Commentary: Propylene and butadiene shortage fears may be overblown

08 November 2013 10:01  [Source: ICB]

While many point to the shift to cracking lighter feeds as leading to a structural shortage of ethylene co-products propylene and butadiene, supply growth may yet outpace demand

The consensus is that ethylene co-products propylene (C3) and butadiene (BD) will become structurally short as crackers – predominantly in the US but also elsewhere – shift to lighter natural gas liquids (NGL) feedstocks. However, fears could very well be overblown, as global supplies are poised to outpace demand.

Alembic Global Advisors analyst Hassan Ahmed sees global butadiene supply growing at 5.4%/year from 2013-2017, outstripping trend demand growth of 5.0%/year. For propylene, he expects supply growth of 5.2%/year overtaking demand growth of 4.8%/year.

Ahmed projects these relatively high supply growth rates, even as he forecasts less than consensus ethylene capacity growth during this period. He noted that consensus has BD supply growing at 7.9%/year, and propylene supply rising by 6.2%/year.

While the analyst sees little capacity additions for either BD or propylene in North America, he highlights large blocks of supply coming on line in China, the rest of Asia, and the Middle East.

“Our supply/demand analysis suggests little upside, from current levels, in butadiene and propylene prices, all else equal. A combination of rising Chinese natural rubber inventories and moderating Chinese auto builds may put a lid on butadiene prices,” said Ahmed.

Global propylene supply could even be higher than Ahmed estimates. The analyst projects limited – just 293,000 tonnes/year – new capacity additions in North America by 2017. Yet there are a number of propane dehydrogenation (PDH) projects planned in the region that would produce on-purpose propylene.

Of the nine announced PDH projects in North America, six are slated to start-up in 2015 and 2016, adding 4m tonnes/year of propylene capacity. Propylene in the US could become cheap once again, argues Fred Peterson, president of US consultancy Probe Economics, on page 26.

Once called the “OPEC of propylene” because of plentiful supply through the 1990s, the US has seen the propylene/ethylene price ratio doubling from around 0.7 in 2000, to over 1.4 times today, said Peterson.

This was the result of not only the relatively recent shift to cracking lighter feeds, which yield far less propylene than heavier naphtha feedstock, but also the slowdown in US gasoline demand, and the government requiring renewable fuels in the gasoline mix. Less gasoline production means less co-product propylene as well.

“This could all change thanks to PDH economics,” said Peterson. “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.”

Peterson sees US PDH economics as not only favourable but sustainable through 2030. He expects the US propylene/ethylene price ratio to plummet to below 1.0 by 2018 and hover near parity through 2030.

Even as US shale gas becomes a game changer for ethylene, thereby also changing co-product propylene dynamics, it may also drive propylene supplies back up if PDH plants are built en masse. Now if only on-purpose BD can follow. Yet the economics could well be very different.

By: Joseph Chang
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