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Butadiene: Only The Supply Side Logic Adds Up

By John Richardson on 05-Jun-2014


By John Richardson

LOGICALLY, yes, if you look at the supply side only, there seems to be a strong case for on-purpose butadiene production.

Here is why:

  • US cracker operators have substantially lightened their existing cracker feedstock slate and, of course, all of the country’s new crackers that are due on-stream over the next 5-10 years are based on ethane.
  • Europe is now joining-in with the “dash for gas”. INEOS is already well-advanced in plans to ship US ethane to its crackers at Rafness in Norway and Grangemouth in Scotland. This will help establish a trade, rather than lighten the European feedstock mix, given that both of these INEOS crackers already run on ethane (the US supplies will replace dwindling North Sea ethane). But, with the announcement by Enterprise that it is going to build an ethane export terminal in the US Gulf, we know of at least one other European producer, which operates naphtha crackers, who is looking at shipping US ethane. We suspect that active discussions are taking place involving several other European producers. Why? Because one of the big themes at last month’s Asia Petrochemical Industry Conference was how the European feedstock slate might lighten by so much that there would be a substantial reduction in the region’s crude C4s exports. At least one Asian producer is also looking at shipping ethane to Asia, to, again, back-out naphtha from its crackers.
  • Perhaps a few of Europe’s less competitive naphtha-based crackers will have to shut down.
  • China might increasingly opt for coal-to-olefins, rather than naphtha, as its route to adding more capacity. The CTO process doesn’t produce any butadiene, although we understand that it does make butylenes, which can be dehydrogenated to butadiene.

Linde and BASF might, thus, end up as one of several new suppliers of on-purpose butadiene technology – i.e. not as a co-product via liquids steam cracking.

Earlier this week, the two companies said that they were partnering each other to develop and license processes for the production butadiene, via first butane and then butenes (butane, like ethane, is plentiful in the US because of the shale-gas boom).

And, of course, there might well be the announcement of several on-purpose butadiene projects as these new processes are developed.

But what about demand? Nobody discusses demand in sufficient depth, still, despite the evidence of profound macro-economic shifts, both in the West and in Emerging Markets, particularly,of course, China. What might the results of these changes be for butadiene demand?

Certainly, in the short term at least, markets for both butadiene and natural rubber, its substitute, or not behaving in the way that people predicted.

Let’s start with butadiene. Two years ago, when the blog attended the ICIS World Olefins Conference in Brussels, the mood amongst the butadiene producers, but not their customers, was buoyant.

Ten billion dollars in earnings before interest, taxes, depreciation and amortisation (EBITDA) had been transferred from world’s butadiene consumers to its suppliers during 2011, Rafael Cayuela, butadiene commercial manager for Styron, told the conference.

“This was exactly the same product, the same customers and the same suppliers – nothing had changed except, of course, the supply and demand fundamentals,” he said.

Since then, as the chart above indicates, pricing has collapsed on weaker demand, despite the still-tight supply.

The conference was also equally optimistic about natural rubber, given lack of planting. It was pointed out that it takes seven years for a rubber plantation to be ready to be “tapped” for the first time and insufficient planting, combined with floods and droughts, guaranteed tight supply for five or six more years.

But this article, from the Indian newspaper the Business Standard, which was published earlier this week, said:  “Rubber prices have sunk roughly 30% [so far this year] and hit five-year lows on persistent worries about slower economic growth in the main consumer, China, and oversupply. Global supply is forecast to exceed demand by 241,000 tonnes in 2014.”

Sure, these might be short-term dips in butadiene and natural rubber markets, but can someone please tell us, in a credible and joined-up way, why? We are very prepared to listen, but what we’ve heard so far just doesn’t make any sense.