US spot ethylene hits six-year low

HOUSTON (ICIS)–US front-month spot ethylene fell 9.0% to a six-year low on Wednesday from Tuesday, tracking continued long supply and low energy markets.

Spot prices have fallen steadily since the start of August, shedding 8.5 cents/lb ($187/tonne) from a peak of 33.5 cents/lb on 1 August, as seen in the graph below.

“I bought at 32 cents/lb last week and thought I stole it,” a market source said. “Now I wish I could return it.”

On Wednesday, US front-month spot ethylene traded at a low of 25.0 cents/lb, down from 27.5 cents/lb a day ago and at its lowest since the week ended 21 August 2009.

Sources said the continued downward pressure on spot ethylene is coming from multiple factors and will likely keep pressure strong.

Ethylene supply is robust, with crackers running in the mid- to high-90s% and several running at expanded rates from a year ago.

Feedstock costs have also fallen, with some putting ethylene production costs from propane or butane at around 4-5 cents/lb and production from ethane at around 8 cents/lb.

With costs that low, margins on ethylene have remained very attractive, even in the plunging spot market.

“When you’re making 17-20 cents/lb on margin, that’s investment grade for new capital,” the source said. “You can’t justify not selling it.”

Margins have been even higher for ethylene sold at contract prices, which is the majority of merchant ethylene.

July contracts settled at 32.75 cents/lb, and projections for August contracts through the first half of the month are for a decline of 1.00-1.50 cents/lb, still above spot pricing.

For ethylene producers integrated into their polyethylene (PE) production, margins have been even healthier, justifying high operating rates even in the long market, as shown in the graph below.

Some market players are projecting that spot ethylene could fall as low as 20 cents/lb, as the third-quarter turnaround schedule is lighter than expected.

Additionally, derivative demand typically absorbed by overseas markets could start to wane as falling crude oil prices cut into the US price advantage, particularly into Asia and Latin America.

Most sources said that a less-likely cause for reversal would be production costs, as cracker co-products such as propylene, butadiene (BD) and aromatics would need to fall further to outweigh the current cost advantage being provided by propane and butane cracking.

With inventories of propane and butane at or near record highs there is very little upside for prices in the near-term.

“Right now it’s kind of a dog-pile driving prices down,” the source said. “Anything could change, but it seems unlikely.”

FOCUS article by John Dietrich