INSIGHT: US olefins producers glory in cheap ethane

01 February 2013 17:06  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--So the US shale advantage begins to flow.

Petrochemical producers gained little from volume growth in the 2012 fourth quarter and none from prices but US natural gas liquids (NGLs) margins were strong.

The sharp margin increase for Dow Chemical’s performance polymers in the quarter, for instance, showed most clearly where the company is reaping the advantage of cheap ethane.

The 76% increase in chemicals profits at ExxonMobil were largely due what the energy giant called higher commodity margins.

LyondellBasell on Friday attributed a great deal of its 68% fourth-quarter earnings before interest, tax depreciation and amortisation (EBITDA) increase to higher margins from its US crackers.

The olefins business in North America continues to benefit from strong margins created by low priced NGLs, LyondellBasell CEO Jim Gallogly said.

North America’s shale gas boom is feeding directly into petrochemicals profitability as companies capitalise on cracking ethane and other gas liquids. Dow Chemical is talking about signing a major derivative plant agreement tied to ethylene from its planned new liquids cracker in Freeport, Texas. It is preparing, also in Freeport, to convert propane into propylene to cover its needs in coatings and thermosets.

The feedstock cost advantage makes most cracker product chains in Europe and also in Asia look pretty sick. Europe is more starkly exposed because of other high costs and weak or non-existent demand growth.

It can come as no surprise that the focus in North America is on ethane and other NGLs. These petrochemical feedstocks are available in abundance as shale gas plays produce more oil and natural gas. Ethane prices are low and expected to remain so for some time.

The ethane advantage should help companies produce strong olefins and derivatives profits in the coming quarters.

Dow talked about its performance polymers margins rising 420 basis points in the 2012 fourth quarter from a year earlier. Margins for this business could be sustained in future close to 30%, CEO Andrew Liveris said.

For Dow and most other multinationals, 2012 was a challenging year. Dow, for instance took steps to re-prioritise its many growth projects and rationalise some businesses. The second half was poor with few signs of a turnaround running into 2013.

The focus, though, is on ethane and other NGLs.

The three companies mentioned here have plans to lift ethylene capacity to take advantage of increased ethane supply.

“The US shale gas revolution is clearly visible in our current results as well as future growth plans," Gallogly said on Friday.

Speaking to investment analysts on Thursday, Liveris talked about a $413m (€306m) decrease in purchased energy and feedstock costs in the fourth quarter and the way Dow expected to fully leverage the ethylene cycle.

Dow thinks that there could be a double advantage in the next few years.

Derivatives demand is expected to grow in North America before new ethylene capacities come on stream. Domestic prices are likely to rise, the thinking goes, as products are sucked in and America becomes a net importer.

And before new crackers, and yet to be announced derivatives plants, in the US start up, global supply/demand balances should tighten leading to a peak in ethylene cycle.

“Wet shale gas dynamics are fundamentally changing the game for integrated North American-based producers like Dow,” said Liveris.

“This is clearly evidenced by operating rates in the US and Canada being in the 90s while Asia and Europe have been in the 70s.”

And the company is expecting a great deal from propylene integration as it taps into abundant supplies of propane. “We are especially bullish on propane,” Liveris said.

NGLs prices might rise, of course, and there is deep concern in the US petrochemical industry about the prospects for large-scale exports of liquefied natural gas LNG) pushing the prices of gas and liquids up.

But Dow believes that the US ethane market will remain long for the next four to five years extending the period of favourable feedstock prices.

If the North American olefins and derivatives feedstock advantage is prolonged, more pressure will be heaped on producers in high cost, low growth Europe. Liveris’s comments on Europe on Thursday were telling.

“Europe needs more rationalisation, more margin improvement, more restructuring,” he said.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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