16 July 2010 22:48 [Source: ICIS news]
LONDON (ICIS news)--The Middle East is losing its competitive edge over US petrochemical producers as the region contends with rising ethane and capital costs, sources said on Friday.
Rising Middle Eastern prices are contrasted by a decline in US prices. Ethane, the main feedstock for US ethylene, has been on a steady decline since April.
The product traded at 44-45 cents/gal so far in July, down from an average of 52.50 cents/gal in June, 55.20 cents/gal in May and 56.60 cents/gal in April, according to ICIS. The downtrend is due to ample supply and softening demand.
Meanwhile, US natural gas prices have plummeted by two thirds, falling below $5/MMBtu, according to consultants from global group Booz & Co. Those prices will unlikely rise above $6/MMBtu over the medium term.
New sources of natural gas and ethane in the US and Canada have led to the fall in prices and a disconnect with crude oil prices over the last 18 months.
The Middle East, however, has a lot more upward pressure as a result of rising demand and oil prices.
“Most chemical-industry growth has been moving east. Now the raw material cost advantage has been lost and North American assets are being fully utilised [to serve domestic and export markets]," said Dennis Cassidy, a principal based in Dallas, Texas.
Saudi Arabian ethane prices, currently set at 75 cents/MMBtu, will likely rise to $1.15-$1.25/MMBtu when they are renegotiated in 2012, according to Leslie McCune, managing director at UK-headquartered consultancy Chemical Management Resources.
“Whilst we do still see a significant gap between US natural gas prices and Arabian prices, the previous price advantage has disappeared as the differential between US and Middle East prices narrows,” said Jayant Gotpagar, a Booz & Co principal based in Houston.
“Capital costs have seen a huge upswing in the Middle East. What that means is that economic evaluation of new projects on a total cash basis does not offer the same attractiveness," Gotpagar said.
"A combination of these things has led to increased utilisation at US facilities and some delays/hold up at Middle East," he said.
Cassidy said that making more long-term predictions on US pricing was difficult.
“There are a lot of wild cards such as cap and trade and carbon tax legislation, nuclear power, the shift to electric vehicles, the conservation movement plus the fallout from the BP spill," Cassidy said. "But prices based on market fundamentals could be $6-8/MMBtu 5-10 years out.”
Additional reporting by William Lemos
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