01 August 2011 00:00 [Source: ICB]
On-purpose propylene output unlikely to make a significant dent in long-term supply-demand imbalance, says consultant
In Europe, propylene prices went above ethylene for the first time ever during the second quarter of 2010. Since 2001, the price differential of ethylene over propylene had steadily eroded until it reversed in 2010. The price of propylene also has risen above that of ethylene in Northeast Asia.
Back in the good old days, propylene was viewed only as a by-product. Now it is a coproduct, perhaps even the main product in terms of profitability for some steam cracker operators.
ORIGINS OF IMBALANCE
The root cause of today's imbalance stretches back 30 years. In the 1980s, the plentiful availability of C3s led to the search for something to do with all this cheap raw material. This was the trigger for a great deal of R&D in polypropylene (PP). PP has proved to be a wonderfully versatile polymer, gaining market share from other polymers such as polystyrene (PS) and high-density polyethylene (HDPE).
PP global demand growth has, as a result, been well-above the expansion in global GDP and in excess of other polymers.
But propylene supply has failed to keep up with this strong growth because a lot of the recent new cracker capacity in the Middle East has been based on ethane, points out Paul Cherry, Hong Kong-based petrochemical consultant for Officium Projects.
Ethylene production based on ethane yields very little propylene coproduct, while ethylene production based on naphtha feedstock yields a lot more propylene as a coproduct. The next big wave of steam cracker capacity looks as if it is again going to be based on ethane, but in the US this time because of abundant availability of shale gas. Ethane supply is tight in the Middle East, resulting in very few cracker projects in the region.
Existing crackers in the US have also lightened their feedstock slate, switching from naphtha to ethane, because of the explosion in shale gas capacity.
A further factor behind tight propylene markets is a reduction in operating rates at fluid catalytic crackers (FCCs) due to declining US gasoline demand.
Shale gas supply is expected to increase even further because of new exploration and a great deal of extra gas fractionation capacity. This could make existing cracker operators reluctant to switch back to naphtha. New shale gas capacity will yield more ethane than propane supply, says Cherry.
The US refinery sector also is expected to remain under pressure. Gasoline demand is expected to continue to decline because of, for example, tougher fuel-efficiency regulations
Will the prospect of propylene remaining expensive lead to a flood of on-purpose C3 projects? Could this drive the price of propylene back below ethylene? Or might there be demand destruction in PP as converters switch to other cheaper polymers? Could this loss of market share restore the discount of propylene to ethylene?
A lot of the talk at this May's Asia Petrochemical Industry Conference (APIC) in Fukuoka, Japan, concerned on-purpose propylene investments. PP demand destruction was also a significant concern among attendees.
A widespread belief was that the problem would be fixed and that enough investment dollars would be found to bring propylene down to a more-affordable level. Cherry argues that the petrochemical industry will have to continue living with expensive propylene because of the economics of on-purpose production. He also contends that PP demand destruction will not be sufficient to drive propylene back down below ethylene.
The nature of spot propylene markets is another reason to believe that C3s will remain costly.
"Propane dehydrogenation (PDH) technology was first developed commercially in the 1990s," Cherry said. "The initial units in South Korea and Western Europe often shut down in winter months when the seasonally higher prices for propane made PDH production economics unworkable."
Then came subsidized propane in Saudi Arabia during the 2000s, resulting in a substantial number of PDH investments in the kingdom. These were by Saudi industrial conglomerate SABIC and private Saudi firms such as TASNEE, Advanced Polypropylene, NATPET and Sahara Petrochemicals.
"There are a number of advantaged-propane PDH operators in Saudi and a small number in other countries such as Thailand and Malaysia," says Cherry.
"They represent a much smaller proportion of global C3 production than ethane cracker operators represent of global ethylene production." Subsidies for propane are also less than those for ethane, he adds.
"The effect of the PDH players on global C3 and PP pricing is therefore less pronounced than that of advantaged ethane cracker players on global ethylene and PE pricing." Cherry said.
Propylene has become so expensive that new PDH plants have been announced, or already constructed, without cost-advantaged propane, he adds.
One example is the 544,000 tonne/year Petrologistics PDH unit in Houston, Texas, which came on stream in October 2010. It is the only PDH unit in the US, although US-based Dow Chemical is planning to build a second unit in Freeport, Texas, by 2015.
China's Tianjin Bohua Petrochemical plans to start up the country's first PDH plant at Tianjin by June 2013. The $579.6m (€407.5m) project will have a capacity of 600,000 tonnes/year.
"Metathesis has recently become another popular on-purpose production route for C3s in Japan, South Korea, China and Singapore," says Cherry.
"Metathesis involves the reaction of ethylene with butene-2 to form propylene.
"It requires a significant butene stream [approximately two tonnes of butene-2 for every tonne of ethylene], which is almost always sourced from FCCs. Typically, the economics are workable when the ethylene price is equal or less than the propylene price."
Metathesis units were built in Northeast Asia to "upgrade" ethylene that was devalued by all the cheap ethane-based capacity in the Middle East, says Cherry.
The Middle East, because it doesn't have access to butene-2 feedstock, only has one metathesis plant, which is run by Borouge in Abu Dhabi. This facility uses the dimerization process, where ethylene is converted to propylene without any need for an external source of butene-2.
Methanol-to-propylene (MTP) technology is the third on-purpose route to C3s. "It is a relatively new technology and projects are being considered in locations such as Nigeria and Trinidad. This is an option for upgrading the methanol being produced from locally available stranded natural gas," says Cherry. "There are also plants in China which use coal as a feedstock to make methanol."
"It is too early to say if MTP technology will become a significant source of the world's propylene," he adds.
"But it can be said that capital requirements are very high due to the volume of methanol feedstock which needs to be produced. This is around three tonnes of methanol to make one tonne of propylene."
PDH, metathesis and MTP are growing in importance, but Cherry says that cost advantages over steam cracker and FCC propylene are not that significant.
"Some will argue that the major C3 derivative PP will lose significant business to HDPE if there is a sustained price premium. However, a number of the major PP applications cannot be converted to HDPE such as biaxially oriented film, bulk continuous filament, spun-bond fiber, injection molded automotive applications and applications where the clarity of PP random copolymers is important.
These applications include housewares and DVD packaging," says Cherry. "Even the largest global application for PP, raffia, while substitutable by HDPE, requires HDPE producers to choose a particular production technology when constructing their plants," he adds.
Most PP technologies can produce grades for most applications and the grade transitions are relatively simple, added the consultant.
HDPE plants, in contrast, tend to focus on a certain application. This is because some technologies are only suitable for a limited number of applications and the production of large quantities of off-spec material where grades can be changed.
"Until now, HDPE producers have focused on blow molding, film and pipe applications and the number active in the injection moulding and raffia markets is relatively few," says Cherry. "Therefore it seems unlikely that there will be enough demand destruction for PP to put any downward pressure on C3 prices."
THE INFLUENCE ON SPOT
Another problem for propylene affordability is the influence on spot prices from non-PP buyers.
"This is out of proportion to the size of their total demand for C3s. With most PP producers integrated to steam crackers, refineries or PDH units, the majority of spot C3 buyers are producers of non-PP derivatives such as acrylonitrile, oxo-alcohols and cumene," Cherry points out. "For these producers, C3 represents a significantly lower proportion of their total cash costs than it does for PP producers," he adds.
Therefore, they have a much greater ability than PP producers to "bid up" spot prices when availability is tight.
"For this reason, the outlook is particularly difficult for PP producers which rely on spot supply of C3 or have term C3 supply contracts with price formulas linked to spot C3 prices," he continues.
Economist John Kenneth Galbraith added: "The only function of economic forecasting is to make astrology look respectable." For example, just a few years ago the US petrochemical industry was written off as uncompetitive.
Nevertheless, the depth of Cherry's arguments suggest that a great deal will have to happen if propylene is to become cheap once again.
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