A challenging year

24 March 2003 00:00 [Source: ICB]

After a lacklustre performance in 2002, olefins markets continue to suffer from instability

Hopes for a substantial recovery in the US olefins industry in 2002 failed to materialise. Although a recovery of sorts was evident, particularly in the first-half of the year, this could not be sustained as economic sluggishness and market uncertainty took their toll. By the year-end disappointment with prices and margins was an oft-repeated claim of olefin industry players.

A poor quarter four in 2001 had dampened industry hopes of an early market turnaround in 2002. 'Industry expectations were not great. Severe downward price pressure on feedstocks and a build-up in inventories marked an horrendous quarter four, with olefin demand falling by 6-7% late in 2001,' claims Sergey Vasnetsov, senior chemicals analyst at Lehman Brothers in the US.

However, as early as late January positive signals began to be evident in the market for 2002. Volume sales began to increase and a series of price hikes began to take hold. Market optimism picked up following the run-up in prices and demand early last year, but maybe industry jumped to too positive an extrapolation - that recovery was fully under way.

By early summer re-stocking had come to an end. It became increasingly evident that the US economy was not growing at a strong enough rate to support downstream derivative demand, which would have positively supported olefin demand and encouraged ongoing improvement in the olefins industry.

Throughout the second-half of 2002, in terms of volume of chemical purchases and frequency, players were living from hand-to-mouth. Especially from August onwards when market sluggishness had re-established interest.

'The industry managed the downturn quite well, although it could be argued they should have shown a little more discipline in terms of cracker volumes,' comments one industry analyst.

Others note, however, that throughout 2002 various cracker operators either trimmed back output or did not rush to put units back up, following scheduled and unplanned maintenance turnarounds.

Despite this, at various points in the year industry observers continued to debate the viability of various cracker operators. Cracker operators, though, managed to avoid a deeply disruptive chase for volumes, once it became clear market growth would be limited at best.

Ethylene

It could be argued that 2002 was the year when the US monthly ethylene contract fell into disrepute. Instead of 12 orderly monthly settlements the market endured a three-month settlement and then a four-month settlement and at least one two-month agreement. Why did US ethylene producers find it so difficult to pin down monthly agreements?

According to Vasnetsov: 'There was unprecedented volatility on all sides of the market, feedstock and energy, and so the traditional rules of contract negotiation ceased to exist.' Unprecedented levels of market uncertainty also undermined confidence, contributing to extended contract negotiations.

Ethylene availability had tightened in the first half of the year due to unscheduled outages at Shell Chemicals' US Deer Park facility in Texas and ExxonMobil's Baton Rouge, Louisiana, unit among others, which supported higher numbers.

Effective cracker operating rates moved up to around 85%. Once units began to come back online availability improved, undermining sellers' efforts. Inventories began to rise as seasonal demand slipped in the summer months.

Although January 2002 contract negotiations were relatively painless, it took until the end of April before the next US ethylene contracts were settled. Then a February-to-May deal emerged, with prices moving up 4 cent/lb, eventually confirming improved market conditions. Despite producers posting further increases in June, the ethylene price rise initiative was losing momentum as it became increasingly evident to ethylene purchasers that derivative markets could not sustain these price hikes.

Producers were slow to realise that inventory restocking had come to an end and recovery was piecemeal at best, so they continued to push ahead with posted price rises in July and August. Contract prices rolled over in these summer months. This was the clearest indicator that the ethylene hikes had come to an end.

However, through September and October ethylene producers pushed for price increases of 2-4 cent/lb, believing they could regain the momentum they had in the first half of the year. Derivative players unable to pass on earlier hikes down the line, stiffened their resistance to sellers. Lower ethane feedstock costs added to the resolve of purchasers.

Due to the level of market volatility, including feedstock price upheavals and mixed signals from derivative end users, ethylene contract negotiations were drawn out through the fourth quarter, with eventually a three month settlement being reached, up 1 cent/lb in October, and prices rolling over for the last two months of the year.

Looking at the year as a whole there was some improvement in the market with demand rising by 4% compared to a drop in ethylene demand of around 10% in 2001.

2003 is proving to be a challenging year for ethylene producers. Renewed energy price volatility creates a host of problems for cracker operators which primarily rely on ethane as a light cracker feed.

With high oil prices, even those with flexible cracker capabilities can find no comfort in a heavier feedslate. According to one market observer: 'US ethylene derivatives will be uncompetitive, particularly in the export markets, as these high energy costs translate into significantly higher feedstock costs.'

The run-up in natural gas and crude is described as a 'disaster for ethylene producers'. The viability of certain cracker operations will be being questioned, once more.

Propylene

A rebound in the North American economy and its manufacturing sector saw significant improvement in propylene demand in 2002. This followed what has been described as 'the worst growth performance in over a decade in 2001, when North American propylene demand fell by 3%. However the rebound last year pushed propylene demand higher by 5%.

As a result of renewed demand and tight supplies during the first half of the year, propylene polymer grade prices gained almost 5 cent/lb between January and the summer months. Steve Zinger of CMAI notes: 'In Europe there was a large interest in US exports of propylene, due to planned and unplanned steam cracker outages and the delayed startup of PropaneChem's 300 000 tonne/year propane dehydrogenation unit in Tarragona, Spain.'

Improved export demand absorbed any excess propylene in the US markets and helped support higher prices. Early in the second quarter of last year, it is estimated that more than 80 000 tonne of US propylene was booked on vessels to Europe.

Excess ethylene availability in the US cracker system meant units were often run at reduced rates, further tightening supplies of much needed propylene.

According to Zinger: 'Propylene derivatives demand improved dramatically in 2002, after the poor conditions of 2001. Total propylene demand grew by 5%, led by polypropylene, but supported also by oxo-alcohols, cumene and propylene oxide.'

The recovery in propylene demand has been significantly stronger than ethylene. Zinger says 'the propylene to ethylene price ratio averaged 0.88 in 2002, much higher than the previous ten year average of 0.80'. Hence the price increases of propylene were generally stronger than ethylene, last year.

Butadiene

Despite a relatively slow start to 2002, when it seemed the balance of market power has shifted from industry sellers to buyers, availability dominated the US butadiene industry last year. Steady January and February contracts, with prices rising over 16 cent/lb, pointed to a degree of market stability in the early months of the year.

However, with steam crackers favouring a light feedslate and disappointing demand from ethylene derivatives entrenching low cracker operating rates, the availability of crude C4 feedstocks for US butadiene extraction units became an issue before the end of quarter one.

In March at least one major butadiene producer attempted to force the price pace, posting a 1 cent/lb contract price hike. Although the initiative ultimately failed, it did send a clear signal to the market, that higher prices were back on the agenda, which rising spot prices seemed to confirm.

A series of production problems dominated the butadiene industry in quarter two. In April Texas Petrochemical declared force majeure on butadiene. Huntsman Chemicals placed customers on 85% allocation due to unexpected production problems, while Shell was also reported to have problems with an extraction unit, limiting customers supplies.

However, as a counter-balance, there were indications that cracker operators were shifting to a heavier feedslate, to maximise co-product output of both butadiene and propylene.

US butadiene prices rose by 2 cent/lb in April and again in May, to reach 20 cent/lb, as it became increasingly clear that supply restrictions was the main theme influencing markets. The expected swing to a heavier cracker feedslate has not been as pronounced as predicted, so crude C4 availability was an ongoing concern for the industry and supported upward price sentiment.

According to DeWitt's Phil Eiserloh, the run-up in prices 'was driven by weak supply and not strong demand, with a contest raging between butadiene cost push and feedstock economics'.

At least three of the major butadiene producers had some level of allocation into the summer months. A combination of low inventories and customers fears around securing material, fuelled further price hikes. June contract numbers rose by another 2 cent/lb. Synthetic rubber prices also moved up, although margins remained poor. By August butadiene contract prices had reached 24 cent/lb, up 50% on numbers seen at the beginning of the year.

Continued tightness in the market and a lack of crude C4 feedstock remained the driving force behind higher prices, which rose through the second-half of the year. However, there was a sense of market stabilisation in the second-half of quarter four, as November's 27 cent/lb rolled over into December.

But the growing war fever between the US and Iraq and disruption to Venezuela's oil production is creating a platform for further price hikes in the first quarter of this year.

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