OUTLOOK '11: US olefins prices to begin 2011 on uptrend

27 December 2010 15:57  [Source: ICIS news]

By William Lemos

HOUSTON (ICIS)--The US olefins market, particularly propylene, is expected to begin 2011 on an uptrend following tight supply and higher spot prices in the final weeks of 2010.

The expected increase would seem like a repeat of 2010, when propylene and ethylene prices rose quickly in January, delivering by most accounts one of the best years ever for US ethylene producers.

Profitability in 2010 soared on tight supply, which pushed ethylene and propylene prices to record highs. Meanwhile, producers benefited from a firm export market and a competitive cost advantage caused by cheap feedstock ethane prices.

US ethylene margins in 2010, as assessed by ICIS, were likely to average around 20.00 cents/lb ($441/tonne, €335/tonne), more than triple the 6.29 cents/lb margin in 2009.

The year was “definitely one of the best years ever”, a producer said.

Favourably for US cracker owners, the bounty in 2010 was probably more than just a blip, as the odds pointed to margins remaining strong for the foreseeable future.

There was a series of outages in 2010 that inflated monomer prices, but the US ethylene industry of 2010 was a different animal. The sector was more nimble, thanks to some capacity reduction, and also highly competitive because of cheap ethane caused by growing shale gas availability.

US ethane supply, or the prospects thereof, took a quantum leap in the last two years as shale gas technology began allowing the US to extract natural gas from reserves previously inaccessible or commercially unviable.

“Shale gas was a game changer for the industry,” Kraton Performance Polymers director and chairman Dan Smith said at an industry event in New York in December.

The discoveries so far have barely touched the tip of the iceberg, Smith said, adding that the price advantage of natural gas over crude oil was likely to continue.

The new discoveries in the US consist of “wet gas” -  rich in ethane and able to provide an ample and inexpensive feedstock source for ethylene makers.

US ethane production, estimated at 850,000 bbl/day, was expected to surge by 30% in the next two years and grow steadily, according to industry projections.

The rise in production also was expected to keep the price of ethane down, giving gas-based crackers a continued advantage over those relying on heavier feeds.

“Ethane is an advantaged feedstock in the US, and we anticipate a favourable oil-to-gas ratio to continue,” Dow Chemical vice president for hydrocarbons Raja Zeidan said in December as the company announced plans to boost ethane cracking in the US by 30% in the next three years.

Dow said it also was reviewing joint-venture options to build a natural gas liquids (NGLs) fractionator in the US to secure ethane supply for its crackers.

The company has five olefins plants in Texas and Louisiana with a combined ethylene capacity of around 3.5m tonnes/year.

Dow’s strategy was in line with similar moves by LyondellBasell and Shell, which in the last two years began switching cracker feedstocks in the US to NGLs to capitalise on cheap natural gas resources in the region.

The ethane revolution, as some have called it, also has triggered talk of possible ethylene capacity expansions in the US Gulf, something that would be considered just short of heresy only two years ago.

According to sources, capacity growth would probably result from expansions by producers already established in the US.

“I would not build another cracker but would make better use of the ones in place,” said Kraton's Smith during the New York event .

A case in point: ethylene capacity that idled at the height of the financial crisis in 2008 was being restarted in December of 2010.

On 10 December, Chevron Phillips Chemical restarted its 295,000 tonne/year Sweeny 22 cracker in Texas, which had been off-line for just over two years, while Eastman Chemical was in the process of firing up one of crackers that had sat idle since November 2008.

"This decision [Eastman’s] was prompted by improved forecasts for the feedstock and olefin markets over the next several years,” said a market participant familiar with the company.

But the improvement in US feedstock economics was not absent of some collateral damage.

In the case of shale gas, the short end of the stick would go to propylene buyers, as growing ethane use would keep propylene supply constrained and lend support to that side of the market.

US refinery-sourced propylene supply, which accounts for 60% of the market, was unlikely to make up the difference because gasoline production, of which propylene was a co-product, is not expected to increase in the coming years.

That trend was already seen in the second half of 2010, as propylene prices climbed around 3.5% even though the US gained 544,000 tonnes/year, or 4%, of new capacity in the period.

US propylene contracts were poised take a big jump in January, market sources said, citing a 20% increase in spot prices in December.

On the ethylene side, contracts also were poised for an increase as the market was expected to reach a two-month settlement for November and December immediately after the New Year.

($1 = €0.76)

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By: William Lemos
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