Olefins Markets Remain Weak, Propylene Recovery on Thin Ice

12 November 2001 00:00  [Source: ICB Americas]

The markets for the major olefins remain beset by problems, although energy and feedstock costs are coming down and inventories of downstream derivatives are low. Ethylene and butadiene remain weak, and the recent recovery in propylene pricing is unlikely to last more than a month or two.

Barring a further economic downturn, producers expect ethylene to pick up in the middle of next year. The market's main problem is lackluster demand caused by the recession. However, the Federal Reserve continues to cut interest rates, and inventories of most ethylene derivatives are so low that a recovery in demand could cause a sudden turnaround for the entire ethylene chain, even if the overall economy remains weak.

Lower oil and naphtha costs are encouraging flexible crackers to switch to heavier feedstocks. That should boost supplies of propylene and crude butadiene, straining both markets. The butadiene market is already burdened by a large surplus of crude C4s. The price of finished butadiene has collapsed from 28 cents per pound last March to 18 cents for November, and producers caution that the US market may improve little next year. Propylene pricing shot up in September and October, but with oil and naphtha prices falling, the supply-demand balance is expected to level out or turn against propylene, weakening its price.

"Propylene is still pretty good," a producer says. "The September (1.25 cent) and October (2 cent) increases went through, and most producers have an-nounced a 1 cent increase for November. Our competitors are off sales control, and the supply balance has improved dramatically. The inventory chain has been rebuilding. Demand hasn't fallen off, although by December it could be slower."

Other producers are less optimistic. "Propylene got tight, but the market will probably soften," a producer says. "Propylene demand isn't strong enough to support higher prices if supplies increase and feedstock costs come down."

A propylene buyer adds that the November 1 announcement may be an attempt to ward off a decrease. "Demand isn't all that strong for most propylene derivatives, especially with the economy weak," he says. "Propylene came up too fast and is overvalued. We expect it to come off in November or December."

Following the September and October increases, contract prices for propylene stand at 17.5 cents per pound for chemical-grade material and 19 cents for polymer grade. Spot pricing peaked at around 18 cents for chemical grade and 20 cents for polymer, but spot pricing has tapered off and is already below contract levels, according to propylene buyers.

Crude oil has fallen below $20 per barrel. Propane at Mt. Belvieu, Tex., is 35.5 cents per gallon, according to Dan Lippe, president of Petral Worldwide, Houston. He rates ethane at around 24 cents per gallon, n-butane at 39.5 cents and natural gasoline at 43.5 cents. "The shift to light feedslates is reversing," Mr. Lippe says. "In September, the feedslates for flex-feed crackers were as light as they've ever been. Feedslates should be considerably heavier in November."

In September and October, ethane and propane together accounted for 80 to 81 percent of the ethylene produced by steam crackers in the US, Mr. Lippe adds. Last January, that figure was only 70 percent, and it should drop back to 75, or even 70, percent during November and December.

Between June and August, US olefin crackers produced 22 million to 22.5 million pounds of propylene per day. Mr. Lippe expects that figure to climb to 25 million to 26 million pounds in the next few months, an increase of more than 15 percent, as steam crackers adopt heavier feeds. In terms of pricing, "propylene probably hit its peak in September," he says. "Propylene could fall over the next 90 days." Yet he adds that inventories stayed flat in the third quarter. "No change is good. The industry is in balance at its current production rate."

Ethylene has been in a downturn since late last year, and Mr. Lippe expects the current economic slowdown to have little additional impact on that market, which could turn around before the general economy. With feedstock costs down, ethylene buyers are pushing for lower prices, but margins are still weak, making it unlikely that ethylene contracts will slide much further. Mr. Lippe notes that last summer a few spot sales went through at 11 to 12 cents per pound, but such bargain deals "are gone."

Ken Miller, a senior principal at Purvin & Gertz Inc., Houston, expects oil pricing to level off, assuming OPEC is able to cut production to offset the drop in demand caused by the recession and the terrorist attacks on September 11.

"Since September 11, there has been a massive downturn in the economic outlook through the first half of 2002," Mr. Miller says. "There has been a very large drop in the demand for petroleum and jet fuel worldwide. OPEC must reduce its production to maintain stable pricing. They're caught in a political problem because they don't want to be seen as contributing to an economic slowdown, but they've lowered production three times this year to maintain the stability of the oil market. We think they will keep the market in balance. We're not predicting a collapse scenario, but there is the potential for a pricing collapse."

Propylene oxide and propylene glycol are both relatively healthy because their demand remains fairly consistent from year to year. The propylene oxide market usually grows faster than gross domestic product (GDP), but PO demand is expected to be flat this year. Propylene glycol demand is also flat, although sales to the airplane deicing market could drop because fewer people are flying.

The oxo alcohols market "has been sluggish all year," a producer says. The demand for coatings and durable goods has been poor, leading to flat to negative growth for oxos.

The acrylonitrile market is also soft. "We're in a recession. That's the general theme for most chemical intermediates," a producer says. "The key is the end of the recession, whenever that will be." Exports of acrylonitrile from the US Gulf are selling to Asia at a spot equivalent of $625 to $650 per metric ton. Buyers are looking for material at $560 to $580 per metric ton, but a major US producer says, "We won't react at that price."

With rubber demand off 20 to 30 percent, producers complain that the butadiene market is "weak and getting weaker." The contract price for finished butadiene was 19 cents per pound in September and October, but it slid to 18 cents on November 1. Jerry Law, vice-president, C4 olefins, at Texas Petrochemicals LP, says the market could improve modestly after December, but the rubber industry has lost money for several years, and the butadiene industry may need until 2005 or 2006 before demand recovers to last year's levels.

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