Petrochemicals: ethane advantage soars in January

20 February 2012 00:00  [Source: ICB]

Shale Gas pump Rex Features
 © Rex Features
US producers have been using cheap shale-derived ethane

The average ethane feedstock advantage over naphtha for January has surged to its highest level since ICIS margin records began in 2000.

US ethylene producers have been capitalizing on a glut of cheap shale-derived ethane feedstock to produce near record-breaking cracker margins at the start of 2012.

Following the settlement of US January ethylene contracts which rose by 1 cent/lb to 55.75 cents/lb ($1,229/tonne, €934/tonne), variable margins for US crackers using ethane have averaged 26 cents/lb for the month.

Ethane margins have only averaged higher twice since the turn of the millennium - 27.1 cents/lb in April 2010 and 26.5 cents/lb in October 2008.

Mont Belvieu ethane prices have softened since the first week of January, averaging 68.36 cents/gal last month, down from 80.49 cents/gal in December.

Up to February 10, ethane prices have averaged 50.63 cents/gal: however on February 14, they dropped to a low of 43.75 cents/gal - the lowest price for Gulf coast ethane since July 2010. This time last year, ethane was just above 70 cents/gal.

Prices have been pressured by weaker demand after the start of a busy cracker turnaround season in the US; three crackers have been shut down since early January. One unit has restarted, but five other US producers are planning maintenance in the next few months.

In stark contrast to ethane margins, US ethylene producers using naphtha feedstock have struggled. High naphtha prices, forced up by elevated crude oil prices, have been squeezing margins. Variable naphtha margins for January averaged just over 2 cents/lb, which is close to some of the poorest US ethylene margins since 2000.

Naphtha crackers in Europe also suffered at the start of 2012, with average January variable contract margins at €163/tonne of ethylene produced. However, for the first two weeks of February European naphtha-based cracker margins have rebounded to average almost €300/tonne, boosted by higher ethylene and co-product contract prices, but at the same time weighed down by record high naphtha prices in euro terms.

February contract prices jumped by €99/tonne to settle at €1,219/tonne for ethylene and up by €90/tonne to €1,105/tonne for propylene, with a 7.8% hike in co-products credits.

CURRENCY CONSIDERATIONS

Naphtha prices reached a high of €779/tonne in the week ending February 10, surpassing the peak in July 2008. However, the rise in the naphtha price has been eaten away by the exchange rate rise.

From January 1 to February 10, the European naphtha price has risen by 8.4% but, in the same period, the euro has strengthened against the dollar by 4.8%. This has meant that costs for euro-based naphtha feed went up by just 4.5%.

The improvement in cracker margins will no doubt go some way to pleasing European cracker operators, but there is still much room for improvement.

According to one European producer, January was one of the worst months for margins in the past decade.

It said that margins were still relatively poor and that olefins producers needed another step improvement in March. "We are obliged to try and improve margins for crackers - it is more or less a must," it said.

US ethane prices

The producer added that operating rates at European crackers had improved since December, by at least 5% and maybe as much as 7-10%, with utilization rates averaging around 85%.

The improvement is in sharp contrast to the fourth quarter last year when margins plummeted.

"Margins fell heavily across the globe, accelerating losses made in the third quarter," according to global consultancy Nexant ChemSystems. "Demand stalled as many consumers lost confidence in the outlook for the global economy and heavily reduced their stocks at the end of the year."

Despite extensive cuts in operating rates in western Europe towards the end of 2011, markets remained long, while feedstock costs stayed high and petrochemical prices fell from their mid-year peak.

"Average operating rates across the industry were cut to just 75%, the lowest since the global financial crisis at the end of 2008," Nexant Chemsystems said.

Average petrochemical industry margins in North America, meanwhile, were down 15% to a two-year low, according to the consultancy.

US analyst Bernstein Research said that in western Europe, fourth-quarter propylene margins fell by 38% quarter on quarter, crude C4 margins decreased by 57%, while butadiene (BD) margins dropped by 24%.

However, despite a very poor end to 2011, cracker margins in Europe and the US made healthy gains for the year as a whole.

In Europe, contract naphtha-based ethylene margins for 2011 averaged 26% higher year on year, while in the US they were up by 25%.

Those cracking ethane benefited from almost a 9 cents/lb premium over their naphtha-cracking counterparts. Ethane cracker contract margins rose by 14% year on year in 2011.

PREDICTIONS

According to analyst Hassan Ahmed of US-based Alembic Global Advisors, average ethane-based ethylene margins in 2011 were 22 cents/lb. He predicted that US ethane-based margins should average around 27 cents/lb in 2012, with naphtha-based margins around 7 cents/lb.

"On the back of cheap natural gas/ethane US margins should be far better than European and Asian margins. I expect European and Asian margins to be between break-even and 5-6 cents/lb inferior to US ethane-based ethylene margins," he said.

Bernstein Research, meanwhile, expected weak naphtha cracker margins to gradually improve in 2012. Bernstein's analysts said: "During the economic crisis, we believe cracker operators improved their capabilities to respond to rapid changes in demand. As a result, they are now better positioned to operate in a weak environment and preserve margins."

A European producer said it believed that margins will improve slightly during this year but theywill not be much better overall than in 2011.

"We will have a more stable situation in 2012 but we have to be cautious," it said, referring to the volatility of raw materials such as crude and naphtha and the current geopolitical climate.

  • Additional reporting by Regan Hartnell, Nel Weddle, Nigel Davis and Franco Capaldo in London and William Lemos in Houston

Author: Elaine Burridge and Andy Brice



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