17 April 2006 00:00 [Source: ICB Americas]
AFTER A first quarter filled with turnarounds, almost every ethylene plant in North America is back on line. However, the much hoped-for rebound in demand has yet to materialize and ethylene makers are now anticipating another decline in contract prices, while spot prices continue to scrape bottom.
With the recent restart of Ineos’s Chocolate Bayou, Tex., cracker and Formosa Plastics’ cracker in Point Comfort, Tex., (each damaged in fourth quarter explosions) the only plant currently off-line is the BASF-Total joint venture in Port Arthur, Tex., which is down for a 60-day turnaround. During the first quarter, as much as 12% of North American capacity was off-line on account of turnarounds and unplanned outages.
“With Ineos and Formosa back on line after both crackers experienced fires in the fourth quarter, the market is now fully supplied,” says Kevin McCarthy, analyst with Bank of America. “Moreover, declining prices are keeping demand at bay.”
With so much capacity back on line, spot prices have dipped significantly. Spot prices had been hovering around 39 cents per pound at the end of March. Now, deals have been confirmed as low as 32 cents. “There is a huge delta between contract and spot numbers and the supply/demand balance is even getting some length because everybody is up and running,” says Mark Eramo, vice president of olefins for Houston-based Chemical Market Associates Inc. (CMAI).
Contract prices stand at 47.5 cents per pound for March. Most industry participants are expecting another 2.5 to 3 cent decline in April contract discussions.
supplies are up
North American ethylene supplies are getting a further boost from flex feed crackers, which are using ethane as a feedstock over naphtha. When producers crack ethane, there is much more ethylene produced than is produced from a naphtha cracker.
“Ethane is still the favored feedstock over naphtha,” says a producer. “Right now, I see ethane over naphtha by 4 to 5 cents per pound on an incremental ethylene basis. Those people who can run ethane are at that much more of a benefit.”
“With NYMEX crude oil at $67.43 per barrel and natural gas at $6.70 per mmbtu, the ratio of crude to gas now exceeds 10x, higher than the 9.6x level of a month ago and well above thermal parity of 6x,” says McCarthy. “This means that those ethylene producers with the ability to process natural gas-linked feeds like ethane are doing so.”
With so much ethylene on the market, demand has eased somewhat as buyers hold out for lower prices. “Purchasing managers have stepped back with the belief they can buy ethylene derivatives later at a lower price,” says McCarthy. “Year-to-date, they have been right; the price of ethylene has fallen steadily throughout 2006 and is expected to drop further in the second quarter of 2006.”
“Despite low customer inventories, demand for ethylene derivatives has been disappointing thus far in 2006 as converters anticipate further price declines due to bloated natural gas inventories, discounted spot ethylene, and the expected restart of significant US ethylene capacity,” adds Don Carson, analyst with Merrill Lynch.
Besides a drop in domestic demand, a weaker export market is also to blame for the poor downstream demand. “Limited exports have compounded the issues,” notes McCarthy. “Exports are a big factor on the demand side,” adds Eramo. “Downstream producers need to get back into the export market in a big way.”
Prior to the hurricanes on the US Gulf Coast last year, US and Canada polyethylene exports to Mexico and elsewhere peaked at around 600 million pounds, according to the American Plastics Council. In the months following the hurricanes, exports fell off to 200 million pounds. Through February, exports have picked up to 300 million pounds.
Presently, North America can compete with other international producers, excluding Middle East producers, on a cost basis. However, Eramo points out, the international market is not that strong. “China is not buying the way we thought they might,” he says.
“Net exports are the key to getting domestic balance back to stronger levels of supply and demand,” adds Eramo. “It appears as though the domestic indicators look good. The economy is hanging tough and manufacturing looks reasonable.”
Despite all the negative talk, margins remain fairly healthy for North American ethylene producers. “By the time 2006 is completed, we expect weighted average unit cash margins for ethylene to average 2 cents per pound higher than 2005, 1 cent higher than the 1995 peak, and around 4 cents lower than the 1988–89 peak,” says Carson.
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