Think tank: Ethane benefits naphtha players

22 November 2012 20:24  [Source: ICB]

Purely on a cost basis, cracking naphtha or liquids hardly appears attractive when set against the technically much simpler cracking of gases like ethane.

Gas crackers are easier and cheaper to build. So the availability of higher volumes of ethane in North America from the exploitation of shale gas and shale oil, as well as relatively low projected prices, makes the decision to crack more gas an easy one. Not so the cracking of liquids, which is rather the opposite.

Naphtha cracker

 The value of co-products is sustaining profit margins for naphtha crackers

Petrochemical producers in the US have moved sharply to crack more ethane. Elsewhere, the situation in which those producers find themselves is viewed with some envy.

Taken together, feedstock and energy costs are by far the greatest cost element of the cracker. And if those costs are related to cheap ethane and natural gas rather than expensive naphtha and oil, then so much the better.

Yet you would not build a naphtha cracker to produce solely ethylene, although ethylene is the primary product. The value of co-products, primarily propylene, C4s such as butadiene (BD), and aromatics such as benzene and the xylenes, is immense.

Taking the value of these products into account when assessing the profitability, or the value generated, from these competing petrochemical processes sometimes sheds a very different light.

Financial analysts Bernstein, for instance have assessed the cracking process and the fact that profit margins from naphtha cracking remain "surprisingly high". They are surprisingly high simply because the co-products produce so much value for the operator, even though C3 and C4 prices have declined from 2011 highs.

"Naphtha cracker owners have surprisingly benefited from low-cost gas," Bernstein Research says in a note to investment clients. "The shift towards ethane cracking has boosted global naphtha margins to mid-cycle levels when operating rates imply margins should be at trough levels." Bernstein reckons that cracker operating rates globally are around 88%. And because of the shift in value from oversupplied ethylene to relatively tight co-products, we are in a situation not seen in the past 20 years.

"The shift in feedstock mix is smoothing the naphtha cracker cycle - it has made the current trough shallower and could smooth the next peak," the analysts say. "We estimate several naphtha cracker owners (eg, BASF, Sinopec, Reliance) are earning an additional 10-25% EBIT [earnings before interest and tax] in their chemicals businesses and 3-7% of group EBIT due to co-product scarcity."

By: Nigel Davis
+44 20 8652 3214

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