By John Richardson
AS you can see from the table below, there are no less than 12 US ethane-based cracker projects being planned with lots of associated downstream capacity.
Theoretically, this represents:
- 14.8m tonnes/year of new ethylene capacity at these 12 proposed facilities. There are also eight planned expansions of existing plants, adding up to another 1.6m tonnes/year of more C2s.
- In total, this could add 60% to existing capacity and thus raise it to 43.7m tonnes/year.
- At the same time, 8.1m tonnes/year of new US polyethylene (PE) capacity could be add – 53%. This would raise total capacity to 23.4m tonnes/year.
But we know that it is simply impossible for the US to find a home for all these surplus PE volumes because the China import market is heading for “ex growth” as the economy slows and Beijing aims for greater self-sufficiency.
And if you add import demand from all the other emerging markets together, this amounts to little more than a “hill of beans” next to China.
Meanwhile, as far as the US market goes, Stephen Pryor, president of ExxonMobil Chemical said in January last year: “The reality is the US from a chemical standpoint is a very mature market. We have some demand growth domestically in the US but it’s a percent or two, it’s not strong demand growth. PE hardly grew in the US in a decade. That is not going to change.”
Some of the recent euphoria connected with the shale gas-driven petrochemicals revival in the US might well have ignored the above reality – perhaps because of all the positive news about the overall US economy.
But even this positive news has to be put firmly into the context of longer term economic analysis.
As Edward Luce wrote in this excellent Financial Times article: The US recovery is already mature — there is no Clinton-style middle class boom around the corner. In spite of seven years of zero interest rates, the US has yet to clear the 3% growth milestone.
Free money does not go far nowadays. Long run trend growth has fallen from above 3% to about 2%. The US middle class has yet to regain its pre-2008 median income levels. It would take several years of 3% growth for that to occur. The chances are this business cycle will come to an end in 2016 or 2017 without that having happened.
There is no Clinton-style middle class boom around the corner because of the end of the Babyboomers demographic dividend.
Meanwhile, as I discussed in a 4 December post: This latest attempt to create a “wealth effect” [the Fed’s quantitative easing programme] has been much more narrowly based than the sub-prime boom. The rich, the very rich and the super-rich have become a lot richer thanks to surge in stock markets, whilst real demand in the real economy has weakened even further.
But the illusion that this is once again “Morning in America” seems to have heavily influenced the country’s petrochemicals business – perhaps because of the surge in US equity markets.
As stock markets have soared on lots of cheap Fed money, so did oil prices.
We now know, though, that the era of cheap money in the US – and more importantly also in China – is coming to an end.
Real price discovery is thus returning to oil markets – hence, the collapse in crude to below $50 a barrel from $107 a barrel last June. As the supply glut has become more apparent to the oil market, so has the extent of the slowdown in the global economy – led by China.
There has never been any real market for all these proposed US petrochemical expansions – and now, of course, as the global economy slows it would be even harder to place all of these volumes.
Crucially, also, the decline in oil prices means that the advantage that ethane cracking has enjoyed over naphtha cracking is being eroded – as the chart below illustrates, from this post by fellow blogger Paul Hodges.
The chart shows that:
• Oil (blue line) has around 6 times the energy value of gas (red).
• US oil and gas prices have historically tracked each other on the basis of relative energy values.
• Prices have only recently diverged, due to the Federal Reserve’s Quantitative Easing (QE) policy.
• Now the two lines are reconnecting very fast, with the gas advantage already nearly halved since the summer.
This makes my three predictions for the US petrochemicals business in 2015 almost easy as my three predictions for Europe yesterday.
I think that:
1.) The ethane cracking advantage over naphtha is not going to return to its recent historic highs. In fact, it could further decline.
2.) US petrochemicals companies will, thus, see no repeat of the record profits they enjoyed in 2014. Investors will come to realise that this profitability was a temporary phenomenon, resulting from the mispricing of gas and oil.
3.) Companies will therefore postpone projects. Particularly vulnerable will the projects where construction hasn’t already started.