08 February 2013 09:56 [Source: ICB]
The US ethylene cycle is poised to hit a "double peak" in the coming years in the form of higher margins from low natural gas liquids (NGL) feedstock costs, as well as higher operating rates, said US-based Dow Chemical chairman, president and CEO Andrew Liveris.
"Wet shale gas dynamics are fundamentally changing the game for integrated North American-based producers like Dow," said Liveris on the company's fourth-quarter conference call. "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."
Twin peaks: cheap NGL and high operating rates will boost margins
Before the wave of new US ethylene capacity hits the market in the form of new worldscale crackers in the back half of the decade, the Americas may well become a net importer of ethylene derivatives, "leading to a step change in price necessary to attract those imports", he noted.
"Further, as global demand outstrips supply in the next few years and world GDP gains further traction, we anticipate operating rates higher than 90%, leading to substantial margin expansion - a double peak, so to speak," Liveris said.
US ETHANE LONG
The US ethane market will remain long for the next four to five years, resulting in an extended period of favourable feedstock prices, noted the CEO.
"One would expect we're going to benefit from this 20-something number for a few years to come. If it goes into the 30s, it will be due to aberrations," said Liveris, referring to ethane prices in cents/gal.
Dow has a $25bn (€19bn) asset base in the US that will benefit from low ethane prices, Liveris said. Dow also expects to take advantage of low propane prices, as it uses both ethane and propane feedstock at its crackers.
"We are especially bullish on propane. In fact, going forward, we see structurally long propane creating a ceiling on ethane pricing," Liveris said. "And you can be sure Dow's feedstock flexibility will allow us to continue to pivot so we continue to take advantage of our uniquely advantaged feedstock slate."
Dow posted a 35% year-on-year gain in fourth-quarter 2012 earnings to $389m, despite 1.3% lower sales of $13.9bn. The shale gas cost advantage was evident in its performance plastics segment earnings before interest, tax, depreciation and amortisation (EBITDA), which rose 24% to $829m.
The Netherlands-based LyondellBasell's Americas olefins business also continued to benefit from the US shale gas boom. It has lightened its US Gulf Coast cracker feed significantly, with NGL accounting for 85% of the total in 2012 versus 75% in 2011.
The company's NGL supply programmes worked well over the course of the year and in the fourth quarter. "We exceeded nameplate capacity in the third and fourth quarter of 2012," said LyondellBasell CEO Jim Gallogly. "Our cracker operations have been rock solid".
In the fourth quarter, LyondellBasell posted an 89% year-on-year gain in EBITDA to $769m in its Olefins & Polyolefins (Americas) segment.
While companies are bullish on US petrochemical prospects, it is a different story in Europe.
Dow plans to restructure further in Europe to deliver stronger margins in a slow growth and high cost naphtha feedstock environment.
"Europe needs more rationalisation, more margin improvement [and] more restructuring as time goes by," said Liveris. "We will manage that with our portfolio management process."
Dow is in the midst of a $2.5bn cost reduction and cash flow improvement programme designed to position the company better to tackle an expected slower global growth environment. Capital and research spending is being prioritised and the divestment of non-core operations planned.
Liveris spoke of the significant, naphtha-based margin decline in Europe and in Asia in the second half of 2012 and the prospect of slow growth in Europe this year.
The company's performance plastics segment businesses experienced "trough-like conditions in Asia and Europe", in the fourth quarter, he said. Liveris called 2012 "a challenging year".
The stabilisation of demand growth in Asia and the Americas in the fourth quarter for Dow offset declines in Europe.
"Volume was flat for the [fourth] quarter, as a 5% decline in western Europe offset volume growth in Asia Pacific (up by 5%) and North America and Latin America (each up by 1%)," stated Dow in its earnings release. "Excluding Dow's Feedstocks and Energy operating segment, volume in North America increased 7%, reflecting improving demand."
Dow expects "continuing challenges" in Europe this year, while it has higher hopes for a stronger macroeconomic performance in North America and in China, Liveris said.
The outlook in China is getting brighter, he added, with Dow expecting China GDP growth in 2013 of 7%.
Dow expects global GDP to grow closer to 2.5% in 2013 than 2.0%. "We are more confident in the macros that our market planning suggests," Liveris said.
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