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"Oversupply conditions in ethane stand to become materially looser over the next several years," said the analyst.
"According to Lyondell's data, ethane production, if maximized, would about touch 1.6m bbl/day by the second half of 2014," said Zekauskas.
"Ethane production today is roughly 1m bbl/day. An incremental 600,000 barrels of ethane per day is capable of being used as feedstock for 21.2 billion incremental pounds of ethylene. North American ethylene production inclusive of projects to convert napthenic and propane crackers to ethane is probably no more than 5 billion lbs. Accordingly, a loose market should slacken further," he added.
Just how far up the global ethylene cost curve will Middle East crackers go? One Wall Street analyst sees dramatic cost escalation for producers in Saudi Arabia, Qatar and Iran as ethane supplies dry up and feedstock costs rise, especially for mixed feed crackers that use ethane as well as liquefied petroleum gas (LPG) - propane and butane.
It's certainly worth watching as US producers move down the cost curve on the shale gas boom and resulting low ethane prices. All the new crackers being built in the US are based on ethane, while Middle East projects are largely mixed feed.
While Middle East ethane crackers still enjoy the lowest costs in the world with a 46% cost advantage relative to US ethane crackers, Middle East mixed feed crackers have a 24% cost disadvantage to US ethane crackers, according to Hassan Ahmed, analyst at Alembic Global Advisors.
"NGL [natural gas liquids] production in Saudi Arabia has remained relatively flat over the last few years while ethylene capacity has increased considerably," said Ahmed. "Saudi Arabia has been running short of NGLs since 2009 and not surprisingly is considering heavier feeds like naphtha for further chemical expansions."
Saudi Aramco's $20bn (€15bn) Sadara joint venture with US-based Dow Chemical in Al-Jubail will be based on 70% naphtha feedstock, with ethane, propane and butane comprising the rest.
The second phase of Saudi Aramco and Japan-based Sumitomo Chemical's Petro Rabigh project will involve additional ethane but also use 3m tonnes/year of naphtha as feedstock.
In Qatar, in early 2005, the government placed a 5-year moratorium on additional development projects in its offshore North Field, the largest non-associated gas field in the world, noted Ahmed. And then in December 2009, an official at state-owned Qatar Petroleum said a decision on new North Field developments would not be taken until 2014, essentially extending the moratorium.
Analysing raw material cost data from the state fertilizer company QAFCO from 2004 up until 2009 when it stopped releasing certain details from its financial statements, Ahmed concludes that natural gas prices charged to the chemical industry in Qatar may have risen from $1.25/MMBtu in 2004, to around $3.00/MMBtu in 2009.
In Iran, aside from the global trade sanctions led by the US, which is severely limiting its petrochemical and derivative exports, a plan approved by the Iranian parliament in October 2009 and started in December 2010 will eventually set natural gas prices to market prices, noted the analyst.
"Industrial projects, including the petrochemical projects, now have to pay around $2/MMBtu for natural gas for the first year of the reform plan, which is considerably higher than the past price of $0.53/MMbtu in early 2010," said Ahmed.
Looking ahead, Iran plans to increase gas prices to 65% of the average export gas price within 10 years, suggesting gas prices of $5.20-6.50/MMBtu, the analyst added.
Ultimately, all these changing cost factors are worth another look when considering the Middle East's position on the global ethylene cost curve.
For US producers, Ahmed sees a peak in the commodity chemical cycle by 2015-2016 amd a capacity vacuum, and one higher and longer drawn out than in past cycles.
The amplitude of the peak will be higher for US producers, as they are further down the cost curve. Plus, the cost curve has become steeper than in previous years, he added.
The spotlight on petrochemical investment in the Americas has shone on the US shale gas boom and the resulting rash of planned new ethane crackers that could increase US ethylene capacity by about 32% by 2017-2018. But Latin America's game-changer could be Brazil's pre-salt oil and gas bounty, as well as shale gas formations in Argentina.
Naphtha crackers today are not competitive with their ethane counterparts - a fact acknowleged by Isabel Figueiredo, director of Brazil-based petrochemical producer Braskem, who spoke at the 6th EBDQUIM conference in Praia do Forte, Brazil, hosted by Brazilian association of chemical and petrochemical distributors Associquim in mid-March.
Braskem is already preparing to build a 1.05m tonne/year ethane cracker in Mexico through Braskem Idesa, its 60:40 joint venture with Mexico's Grupo Idesa. The project, with associated polyethylene (PE) units, is expected to be complete by mid-2015.
Its next big undertaking will be Comperj - the long-anticipated project with state oil firm Petrobras, which is expected to be the largest ever in Latin America. Braskem will define the scope of Comperj in 2012.
The ultimate success of Comperj will be tied to Petrobras's development of its giant offshore oil and gas reserves, which lie underneath a massive layer of salt. This could contain up to 10bn barrels of oil equivalent.
Petrobras plans to invest a total of $225bn (€171bn) during the 2011-2015 period. This could significantly boost natural gas production, providing cheap ethane feedstock for petrochemicals.
Meanwhile, Argentina will start to develop its large shale gas reserves. In February, its largest energy company, YPF, raised its estimate for shale oil and gas reserves from less than 1bn bbl to 22.8bn bbl.
YPF, majority-owned by Spain's Repsol, is under heavy government pressure to develop its oil and gas reserves, as falling production has led to greater imports. Natural gas shortages in 2010 resulting from a cold winter led to severely curtailed production at petrochemical operations in Bahia Blanca. In neighboring Chile, where Methanex has four methanol units, the Canada-based producer is relocating a unit to Louisiana, US, because a lack of natural gas supply has meant only one plant is in operation.
However, development of shale gas in Argentina and the pre-salt oil and gas reserves off the coast of Brazil could go a long way to making Latin America more competitive in petrochemicals.
The US shale gas boom and the resulting low prices of natural gas are spurring a wave of new crackers and expansions in the country. Ultimately, the US ethylene market could see a 29% increase in capacity by 2017 (see our full analysis in the February 13 issue of ICIS Chemical Business.
Three local producers - Dow Chemical, Shell and Chevron Phillips - are proceeding, each with world-scale crackers set to start up in 2016-2017. South Africa-based Sasol, which already has a mid-size cracker in Lake Charles, Louisiana, is considering the construction of a 1.0-1.5m tonne/year cracker at the same site, aiming to complete the study by the second half of 2013.
Plus, many others are expanding or considering new world-scale crackers. Yet more are also moving to convert their plants to crack lighter feeds.
Ultimately, a 29% boost in US ethylene capacity by 2017 will cause a profound disruption in the market. Many things have to go right for this capacity to be absorbed into the local and global market.
Many are counting on naphtha-based crackers in Europe and Asia shutting down. Yet for Europe, integrated polyethylene (PE) margins have equaled or exceeded those of US ethane-based producers in every year from 2008-2011. So far in 2012, US producers have taken the lead as ethane prices have plunged.
While some select crackers may shut down, don't count on a wave of Europe cracker closures. Their integrated PE margins taking into account co-products propylene and butadiene from naphtha cracking have been solid.
As the first wave of third-quarter earnings results come in for the chemical sector, profits have largely been solid, showing year-on-year gains. Earnings were propelled by price increases. Yet, one element has been conspicuous in its absence - that of volume growth.
Germany's BASF, the world's largest chemical company, posted a 6% year-on-year gain in underlying operating profits for the third quarter. But volumes were flat versus a year ago. The same pattern was apparent across the board for chemical companies.
US-based Dow Chemical posted a 15% increase in year-on-year earnings per share with results coming in slightly short of Wall Street expectations. Volumes were off by 4% in coatings and infrastructure, down 3% in performance materials, and up just 1% in performance plastics.
On an overall geographic basis, volumes were down by 3% in North America; down by 2% in Europe, Middle East and Africa; but up by 5% in Asia-Pacific; and up by 7% in Latin America.
Going forward, CEO Andrew Liveris cited the volatility of the global economic recovery, and expects "jagged economic conditions over the near term."
He sees continued headwinds for the developed countries, which are constraining consumer spending and business investment. But in emerging markets such as Asia and Latin America, "growth in the middle class continues to drive demand, particularly as it pertains to infrastructure and urbanization."
US-based DuPont beat Wall Street expectations, posting a 73% year-on-year rise in underlying third-quarter earnings per share.
Overall pricing was strong, but volumes were down by 1% in performance chemicals; up by 4% in performance coatings; and down by 7% in performance materials.
DuPont highlighted concerns on destocking in consumer electronics, solar, and performance polymers.
US-based Celanese saw a 13% year-on-year gain in third-quarter earnings growth, beating Wall Street expectations. In its acetyl intermediates segment, pricing rose by 23%, but volumes were down 2%. However, its advanced engineered materials segment saw both pricing and volume gains of 5% and 7%, respectively.
US-based Solutia posted a 7% year-on-year increase in third quarter earnings per share, exceeding Wall Street estimates. But volumes were down 2% in its advanced interlayers segment, and down 1% in performance films.
Encouragingly, the company expects sales in the fourth quarter to be comparable to the $519m (€374m) in the third quarter on slightly higher sequential volumes, offset by the translation impact of a stronger US dollar.
As the earnings parade marches on this week, the spotlight will shine on the volume picture going forward. In an uncertain economic environment, it's going to be an uphill battle for volume growth. But if confidence returns, things can turn quickly.
Do third quarter earnings really matter? As we move into the thick of the earnings season, all eyes will be on how the fourth quarter is shaping up and how analysts will handicap fourth-quarter 2011 and full-year 2012 projections.
Leading up to results, pre-announcement warnings have been scarce in the chemical group, boding well for overall third quarter numbers in relation to analyst expectations. The impact of the global economic slowdown will be evident, but likely to be more pronounced in the fourth quarter.
For the petrochemical sector, there is particular risk to the fourth quarter outlook. One key question, says Laurence Alexander, analyst at US-based investment bank Jefferies & Company, is: What will be the timing of volumes and margins in the fourth quarter? US ethylene margins have contracted sharply in the past two months, while volumes have been lackluster.
"Anecdotally, volumes in October are weak as downstream buyers wait for derivative pricing to come down," says the analyst. "Fourth-quarter earnings prospects for polyolefin producers hinge largely on if volumes recover in November, ahead of the winter shutdowns, and if such an uptick in volumes coincides with margin recovery."
Alexander sees downside risk to Wall Street's fourth-quarter consensus estimates for US-based Dow Chemical and Netherlands-based LyondellBasell. His earnings-per-share forecasts for Dow and LyondellBasell are $0.37 (versus consensus of $0.50) and $0.77 (versus consensus of $0.92), respectively. His 2012 earnings-per-share estimates on Dow and LyondellBasell for 2012 are also significantly below consensus.
On the flip side, Hassan Ahmed, analyst at US-based investment research firm Alembic Global Advisors, sees positive signs that global chemical volumes are not as weak as many believe. At Dow's investor day meeting on October 4, the company indicated that it continued to see significant demand growth across almost all end markets in China - "negating the cycle bear arguments in our view," says Ahmed.
More recently, he points out that strong third-quarter results from Saudi Arabia-based SABIC bode well for commodity chemical sector results in the quarter.
Yet on the outlook, most analysts have taken down 2011 and 2012 earnings-per-share estimates in the past several weeks, with more cuts likely to come following third-quarter earnings season.
In the Western world, refining is the red-headed stepchild of the oil, gas and petrochemical business. Companies are either selling, spinning off or shutting down refineries - spurred by near-term profitability issues as well as long-term strategic shifts in direction.
The desirability, or more aptly the lack thereof, of these assets is highlighted by LyondellBasell's announcement that it will shut down its 105,000 bbl/day refinery in Berre L'Etang, France, after a months-long sales process in which not a single bidder emerged.
This was despite the Netherlands-based petrochemical company, its financial advisor and the Invest in France Agency reaching out to 85 potential buyers around the world.
While LyondellBasell emphasized its olefins and polyolefins operations at Berre would not be affected by the closure in the long term, the company started shutting down all production at the site because of a worker strike following its announcement.
The culling of older, less efficient refineries is finally at hand. US-based energy firm ConocoPhillips has started the process of idling its 185,000 bbl/day refinery in Trainer, Pennsylvania, US, and will permanently shut it down if no buyer is found in six months. It also plans to split off its refining business as a separate entity.
US-based industrial firm Sunoco is getting out of the refining business altogether, putting up for sale its 335,000 bbl/day refinery in Philadelphia and 178,000 bbl/day refinery in Marcus Hook - both in Pennsylvania. If no deals are reached by July 2012, Sunoco plans to idle the main processing units.
US east coast refining has been particularly challenging. "You lose money by refining on the east coast using Brent," said an east coast spot market trader. "The east coast refining cracks are based on Brent crude prices which are $20 some over [West Texas Intermediate (WTI) crude], midcontinent crude, and sizable amount over [Louisiana Light crude], Gulf coast crude."
If refineries are shut down rather than sold, it is ultimately a positive development for the refining industry, as capacity is taken out.
But less refining capacity also means less byproduct propylene. In a market that has already been tight in the US and Europe, this trend could be troublesome for buyers if more and more refineries are shut down before additional on-purpose propylene production comes on line from new plants.
Additional contribution by Sheena Martin in Houston
Wild swings in global stock markets are emblematic of chaos in the collective mindset. Confusion reigns, and who can blame the participants?
Wednesday's 520 point, or 4.6% decline in the US Dow Jones industrial Average marked a third day of heightened volatility. The market was up 4.0% on Tuesday, after a 5.6% crash on Monday.
Caught in the overall market downdraft was crude oil prices, which fell to about $80/bbl on the New York Mercantile Exchange (NYMEX) as of Wednesday - a far cry from $100/bbl as recently as late July. Oil prices tanked as players adjusted their economic growth expectations lower.
Petrochemical and polymers prices are poised to fall on the back of lower crude and diminished economic growth expectations. And the dire economic outlook is being reflected in chemical stock prices - few sectors have been hit harder than the industrial group.
For the month of August thus far, US bellwether Dow Chemical's stock is down almost 19% while US-based Huntsman has lost a staggering 35% of its value. Germany's BASF, the world's largest chemical company, is down 22%, and Netherlands-based petrochemical and polymers giant LyondellBasell is off 21%.
The greatest threat to the global economy today is the loss of confidence - confidence that the US can get its fiscal house in order and reinvigorate its stalling economy, confidence that Europe can halt the spread of its growing sovereign debt crisis, confidence that China can get a handle on inflation without stamping out growth.
The S&P downgrade of US debt from AAA to AA+ did not cause interest rates to rise - not yet. In fact, US bonds rallied, driving down yields even further as the market shifted its focus to the growing likelihood of a recession. Indeed, the US Fed made an explicit statement to keep interest rates low for years to come to support the economy.
The bigger blow of the downgrade is to consumer and business confidence. US government debt - as close to a "sure thing" than anything - is that no longer.
You can indeed talk your way into a recession. Negative sentiment can trigger behavior that leads to a double-dip downturn. Watching stocks dive and sovereign credit ratings cut with no coherent policy response from governments and central banks might make you think twice about eating out for dinner, buying that new car, or building that cracker.
Leadership is needed in times of crisis. The European Central Bank (ECB) must act as the buyer of last resort for the sovereign debt of its members. Indeed, it swept in to buy Spanish and Italian bonds on Tuesday. The US must come up with a plan to boost its economy.
Much has been made of the point that policy-makers are "running out of bullets," or "running out of rabbits to pull from the hat" to make things better. The US has already cut interest rates to near zero, and completed its second round of quantitative easing (QE2) featuring the purchase of $600bn (€420bn) in debt securities, in June.
But it's time to reload the gun. There is no reason the ECB can't reverse its tightening bias and lower interest rates. It has raised rates twice this year even in the face of severe fiscal austerity for some of its members. There is room to ease from its current stated level of 1.5%. The US has a stated interest rate target (Fed Funds rate) of 0-0.25%. The ECB can also embark on a round of QE, an increasingly likely scenario.
The US needs a plan to revive the economy, and this will require investment. So far, the world is waiting.