US propylene spike ripples downstream

10 June 2011 12:07  [Source: ICB]

Soaring propylene prices resulting from lack of supply have affected a number of key intermediates

The petrochemical sector's enthusiasm for cheap shale gas has come at a price: record high costs for key feedstock propylene. The impact is being felt down the chain to intermediates cumene, phenol-acetone and acrylonitrile (ACN).


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US propylene contracts settled at a record high in May for the second month in a row, lifted by lingering tight supply following a series of refinery shutdowns earlier in the year. The May settlement put polymer-grade propylene (PGP) at 97.00 cents/lb and chemical-grade propylene (CGP) at 95.50 cents/lb - an 11% increase from the previous record settlement in April.

The price surge in the past two months took propylene beyond the levels seen in July 2008, when PGP hit 85 cents/lb because of record-high crude oil prices.

The latest uptrend in the US propylene market stems from tight supply, particularly of refinery-grade propylene (RGP). The product accounts for around 60% of the US propylene market.

RGP inventories in the US fell to three-year lows in April after many turnarounds in the first quarter, which included the shutdown of 18 refineries. As well as the planned shutdowns, seven refineries had major outages of one week or more between January and March.

The drop in supply pushed first-quarter RGP spot prices up by 25% and paved the way for another 20% gain in April, putting it at 91 cents/lb at the end of that month. RGP normally trades at a discount to PGP, but the monomer ended April with a premium of 4% over the 87.50 cent/lb PGP contract price for the month.

Along with rising RGP prices, the widespread use of light cracker feedstocks in the US, particularly ethane, is also cited as a factor lending support to propylene contracts.

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. Since US natural gas supply is forecast to grow steadily on the shale gas revolution, ethane is expected to remain more competitive than naphtha in the long term. Announcements of planned cracker expansions in the US point to ethane as the driver behind the prospective investments.

The cost advantage of natural gas compared with crude oil is irreversible, and the US olefins feedstock base will remain tight, an industry source said. Another market participant predicted that ethane will account for as much as 70% of US cracker feedstocks by 2015, while the use of naphtha will drop to around 7% in the same period.

The anticipated lack of incremental propylene output from steam crackers has prompted planned investments in propylene production, but buyers will have to wait until at least 2013 to see any extra in the market.

In May, US-based natural gas processor Enterprise Products Partners said it planned to expand PGP fractionation by 10%, citing tightness in US propylene supply caused by reduced output from the cracker side. It plans to add 500m lbs/year of PGP production at its Mont Belvieu facility in Texas, boosting PGP capacity there to 5.4bn lbs/year in the first quarter of 2013. US propylene production in 2010 was 31bn lbs, according to data from the National Petrochemical & Refiners Association.

US-based Dow Chemical is also looking to expand propylene capacity. The company plans to operate a propane dehydrogenation (PDH) plant by 2015, at Freeport, Texas. The company is also exploring an option to commercialize its own technology to produce propylene from propane, with the potential start-up of a second production unit in 2018.

With demand for propylene strong from several downstream chemicals, numerous other markets are feeling the price pinch.

In the past month, prices in the US polypropylene (PP) market have surged by more than 25% for homopolymer and copolymer material. PP prices were at 108-111 cents/lb for homopolymer material and at 109-112 cents/lb for copolymer material by May 20.

The surge in prices has left PP producers worried, with those converters who can switch over to producing high-density polyethylene (HDPE) doing so to ensure strong margins.

In the US phenol and acetone segment, record high propylene prices are pushing up on producer's margins. The feedstock for phenol-acetone production, cumene, is made from 0.66 parts benzene and 0.36 parts propylene. As a result, phenol-acetone producers link acetone prices to the propylene market.

With the increase in propylene prices, acetone producers have attempted to pass along the rising feedstock costs in full to downstream buyers, especially in the key methyl methacrylate (MMA) market.

Cumene supply was constrained in the first quarter of 2011 because of several planned and unplanned turnarounds by major producers, so acetone and phenol supply was also tight.

The tightness of phenol supply prevented producers from securing expected profits because of the reduction in sales volume, forcing them to make up for this by pricing acetone higher than normal. Rising propylene prices pushed acetone prices higher, despite moderate downstream demand. The May acetone MMA barge contract price settled at 71.25 cents/lb, just 0.25 cents below the record high.

In the US acrylonitrile (ACN) market, spot prices have hit record levels of $2,900-3,000/tonne FOB, up $300-350 from March because of rising propylene prices. Before the surge in US Gulf spot prices in October 2010, the previous record was $2,475/tonne in June 2010.

When prices started rising again in February 2011, several market participants thought the $3,000/tonne price would be a psychological barrier for buyers. But the rising feedstock propylene costs made upper-level transactions inevitable, sources say.

While producers are enjoying the higher prices when they can sell the material, they say demand is starting to be destroyed in the export market, where Asian consumers, particularly in the acrylic fiber markets, are unwilling to pay more than $2,900/tonne.

The price differential between what the material costs to make and what overseas consumers will pay has at least one US ACN plant reducing operating rates in May. With propylene costs at record levels, producers do not want to have expensive material in their inventory that they are unable to sell. The situation could put ACN supply at risk in the coming months, market sources said.

For more on propylene, visit our comprehensive Chemical Intelligence database

Author: John Dietrich and William Lemos

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