Shell's refinery and petchems complex in Deer Park, Texas
Source of picture http://www.msnbc.msn.com/
By John Richardson
THE excellent third-quarter financial results of the likes of Dow Chemical and LyondellBasell further confirm the extraordinary turnaround in the cost positions of those with a big proportion of their global polyolefins production based in the US.
Some more pain might be ahead for these now advantaged feed producers (if such a phrase had been used by anyone in connection with the US three years ago they would have been advised to seek the help of a psychiatrist) as higher production from new plants in the Middle East is absorbed. We will detail this risk in a post later this week.
But producers can at least look back on a year that has confounded probably even the most optimistic of expectations.
A recently released chemicals research report by the privately held financial institution, the Susquehanna Financial Group (SIG), details just how good 2010 has been in terms of margins.
"We have a more positive view on the ethylene cycle for US producers due to what is turning out to be a longer lasting and greater cost advantage for US ethylene production from ethane feedstock," write the authors of the report.
"With this cost advantage it now appears that the long anticipated 2011-12 downturn due to new ethylene capacity in the Middle East and Asia will be almost a non-event for US ethane-based ethylene producers.
We project that contract cash margins for US Gulf ethylene production from ethane feedstock will trough at $0.15/lb.in 2011 versus our previous expectation of $0.10/lb.
This represents a mid to early peak cycle margin by historical standards - US ethylene margins for all feedstocks troughed at $0.08/lb in 2001-02 and peaked at $0.18/lb in 2006. "
And as we said we will discuss later on this week, SIG see some tougher times ahead as the supply-driven downturn - delayed by all the start-up problems in the Middle East and a reduction of associated gas supply - has yet to fully happen.
"The downturn will be more severe for other feedstocks and regions (other than the US)," the report continues.
"Margins for naphtha-based ethylene production in the US, as well as Asia and Europe, should reach trough levels in 2011-12 before a broad-based upturn starts in 2013 as demand growth absorbs the new capacity.
"US producers should see higher operating rates due to continued export competitiveness. We project US operating rates above 90% in 2011-12 versus low-to-mid 80s globally."
Who on earth would want to exit US ethane-based petrochemicals capacity given such an outlook?