Commentary: US ethylene cracker may be the first seed sown for the downturn

04 April 2011 00:00  [Source: ICB]

The bulls run at the National Petrochemical & Refiners Association's meeting in San Antonio and a watershed announcement is made. But seeds of the downcycle are being sowed

In the first of what we believe will be a wave of new investment in North American petrochemical capacity, Chevron Phillips Chemical has unveiled the first plans for a worldscale grassroots ethylene cracker in the US to take advantage of abundant supplies of shale gas.

Recognize this as a watershed event. This is the first announcement of a cracker in the US for about a decade, as the entire industry took a solemn vow to never again build in the country after the severe downturn in 2001-2002, as aptly recalled by Petral Consulting principal Dan Lippe back in 2006.

The last decade has seen unprecedented volatility in the price of of natural gas - the key feedstock for the US petrochemical industry. But shale gas had the bulls running at the International Petrochemical Conference in San Antonio, Texas, US last week.

Hosted by the National Petrochemical & Refiners Association (NPRA), the conference was the US venue of the running of the bulls. The theme - upward price pressures across a wide spectrum of commodities - from ethylene to naphtha cracker coproducts propylene and butadiene (BD), to short-term shortages in cumene, and downstream products phenol/acetone.

And in the medium term, supply constraints are poised to emerge in monoethylene glycol (MEG) and methyl di-p-phenylene isocyanate (MDI). Titanium dioxide (TiO2) has been tight as a drum and producers are banging the skins for further price increases.

The announcement of a new US ethylene cracker was inevitable. The rising prices, favorable cost economics and tight market demanded it. The question is: How many more are on their way? Every global producer is evaluating the potential.

For long-time industry players and observers, this should ring familiar. While not every cycle is the same, there are repetitive elements. The build-up of capacity in what are indisputably favorable conditions is one key element. Does the planned cracker, which is only in feasibility studies, signal the end of the upcycle? Not necessarily. But keep an eye on other announcements - whether grassroots capacity or other major expansions.

Canada's NOVA Chemicals is undertaking a $100m (€70m) upgrade of its flexi-cracker in Corunna, and other players are debottlenecking capacity.

The global petrochemical industry, in the next two-to-three years, should enjoy the sweet spot of the cycle. No one wants to leave the party early. But recognize the seeds of the downturn that are already being sowed.


By: Joseph Chang
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