Commentary: US petrochemicals could be tighter and brighter

How will integrated cracker operators with assets in the US fare over the next few years? The first big, new US crackers will come onstream from 2017, most integrated to significant polyethylene (PE) capacity. At least one consultant has warned of a “bloodbath” in the sector as players seek to export polymer away from an oversupplied market. How low prices go will depend on how much excess capacity is available at any one time.

An alternative view is that the ethylene oversupply will be worked off relatively quickly in a market that needs capacity added globally at a steady rate. There will be a battle for market share but that will vary from market to market and grade to grade.

The Wall Street view has tended to be negative, the new capacities seen as driving a surge of oversupply for a period before domestic and regional Americas demand can catch up. Hassan Ahmed, analyst at Alembic Global Advisors, however, presents a very different opinion, suggesting the consensus consultants and trade press view overestimates 2015-2019 global ethylene supply by as much as 7.1m tonnes/year, or 22%. The shortfalls in expected capacity additions would be in North America, the Middle East and China, he said.

It is all about timing, of course. The Alembic analysis indicates that ethylene capacity in North America and China, particularly, will not grow by 40% and 23%, respectively between 2015-2019. Delays subtract 3.1m tonnes/year of additional ethylene capacity from the North America total over the forecast period. China’s coal to olefins (CTO) capacities could be overstated by as much as 3.3m tonnes/year if those plants run at typical reduced rates. Alembic’s Middle East ethylene supply growth total of 3.2m tonnes/year is 0.8m tonnes lower than consensus.

“Using our supply growth estimates and IMF’s global GDP growth forecast, we contend that a peak in the cycle could arrive as early as 2016,” Ahmed said. “Additionally, that peak could be multi-year one buoyed by increased outages in the US and asset closures in Europe on the back of an ageing asset base. We also believe the US ethane advantage could continue, as our forecast points to ethane oversupply despite incremental ethylene capacity.”

Under Alembic’s peak scenario, earnings and valuations for US ethylene-exposed companies Dow Chemical, LyondellBasell and Westlake Chemical could “virtually double”, said Hassan.