INSIGHT: Making money as market pulls away from the trough

25 March 2011 17:50  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--North America ethylene producers can be confident as recovery turns to growth in petrochemicals. The demand pull for polymers from markets in Asia remains strong while domestic business continues to expand, pushing margins higher.

ICIS reported this week a clear pull on ethylene for derivatives in the US Gulf, particularly for ethylene dichloride (EDC) and mono ethylene glycol (MEG), and for styrene.

The demand pull is welcome and producers continue to benefit from the competitive feedstock situation, although ethane prices have moved higher recently because cracking economic continue to be good. The advantage against liquids cracking, needed for some products, however, is well established.

The pull from Asia has been significant with consultants at this week’s big pre-NPRA conferences in Houston talking of strong regional Asia polymers demand growth in 2009 and 2010.

That demand has helped draw on some of the capacity built up in the Middle East (and in Asia), mitigating the expected impact from these new sources of supply. Producers in the Middle East have also had to work with restricted ethane feedstock supply from associated gas.

Perhaps the worst is over and producers can start to look to the sunny uplands again. Attention seems to be turning to growth and what new capacities can be added to capitalise on expected opportunities.

North American gas crackers currently are the second most competitive globally, based on comparatively low feedstock costs. And the consistency of that competitiveness is beginning to show.

Regional cracker margins

Consultants CMAI suggested this week that an additional 1.2m tonnes of ethylene capacity could be added in the US by the end of 2015 by capacity creep alone. It forecasts a further 1.6m tonnes a year after that, with at least one new 1m tonne/year cracker on the Gulf Coast and possibly a cracker somewhere else in the country fed by shale gas ethane.

Companies have expertly matched output supply through the recovery phase of the current cycle, but it remains to be seen how they manage as the upswing takes hold.

Civil unrest and natural disasters are helping to move the oil price and create great uncertainty. Demand growth in Asia, however, remains strong, although Asian markets remain extremely nervous.

That nervousness has been reflected in price uncertainty and falling margins through much of last year. Pity the poor HDPE producer whose margins at the start of this year were not much greater than in 2001.

The chart below shows margins for a typical integrated polyethylene producer and the upturn in 2011. There may yet be profitable growth away from the trough.

Asia integrated PE margins

Read Paul Hodges’ Chemicals and the Economy blog
Check out John Richardson and Malini Hariharan's Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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