Ethylene trough may be flatter, shorter

Interview article by Joseph Chang

NEW YORK (ICIS)–The coming global ethylene cycle trough is likely to be less deep and of less duration than many expect, LyondellBasell CEO Bob Patel said.

Cracker construction delays in the so-called first wave of US ethylene capacity, a weaker second wave because of low oil prices and higher capital costs, and the slowdown in China CTO (coal-to-olefins) projects are setting up for this scenario, he said.

“The first wave in the US is coming. What is unknown is the timing. The next 18 months will be the peak period in construction and I suspect there will be some delays, which could impact how pronounced the oversupply is,” said Patel in an interview with ICIS.

“If some new supply gets pushed out to 2019 and 2020, a period where demand growth is expected to exceed supply, it could smooth out the capacity a bit, and we could see flatter operating rates [versus a meaningful decline],” he added.

The US petrochemical industry’s shale gas cost advantage is still intact but has been eroded by the decline in crude oil prices, which have made naphtha-based producers more competitive. And ultra-cheap ethane prices will likely trend above their fuel value as more projects start up.

In addition, construction costs for petrochemical projects have increased – some due to higher activity and some based on structural factors, the CEO said.

“The US will still enjoy a feedstock advantage, but not to the point where it’s obvious everyone will invest. Returns are not as attractive as when oil was at $110/bbl. That will play a factor in the second wave,” said Patel.

And China may be undergoing a major shift in coal policy that could limit new CTO plants, which produce ethylene, propylene along with downstream derivatives.

“Our sense is that that because of concerns about the environmental impact of coal, CTO projects that have not been started, might not be,” said Patel.

China’s 13th Five-Year Plan, released in March 2016, sets a cap on total energy consumption of 5bn tons of coal equivalent (TCE) in 2020 versus consumption of 4.3bn TCE in 2015.

“China would presumably prioritise coal use for electricity as it is a net importer of energy. This could actually shift operating rates upwards,” said Patel.

(Photo: Bob Patel, LyondellBasell CEO)