Market outlook: US propylene could become cheap again

08 November 2013 10:00  [Source: ICB]

On purpose propylene from propane dehydrogenation (PDH) will set a price ceilin

Propylene is going through some long-term gyrations in the US. As recently as the 1990s, the US had so much excess propylene that consultancies such as Probe Economics called the country the “OPEC of propylene”.

Polymer grade propylene was selling at more than a 20% discount to ethylene, and polypropylene (PP) was promoted as a way of getting rid of excess propylene. That has changed and could change again.

 

 Petrologistics’ PDH plant in Houston will have plenty of company in the coming years

Copyright: Petrologitics

The excess propylene was a by-product of producing all the gasoline this country of gas-guzzlers was demanding. But in the last 20 years, things changed:

US gasoline demand growth slowed almost to a halt

The Environmental Protection Agency (EPA) started requiring that renewable, non-refinery fuels make up part of the gasoline pool

More and more ethylene was made with light, gas-liquid feedstocks that produce little propylene by-product

Propylene prices shot up. Polymer grade propylene was selling for as much as 40% more than ethylene, which hurt US propylene derivatives producers and exposed PP to strong competition from polyethylene (PE) and other materials.

PDH ECONOMICS
This could all change again thanks to propane dehydrogenation (PDH) economics. Probe believes that PDH economics will put a ceiling on propylene prices. If the propylene price exceeds reinvestment levels, more PDH plants will be built, and the propylene price will fall back again.

It will take a few years, because PDH plants are being delayed by high construction costs and the scarcity of resources – Petrologistics and Williams have both announced delays.

The big shale gas push has made it hard to find engineers, construction workers and equipment to build petrochemical plants right now.

The PDH-determined price ceiling will not be all that high because the US has shale-advantaged propane. There has been a lot of talk about rising propane exports and how that is increasing the propylene price. That is certainly happening, but Probe still expects US propane, particularly in stranded areas, to be significantly advantaged for years to come.

Also, PDH technology is attractive. According to Probe estimates, PDH is profitable right now and could do well on much lower propylene prices.

The only current US PDH operator, Petrologistics, for now enjoys high gross margins – exceptionally high for a commodity chemical producer and equivalent to margins realised by value-added chemical companies such as DuPont.

ETHYLENE DYNAMICS
Ethylene prices have to stay up because there still is a significant amount of naphtha, condensate or gasoil being cracked in the US, even as virtually all US crackers that were once designed to run 100% naphtha or gasoil have been converted over the last decade to use a significant amount of natural gas liquids (NGLs).

For instance, the Chevron Phillips Chemical plant at Cedar Bayou, Texas, was designed for naphtha or gasoil but is now understood to run purely on ethane and propane.

Many other crackers have converted but still reportedly run on about 5% naphtha. This includes Shell at Norco, Louisiana, and Dow Chemical at multiple locations.

Some crackers are running much more naphtha, gasoil or condensate than that, because they are committed to supplying cracker byproducts within their own companies or to customers on long-term contract. It is believed that the ExxonMobil and Formosa crackers fall into this category.

Basic economics suggests that, if these liquids crackers are to keep operating, they have to receive prices for ethylene and co-products sufficient to at least cover their cash costs.

So, on which products or co-products will crackers raise prices in order to bring revenue up to cash cost levels? Butadiene (BD) does not amount to much, and pygas prices are already set by gasoline values. That leaves ethylene and propylene, but Probe expects propylene prices to be anchored by PDH economics. That leaves ethylene.

Liquids crackers have to make their extra money on ethylene. Probe believes that is why ethylene prices are elevated today and why they will be elevated in the future.

So what does that do to the relationship of propylene to ethylene prices? With ethylene prices being elevated in this manner and with propylene prices headed down to PDH ceiling levels, Probe expects propylene prices to be less than ethylene prices once again.

These are some of the conclusions of Probe Economics’ latest study, “Feedstock, Petrochemical and Polymer Cost, Price and Margin Forecasts to 2030”.

FORECASTS
Probe developed its forecasts with three energy-economic scenarios:

Path A: Slow, steady economic growth

Path B: Higher growth interrupted by a Middle-East-based oil price shock. Growth resumes, but with more inflation

Path C: Another recession followed by slow growth, and lower oil prices

Figure 1 shows Probe’s PDH projections in the Path A scenario. The red line gives the variable cost of producing pound of propylene in the plant, and the green line gives the “reinvestment” propylene price that would induce someone to build a new plant. The blue line gives the market price of polymer grade propylene, which is currently way higher than reinvestment pricing and is shown to come down to reinvestment pricing or below.

In Path B, with its high oil prices, propylene prices also come down to PDH reinvestment levels.

Only in Path C, with its low oil prices, does PDH lose its profitability. Prices drop down close to variable costs, which means that no more PDH plants are built and existing ones are eventually be scrapped.

PROPYLENE VERSUS ETHYLENE
Figure 2 shows the effect of the three scenarios on the ratio of propylene to ethylene prices. As the figure shows, Probe expects the ratio to return to former levels. If this happens, it will give a big boost to propylene derivatives in the inter-material competitive battle and help with the budding US manufacturing resurgence.

Companies such as Brazil’s Braskem that purchased propylene derivative businesses in the US will become a lot happier about their situation.

The study shows the effects of the three scenarios on the prices, costs and margins of 37 feedstocks, petrochemicals and polymers – including BD, which is a similar situation to propylene.


Fred Peterson is president of Probe Economics LLC, a chemical industry economic consulting firm established in 1976. He was an Assistant Professor of Economics at the University of Maryland, an Instructor (Preceptor) at Princeton University, a Senior Staff Economist with the President’s Council of Economic Advisers, a Staff Economist with the President’s Council on Environmental Quality, a Sales Representative with Stauffer Chemical Company, and a Lieutenant in the US Navy. For more information about the study, “Feedstock, Petrochemical and Polymer Price and Margin Forecasts Through 2030”, go to http://probeeconomics.com/new/Brochure.pdf, or contact Probe Economics LLC, 5 Pingree Road, Hanover, NH 03755, (603) 667-3636, fred@probeeconomics.com, or visit www.probeeconomics.com.


Author: Fred Peterson



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