ASC: Oil drop feeds cuts

The recent sharp drop in oil prices has affected pricing of raw materials for the adhesives sector, but that is not the only factor influencing markets

For the past several months, the markets for feedstocks used to make adhesives and feedstocks have re-adjusted to the sharp and spectacular decline in oil prices. Prices for Brent crude fell from $115/bbl in June 2014 to about $55/bbl near the end of March.

Some feedstocks were already demonstrating excessive volatility before oil prices started falling. Key among these are ethylene and propylene, which are upstream feedstocks for a variety of adhesives and sealants.

Heading into the second and third quarters of 2015, the US olefins markets have a clear ceiling imposed by the global crude oil market. While feedstock costs remain low thanks to shale gas – keeping margins strong at the cracker level – overall ethylene and propylene prices will be held back by crude’s effect on overseas polymers markets.

The best example is the US polyethylene (PE) contract price, which took only two directions between the end of 2012 and the third quarter of 2014.

US PE settlements either rolled over or increased in every month between November 2012 and October 2014, gaining a net of 22.5 cents/lb ($496/tonne) in the process. During this time, feedstock ethylene prices were up and down, trending up on incredibly tight supply throughout 2014 until the drop in crude prices.

When crude fell, it allowed overseas chemical producers to enjoy low feedstock costs and compete with the US in most derivative markets. Unlike the US, much of the world relies on oil-based naphtha as a cracker feedstock. They thus benefited from the drop in oil prices and their derivatives became more competitive against those made in the US.

This pressure increased and pushed down ethylene and propylene prices to levels last seen before the surge in the use of low-cost natural gas liquids (NGLs) in the US. Until global crude oil prices recover and the US regains its advantage on derivative products, the nation’s ethylene prices are unlikely to find much room to increase.

A mitigating factor would be the supply situation, which was up and then largely down for 2014, as several cracker expansion plans took longer than expected, several planned shutdowns lasted longer than expected and unplanned outages hit the market.

CAPACITY OUTAGES
Between March and October 2014, an average of 8-12% of available ethylene capacity was down, leading to some of the lowest inventory levels experienced. A repeat or close to it could tighten ethylene supply enough to offset some of the downward pull of crude.

This would likely push derivative producers to lower operating rates and serve only 
domestic contracts, exiting the spot market for the most part.

On the propylene side, a similar situation exists, although tighter supply would likely come from a drop in availability for refinery grade propylene (RGP). RGP has been tight in the merchant market for much of 2015, owing to the annual refinery turnaround season, as well as the possibility of robust gasoline demand in the upcoming summer – owing to low prices – which has incentivised RGP producers to stockpile material rather than sell it.

While supply issues could lend momentum to both ethylene and propylene, the more likely scenario is that prices remain constrained by global crude oil markets and intense competition on derivative products.