Last March, the blog highlighted the major changes taking place in ethylene, propylene and butadiene prices versus naphtha. It also analysed them in ICIS Chemical Business in September. The above chart now summarises the 2010 outcome, using European prices to enable comparison over the last 30 years.
It was a most remarkable year.
The chart shows the US$ 'spreads' of the 3 olefins versus naphtha, in real (inflation-adjusted) terms. It highlights how these remained within a $200 - $500/t range between 1992 - 2004. Before this period, ethylene had been the main price driver, with propylene and butadiene often seen as by-products.
The 2004-8 SuperCycle led to dramatic increases in these spreads, which then fell back to historical levels in 2009. But 2010 saw volatility rise again:
• Ethylene spreads (blue line) climbed to $551/t, due to feedstock shortages in the Middle East and ex-refineries in Europe.
• Propylene spreads (red) averaged $527/t, as US crackers turned to gas feedstocks, and operating rates for US/European refineries reduced.
• Butadiene spreads soared to a record $951/t, as output fell due to lower liquids-based operation on steam crackers.
In addition, of course, prices were supported by the rise in crude oil prices, as naphtha remains the main feedstock for olefin production.
This was remarkable enough, given that demand remained relatively weak in key sectors of the global economy, outside of China. But the combination of feedstock changes, and lower operating rates, led to both butadiene and propylene trading above ethylene for much of 2010. This has never been seen before on such a sustained basis.
The blog would feel more comfortable about forecasting a continuation of such trends, if they had been due to solid demand. But they were in fact mainly supply-driven, with OPEC quotas reducing ME feedstock availability, and lower gasoline demand reducing US/European refinery output. Equally, China's remarkable growth was due to massive government stimulus.
It will therefore be critical to see whether these trends can be sustained in 2011? Can polypropylene maintain its volumes at parity pricing to polyethylene? And what will happen to consumers' discretionary spending, which drives petchem demand, with oil prices at such high levels? The blog will continue to keep a very close eye on developments.