As promised on Saturday, today’s post looks in more detail at the major change taking place in the relationship of propylene to ethylene prices.
When the blog joined the chemical industry in the 1970′s, propylene was often regarded as a disposal problem by many cracker operators. They ran their plants to produce ethylene, which was both the highest volume and the highest priced product.
Accurate historical pricing data only goes back to 1978, and is European-based. The chart (based on the annual average propylene price versus ethylene) shows that then, propylene was only priced at around 60% of the ethylene price. This value-leakage led producers to focus development effort on propylene derivatives, particularly polypropylene.
Their effort paid off in the 1980′s. The combination of propylene’s lower price relative to ethylene, and its increasingly higher quality, led to better volumes. And so propylene was normally able to sell at between 70% – 85% of the ethylene price on an annual average basis.
But in the mid-2000s, propylene’s relative price increased again. This was due to increasingly tight ethylene and benzene markets, which prompted some converters to seek alternatives to polyethylene and polystyrene. In turn, this helped propylene’s growth rate to move to 1.2 x global GDP, versus the 1.0 x level of ethylene.
Now 2010 has seen propylene move to parity pricing with ethylene. This raises important questions for both producers and consumers:
• Should producers invest in more on-purpose production, such as metathesis and propane dehydrogenation? Some major volumes are now coming online in the Middle East and Asia, but perhaps more is needed.
• What will happen to refining rates? Around 30% of propylene is currently produced from this source, and so volumes have been reduced by the reductions in operating rates discussed on Saturday. Will these volumes return? And what might be the impact of China’s heavy investment in new refinery-based propylene production?
• Will propylene derivatives be able to compete successfully at today’s higher prices? Moves to higher auto efficiency in the USA, for example, will mean replacing steel and glass with lighter weight products – so perhaps polypropylene and polycarbonate won’t need to be very price-sensitive in such applications?
• Can converters afford to change their machinery to use less propylene? Undoubtedly the new Polymer Parks in the Middle East will focus on polyethylene, as this is the main product from the local crackers. But with today’s lower margins, the financial basis for a purchase of new equipment may not be sufficiently robust for current users to justify a move.
As noted on Saturday, this is an unprecedented situation, and we have no guide from history as to how these issues will resolve themselves. But the blog believes it would be very dangerous for companies to ignore them, and simply assume that the world will soon return to the pricing basis of the 1980s – 90s.