France Petrochemicals Report Q2 2008

In BMI's latest France Petrochemicals Report we expect a slowdown in petrochemicals growth in 2008 due to the appreciation of the euro and a decline in demand growth from construction-related industries.

In 2007, France recorded 4.9% chemical sales growth, overcoming the slowdown in the US economy, a surge in raw material prices and the strengthening value of the euro. Resulting growth in production encouraged investments, which amounted to EUR3bn in 2007, representing 3.7% of turnover. The increase in the proportion of investments allocated to expanding industrial capacity confirmed that production levels were indeed dynamic. However, the industry was constrained by poor external performance due to currency-related loss of competitiveness. Exports grew by just 2.8%, while imports rose 7.9%, leading to a 20% fall in the chemicals trade surplus to EUR6.4bn. At the same time, profit margins are being affected by a projected rise in global ethylene prices unless French producers pass on their costs to consumers, further undermining competitiveness. However, the French petrochemicals sector has held up due to growth in the construction sector, which has offset stagnation in demand in the automotive sector.

A stagnating domestic market and pressures on external competitiveness mean that it is unlikely that capacity in the French petrochemicals sector will expand in the years ahead and BMI foresees problems of overcapacity in some segments, particularly polyvinyl chloride (PVC). France's petrochemicals trade is likely to deteriorate in 2008 as new capacity comes online in the Middle East and Asia. Ethylene import demand is set to fall faster than the decline in exports, leading to an improvement in the basic chemicals trade balance. Growth in ethylene exports is set to resume from 2009 with an upturn in the petrochemicals cycle. BMI expects a slowdown in sales growth for the chemical industry, with a rise of just 2.5%.

Growth will be encouraged by increased demand from the automotive industry, which will offset the slowdown in construction-related industries.

French polyolefins production is coming under increasing pressure due to supply problems. In January 2008, Ineos announced it was considering expanding high-density polyethylene (HDPE) capacity at Sarralbe from 220,000 tonnes per annum (tpa) to 350,000tpa. The project would require an additional 150,000tpa ethylene supply and Ineos is in negotiations for a supply contract with Total Petrochemicals, which provides ethylene to Sarralbe from Total's petrochemical complex at nearby Carling. Ineos is likely to make a decision on the HDPE project in 2008. Ineos announced plans in July 2007 to concentrate its French polypropylene (PP) operations on Lavra and close 215,000tpa of PP capacity at Sarralbe. It is also focusing on a EUR150mn three-year programme to expand PP and HDPE production capacity at Geel in Belgium. PP production on Line 2 (amounting to 165,000tpa) is expected to cease by end-2008, and production on Line 1 (50,000tpa) is expected to cease by end-2009. Line 3 (65,000tpa) and all HDPE lines (200,000tpa) at Sarralbe will remain online.