Market outlook: US petrochemical and polymers margins soar on cheap ethane

08 February 2013 10:00  [Source: ICB]

Based on spot prices, average ethane-based ethylene margins have grown by 60% over 2011

Copyright: RexFeatures

A sharp fall in US ethane prices has given ethylene producers in North America a strong advantage over naphtha-based producers in Europe and Asia. US ethane prices have tumbled over the last 12 months, enabling sharp increases in margins for ethylene and its derivatives.

For 2012, average ethane-based ethylene margins based on contract prices reached 31.22 cents/lb, the highest level since ICIS records began in 2000 and 45% higher than those in 2011. Based on spot prices, average ethane-based margins reached 43.95 cents/lb, representing 60% growth over 2011.

Integrated polyethylene (PE) producers have also benefited from the abundant supply of cheaper and lighter feedstocks in the US.

Average contract margins for integrated PE production (ethane-based) for 2012 were the highest on record at 42.22 cents/lb for HDPE - the most widely used grade of PE. The change on 2011 margins is 14.66 cents/lb, representing a 53% increase according to ICIS margin data, which reports the variable margin per lb (or tonne) of polymer produced.

Average US ethane prices declined by nearly 50% in 2012 compared with 2011. Average contract ethylene prices were about 12% lower, while HDPE prices were about 3% lower. The lower prices for ethane, ethylene and PE in the US contributed to a 5% drop in US petrochemical prices in 2012 compared with 2011, as indicated by the ICIS Petrochemical Index (IPEX).

The IPEX, which is published monthly, tracks changes in global prices for 12 petrochemical products.

The downward trend in US ethane prices has continued into early January, with prices in the week ended 11 January reaching their lowest level since March 2002.

Ethylene margins have continued to climb, with contract margins (ethane-based) that week reaching their highest level since April 2012.

Ethane prices are falling in the US as a result of oversupply, caused by newly abundant supplies of natural gas from shale formations. According to the US National Intelligence Council (NIC), US production of shale gas has increased by nearly 50% per year between 2007-2011.

Cracker outages helped support ethylene prices in 2012. There were an unusually high number of turnarounds in the first half as well as at the end of the year.

In December 2012, Williams Olefins, Flint Hills Resources and BASF TOTAL all had cracker outages. The three crackers have a combined capacity of nearly 2.2m tonnes/year.

The outages have continued into 2013. Huntsman has shut its 193,000 tonne/year Port Neches cracker in Texas, and Westlake has taken down its 699,000 tonne/year Petro 2 cracker in Lake Charles, Louisiana.

And BASF TOTAL Petrochemicals has also shut its Port Arthur cracker in Texas for planned maintenance.

"We believe US petrochemicals will enjoy a 2013 similar to 2012 - record ethylene profitability underpinned by cheap NGL (natural gas liquid) feedstocks," said Deutsche Bank analyst David Begleiter.

With domestic US natural gas prices low and crude oil high, chemicals manufacturers in North America are enjoying a major cost advantage over producers in other regions that has not been seen for more than a decade. In Europe and Asia, where ethylene production is based mainly on naphtha, producers have been hit by rising naphtha costs.

European contract margins for naphtha-based ethylene production were down by €23/tonne, or 5%, in 2012 compared with 2011 as euro-denominated naphtha costs rose by 8.8%. The dollar was 7.7% stronger in 2012 than in 2011, contributing to pressure on margins.

The fall in margins was limited by a 4.8% rise in co-product credits and a €101/tonne gain in average contract ethylene prices for the year, according to ICIS data.

European ethylene market players are, however, predicting a fairly bullish start to 2013 as a result of several planned cracker maintenance turnarounds.

The turnarounds are expected to get under way towards the end of the first quarter, beginning with Shell Chemical's 910,000 tonnes ethylene cracker in Moerdijk, the Netherlands. But the crunch will come in the second quarter when three more crackers, including Europe's largest, are expected to be closed for maintenance.

Restocking activities and a couple of unplanned cracker issues over the Christmas and New Year holiday period have also contributed to increased demand in the first half of January.

In Asia, naphtha-based ethylene margins were dented by a 1.2% rise in naphtha costs and lower co-product credits. Average margins approximately halved in both the northeast and southeast, despite higher ethylene prices.

Co-product credits were 4.1% lower in 2012 compared with 2011 in the northeast, while in the southeast they were 5.2% lower. Average ethylene prices were $29/tonne higher in the northeast and $43/tonne higher in the southeast.

Asian demand for ethylene and other chemicals has suffered from underwhelming Chinese demand. The northeast Asian nations (South Korea, Taiwan and Japan), in particular, are heavily dependent on the strength of China.

Ethylene margins dipped into the red in northeast Asia at the end of November, prompting cracker operators in South Korea and Taiwan to trim operating rates in December. Burdened by high naphtha costs, the majority of the crackers in Japan were also operating at 80-85% in January, market sources said.

Margins have since improved but producers remain cautious about the outlook, mainly because of uncertainties about the global economic climate.

"I think it might take some time for a turnaround from the bottom because there are no signs of market recovery," a northeast Asia cracker operator said.

"Demand in China as well as the European and North American economies have to improve first before the situation can change," the source noted, adding that polymer demand is expected to strengthen ahead of the Lunar New Year season in February.

While there were expectations that some pre-buying ahead of the February holidays could force prices higher, there were concerns about the lengthening of supply in 2013.

The Asia cracker maintenance schedule this year is lighter than it was last year, and new cracker start-ups in China - by Daqing Petrochemical and Fushun Petrochemical - are also expected to reduce the need for imports.

Daqing Petrochemical's 600,000 tonne/year cracker and Fushun Petrochemical's 800,000 tonne/year plant came on stream in September and October 2012.

Looking downstream, integrated PE producers in the US had a good year thanks to the low cost ethane feedstock, but manufacturers in Europe and Asia were hit by higher naphtha costs.

In Europe, average integrated contract HDPE margins (naphtha-based) for 2012 fell by €66/tonne, with added pressure from the stronger dollar during the period. In Asia, average integrated PE margins sank to their lowest since ICIS records began.

PE prices were fairly volatile in all regions in 2012. In the US, prices fluctuated because of the various cracker turnarounds, limiting the supply of spot ethylene and causing prices to increase significantly in the first two months of 2012.

Prices are expected to be more stable in Q1 2013 than in the same period in 2012 because there are fewer ethylene plant turnarounds planned.

Price volatility was a similar theme in Europe last year, making it harder for buyers and sellers to manage their businesses. PE players are bracing themselves for a difficult 2013.

European PE demand had been waning towards the latter part of 2012 and producers have reduced operating rates to as low as 75%, as they attempt to manage stocks in the high-priced, low demand environment.

The negative economic outlook is adding another layer of pessimism, with the European Central Bank (ECB) cutting its GDP forecast for the eurozone to -0.5%.

With Dow Europe announcing a closure of its 190,000 tonne/year HDPE plant at Tessenderlo, Belgium, in October 2012, some players expect more closures in the medium term in Europe.

In Asia, PE prices were hit by weak Chinese demand. China's PE demand rose by just 4% in January-September 2012 compared with the same period in 2011, according to US-headquartered Global Trade Information Services (GTIS).

This compares with double-digit growth throughout the last decade, peaking at 53% during 2008-2010, as China launched a huge economic stimulus package to compensate for the global financial crisis.

After a disappointing 2012, Asian PE margins started improving in early January, helped by a firming of PE prices. The pricing recovery has been driven partly by shutdowns in the Gulf Cooperation Council (GCC) region plus an outage at Daqing Petrochemical in China.

At the same time, there is confidence among converters that China's new leaders are serious about economic reform.

Meanwhile, in the US, ethylene and integrated PE producers are continuing to benefit from rising supplies of shale gas.

The US Energy Information Administration (EIA) sees production of natural gas increasing exponentially in the near years, "outpacing domestic consumption by 2020 and spurring net exports".

  • More information about ICIS margin reports
  • Additional reporting by: William Lemos, Bobbie Clark and Michelle Klump in Houston; Joe Kamalick in Washington DC; Nel Weddle and Linda Naylor in London; Helen Lee, Peh Soo Hwee in Singapore; and John Richardson in Perth

Author: Afsar Hussain and Anna Jagger

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