By John Richardson
WHEN you have had a terrific year your boss will often expect the following year to be even better. But what if the terrific year you have had is down to nothing more than good luck?
“When we were planning for 2015 we knew that the economic background would be hard and so we thought we’d lose money. We instead made money. But now I worry that my boss will expect even more money next year,” said a contact I spoke with yesterday in Shanghai, who works for a Chinese cracker and derivatives producer.
Polyethylene (PE) has been one of the star performers. For example:
- NEA naphtha-based integrated high-density PE (HDPE) injection grade margins averaged $533/tonne for 2015 up until 9 October, according to ICIS Consulting. This compared with $245/tonne for the whole of 2014 and only $130/tonne for 2013. Between 2009 and 2014, average margins were $221/tonne
- The story is the same for NEA naphtha-based integrated low density PE (LDPE) film grade margins, again based on ICIS Consulting data. The average for 2015 up until 9 October was $615/tonne over $323/tonne in 2014 and $211/tonne in 2013. In 2009-2014, the average was $331/tonne.
What has made 2015 such a great year is tight supply in both PE – and also crucially in the merchant ethylene market.
There were numerous planned and unplanned cracker and derivatives shutdowns across Asia in general during H1, peaking in May when ICIS Consulting estimates that no less than 15% of the region’s cracker nameplate cracker capacity was off-line. This has since fallen to the low single digits.
The peculiar thing about the Asian PE market in general, and not just NEA, is that spot ethylene prices to a large extent determine the direction of PE prices.
Some 95% of Asian PE producers are integrated through to their own ethylene supplies, or receive ethylene through domestic pipelines which is always priced much lower than prevailing spot prices. So when Asian spot ethylene prices rise there is no “cost push” reason for PE prices to go higher.
But Asia’s plastic converters tend to stock-up on PE when ethylene prices go up. This is great news for the integrated PE producers because they see their margins soar at times of expensive ethylene if that occurs when naphtha is relatively cheap.
Because of all the production problems, spot ethylene prices soared from an average price of $908/tonne CFR NEA in January 2015 to a June average price of $1,408/tonne CFR NEA. By September, however, prices had retreated to an average for that month of $849/tonne, but in October rebounded again on more ethylene production problems.
The rally in ethylene has occurred during a period when oil and so naphtha prices have also been very weak.
Another good way to demonstrate what this has meant for the integrated players is to look at the spreads between naphtha and PE prices. The average spread between CFR Japan naphtha prices and HDPE injection-grade CFR NEA prices was an average of $453/tonne in 2009-2014. This had soared to $696/tonne in January-September of this year.
(Spreads are just the difference between two or more sets of prices, whereas margins take into account production costs. The ICIS Consulting margin model also includes co-product credits – the money that PE producers get back from selling propylene, butadiene and aromatics and other cracker co-products.)
But if you are in charge of setting budgets for next year it is important to remember that luck can, and usually does, run out. You need to ask yourself some tough questions about the future of the PE business.
In my monthly Asia PE Forecast report I therefore see margins and spreads returning to their historic averages as supply returns to normal. This explains my chart at the beginning of this post, which shows the historic spreads I mentioned above – and my prediction for spreads between CFR Japan prices and HDPE injection-grade CFR NEA prices between October of this year and September 2016.