingdom Petrochemicals Report Q2 2016", has been published

Above-trend petrochemicals consumption at a time when plastic and rubber output is sluggish should boost UK imports. The competitiveness of British petrochemicals production has been undermined by the lack of locally available and competitively priced feedstock as well as the strength of the pound against the euro. As such, British producers are in a weaker position to compete with foreign output.

British chemicals output grew 5.0% with petrochemicals up 6.7%. However, the manufacturing of rubber and plastic products fell 3.4%, reversing the gains made in 2014. The latest survey of business confidence for members of the Chemical Industries Association (CIA) shows that more than 90% of businesses expect sales volumes to remain or exceed 2015 levels when there was a record 5% growth. More than 40% expect sales volumes to grow in 2016. This lends support to continued domestic petrochemicals growth.

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The main downside risk comes from the lack of access to competitively priced feedstock in a global market facing over-supply. At a time when naphtha feedstock is declining in value, the recent drive to increase ethane as an alternative appears mistimed. While petrochemicals producer Ineos has secured gas imports from the US and acquired North Sea gas fields, these source may be not be price competitive in the long run. Petrochemicals producers are calling for efforts to advance fracking for gas in order to boost ethane availability. However, fracking is at a very early stage and the UK's shale gas fields may not provide the low priced feedstock it needs to compete with rivals in North America and the Middle East.

The British chemicals industry as a whole is in transition to higher-value, lower-volume production, having closed many basic chemicals and polymers capacities in recent years. This should put the industry in good stead for profitability, although existing petrochemicals facilities will continue to feel the challenge of feedstock prices in competing with US and Middle Eastern rivals.

Over the next five years, ethylene capacity should hold at 2.52mn tpa with polymer capacities including 820,000tpa of polyethylene (PE), 495,000tpa polypropylene, 255,000tpa polyvinyl chloride and 157,000tpa of polyethylene terephthalate (PET). Risks are to the downside and we caution that some capacity will remain at risk of closure. Some segments, notably PET, are highly competitive; while other segments, notably PE, will struggle amid the onslaught of new capacity in North America and the Middle East.

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