Petrochemicals: US olefins 2011 outlook

22 December 2010 14:54  [Source: ICB]

Contracts are poised to jump in January, as tight supply and higher spot prices exert upward pressure

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

The expected increase will seem like a repeat of last year, when propylene and ethylene prices surged in January, delivering one of the best years ever for US ethylene producers.

Profitability in 2010 soared as a result of tight supply, which pushed ethylene and propylene prices to record highs. Meanwhile, producers benefited from a firm export market and a hugely competitive cost advantage because of cheap feedstock ethane prices.

US ethylene margins in 2010, as assessed by ICIS, were likely to average around 20 cents/lb, more than triple the 6.29 cents/lb in 2009. "Definitely one of the best years ever," a producer said.

Favorable for US cracker owners, the odds point to margins remaining strong for the foreseeable future.

True, there were a series of outages in 2010 that inflated monomer prices, but the US ethylene industry today is a different animal. The sector is more nimble, thanks to some capacity reduction, and also highly competitive because of cheap ethane as a result of growing shale gas availability.

US ethane supply has taken a quantum leap in the past two years, as shale gas technology is now allowing the US to extract natural gas from reserves previously inaccessible or commercially unviable.

"Shale gas was a game-changer for the industry," Dan Smith, director and chairman of US-based Kraton Performance Polymers, said at an industry event 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 is likely to continue. Unlike the Middle East, which also has plenty of natural gas but of the dry type, the new discoveries in the US consist of "wet gas," the type that is rich in ethane and provides an ample, and inexpensive, source of feedstock for ethylene makers.

US ethane production, which is now estimated at 850,000bbl/day, is projected to surge by 30% in the next two years and grow steadily.

The rise in production is also expected to keep the ethane price 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 favorable oil-to-gas ratio to continue," Raja Zeidan, Dow Chemical's vice president for hydrocarbons, said last month as the company announced plans to boost ethane cracking in the US by 30% in the next three years.

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

Dow's strategy is in line with similar moves by Netherlands-headquartered LyondellBasell Industries and Anglo-Dutch major Shell, which in the last two years have begun switching cracker feedstocks in the US to NGLs to capitalize on cheap natural gas resources in the region.

The ethane revolution also triggered talk of possible ethylene capacity expansions in the US Gulf, something that was considered near impossible only two years ago. Sources said 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 Smith. Ethylene capacity idled at the height of the financial crisis in 2008 was being restarted last month.

US-based Chevron Phillips Chemical on December 10 restarted its 295,000 tonne/year Sweeny 22 cracker in Texas, which had been offline for just over two years, while Eastman Chemical was in the process of firing up a cracker that had been idled since November 2008.

But the improvement in US feedstock economics is not devoid of some collateral damage.

In the case of shale gas, the short end of the stick will go to propylene buyers, as growing ethane use will keep propylene supply constrained.

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

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

US propylene contracts are poised to rise in January, according to market sources, citing a 20% increase in spot prices in December. Ethylene contracts are also tipped to rise as the market is expected to reach a two-month settlement for November and December immediately after the New Year.

By: William Lemos
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