NPRA supplement: Propylene on a rocky upward trend

26 March 2011 00:00  [Source: ICB]

With US ethylene production shifting to lighter feedstocks, pressure is on propylene supply, forcing prices higher with little sign of increased avilability

US propylene prices began 2011 on a sharp upwards trend, after a surge in spot prices in December paved the way for a large contract increase in January, and opened the door for a contentious and drawn-out settlement process.


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The increase, which resulted in a 28% spike in polymer-grade propylene (PGP) prices, split the chemical-grade propylene (CGP) market and widened the spread between the two grades of the monomer to an unprecedented level.

The settlements put PGP at 77.50 cents/lb and CGP at 74.00 cents/lb. They included increases of 17.00 cents/lb for PGP and 15.00 cents/lb for CGP by two producers, an unusual agreement considering that CGP and PGP normally rise or drop by the same amount.

In addition, some CGP contracts settled at 70.00 cents/lb, based on an early January agreement by a third producer that was promptly rejected by rival suppliers. That settlement involved a surprising and highly unusual two-month deal, with an 11.00 cent/lb increase for January and a roll-over for February.

The result of this atypical January settlement process was a three-tiered contract market - something an industry veteran said had never before happened in US propylene. The 7.50 cents/lb contract spread between CGP and PGP was also unprecedented, another source said.

This rise in US propylene contracts in January was widely expected following a 42% surge in refinery-grade propylene (RGP) spot prices in December (see chart on page 30).

RGP is a key element in determining propylene contract prices, because the product is used as a feedstock for higher-purity propylene and accounts for around 60% of the US monomer market. The boost in RGP prices lifted PGP spot prices, which gained 13.00 cents/lb in December alone for a monthly gain of just over 22%.

Market sources also pointed to cracker shutdowns as a driver behind the December increase in propylene spot prices, citing an outage at Shell's GO-1 Norco cracker in Louisiana that month.

Shell shut down the 558,000 tonne/year unit in the last week of November because of a ruptured steam line. The cracker remained off line for four weeks, forcing the company to declare force majeure (FM) on propylene, restricting deliveries of the monomer at 85%.

The outage at Shell was said to have limited supply of CGP, making buyers look for their feedstock on the PGP side. This in turn tightened supply in the PGP market, sources said.

Shell restarted its Norco cracker just before the new year and lifted the restriction on supply a month later.

The outage in Norco was followed by other supply restrictions in January that strengthened propylene prices, sources said. These included maintenance at Petrologistics' propane dehydrogenation (PDH) plant and a disruption in early January at Dow Chemical's St Charles cracker in Louisiana, which lasted nearly two months.

RGP inventory building at the beginning of the year also played a role in driving up prices, a buyer said, citing refinery turnarounds scheduled for the first quarter of 2011.

Some 18 US refineries undertook planned turnarounds between January and March. In addition, significant maintenance occurred at another seven refineries, which experienced major outages lasting at least one week in the first three months of the year.

The rapid increase in propylene prices was matched only by how quickly it caused demand to drop downstream, particularly in the key polypropylene (PP) market. PP accounts for around 60% of propylene consumption.

"Shale gas was a game changer for the industry"
Dan Smith
Director and chairman, Kraton Performance Polymers  
Market participants said PP producers in the US reduced operating rates in January, because the sharp monomer increase could not be passed on to converters. The increase also priced US PP out of its traditional export markets in South America.

The drop in propylene demand became obvious as spot prices, which had risen furiously in December, began to soften in the second half of January, undermining proposed contract increases for February.

US propylene producers initially nominated February increases of 3-5 cents/lb, but contracts went on to settle flat. The drop in demand improved availability in February, which pushed PGP prices down by 5.00 cents/lb in March. The monomer could have dropped by twice that, but the recent rally in crude oil limited the decrease.

The surge in energy prices is also likely to keep the downtrend in PGP short-lived, as higher naphtha costs will further encourage the use of ethane as an ethylene feedstock in the US. Ethane, which yields little co-product propylene, accounts for 65% of US cracker feed slates, while naphtha, which yields around 10 times more propylene than ethane, makes up only 15% of the feedstocks.

US reliance on ethane is expected to continue, because natural gas supply is forecast to grow steadily and ethane will remain more competitive than heavier feedstocks for years to come, market sources said.

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

Ethane constitutes around 40% of the US natural gas liquids (NGLs) stream from gas processing, and it has only one major end use - as feedstock to produce ethylene, said an industry executive.

The cost advantage of natural gas versus crude oil is also irreversible, and the US olefins feedstock make-up will remain extremely light, the source added. Another source predicted that ethane would account for as much as 70% of the US cracker feedstocks by 2015, adding that the use of naphtha would drop to around 7% in the same period.

US access to cheap ethane because of its vast shale gas reserves is a hot topic in the global petrochemicals industry.

"Shale gas was a game-changer for the industry," said Kraton Performance Polymers director and chairman Dan Smith at an industry event in New York in December 2010.

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

US ethane production, which is estimated to have been 850,000 bbl/day in 2010, is expected to surge by 30% by 2012 and grow steadily after that, according to industry projections. The rise in production is 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 favorable 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.

Ethane now accounts for 55% of the feedstocks Dow uses to produce ethylene.

Dow said it was reviewing joint venture options to build an 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 over the past two years began switching cracker feedstocks in the US to NGLs to capitalize on cheap natural gas resources in the region.

Talk that the US may eventually expand olefins capacity is often heard, but even if that were to happen, the gain for propylene would be negligible.

If the US gets a new steam cracker, it is likely to be a plain ethane unit, a consultant said, adding that the cost to build a fully flexible cracker would be prohibitive, given the expected price trends for ethane and naphtha. New supply would not enter the US market for a while, even if it were a flexible cracker, the consultant said, estimating that it can take three to four years to build a new cracker.

If the outlook for propylene on the cracker side points to constrained supply, the situation on the refinery side is not all that different, as US gasoline demand is expected to decline in the coming years.

US propylene output is estimated at 13.6m tonnes/year, but steam crackers account for only a third of that total. The remaining two-thirds come from refineries, where propylene is produced as a by-product of gasoline.

The weak outlook for US gasoline demand stems, in part, from improvements in vehicle-fuel efficiency and the increasing use of renewable fuels as a replacement for motor fuel derived from fossil sources.

In 2010, the US blended 13bn gal of ethanol into gasoline, but renewable blending could increase to 36bn gal/year by 2022 under a government mandate aimed at limiting pollution and reducing US reliance on crude oil imports.

With US gasoline demand expected to weaken, propylene supply will inevitably become more restricted unless there is new investment in alternative methods of production.

By: William Lemos
+1 713 525 2653

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