INSIGHT: Ethylene faces capacity overhang in the second half

13 April 2010 18:02  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The chart below says a great deal. The red line shows available global ethylene capacity; that is, nameplate capacity adjusted for planned and unplanned outages. It is set to rise steeply in the second quarter.

Global available ethylene capacity fell in the first months of this year just as demand showed much welcomed signs of life. Markets tightened as a result of that and prices rose. Combined with lower feedstock costs, ethylene margins in the US hit levels not seen since the third quarter of 2008.

Producers will be pleased with that but mindful of just what could – and what is more than likely to – happen next.

New ethylene capacity is coming on stream fast. Between December 2009 and March of this year, 6.7m tonnes/year of ethylene capacity came on stream worldwide, from crackers in Thailand, Singapore, China and the Middle East.

According to the Worldwide Ethylene Plant Report for April from ICIS, a further 5.2m tonnes of capacity is due on stream between March and December 2010. The million-dollar question for 2010 has to do with how those new volumes are absorbed.

This year we are likely to see the petrochemical industry capacity glut writ large.

Many words have been written about the potential impact of overcapacity and poor supply/demand balances. Currently, sector producers are in a not bad place. Feedstock costs are not so much a burden, particularly if you are running on ethane in North America.

The US industry has seen available capacities clawed back via shutdowns. For example, Shell admitted last month that it had cut its US ethylene capacity by 22% over the past two or more years as it switched more capacity to ethane feed.

Ethane cracker feedstock costs have come down, pushing ethane-fed ethylene contract margins in the US up 5.7% in the week ending 9 April.

The upward slope of the red line on the chart for the next few months, however, is mighty steep.

There may be continued confidence in end-use markets for chemicals, but you can make your own estimates of the shape of recovery in construction and autos – the two key industrial sectors for petrochemicals, and hence ethylene, consumption.

Financial analysts have factored in new capacity additions to most of what they say about the sector. But one wonders whether the pace of change in ethylene availability in 2010 and its impact may not still come as a shock.

The second half of the year does not bode well for most upstream players. But it must be difficult to try to explain, even to managers in your own business, just why additional production volumes have not shredded ethylene-based commodities markets – and there is no certainty that they will. But most sector consultants expect ethylene capacity rationalisation to continue.

The US is probably just about done with rationalisation, according to De Witt’s Earl Armstrong, who was speaking at the consultants’ World Petrochemical Conference in late March.

Excess capacity later this year is likely to put margins under pressure, he maintained. But Asia will be getting adequate supply, having been tight at times over the past two to three years, and it will be producers in the US and Europe that lose important export business.

The focus will turn to Europe and the capacities that can be shuttered or closed in what look likely to be difficult market conditions. Closing plants in Europe is never easy, but capacity reductions could be made in the face of new imports of ethylene products. Europe has avoided the crunch for so long, but that does not mean that it will not come.

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By: Nigel Davis
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