By John Richardson
TOO many people will look at the chart on the left and think, “Crisis? What crisis?” But glance to the right for what it is like in another petrochemicals value chain. What is happening on the right could sooner than you think be happening on the left:
- The polyethylene (PE) value chain has been supported by the lag effect of PE pricing falling less rapidly than declines in oil and therefore naphtha. A lot of this has been to do with the strength of spot ethylene. Spot ethylene prices largely set Asian PE prices.
- But purified terepththalic acid was in a good place before the arrival of vast quantities of new Chinese capacity. From 2017 onwards, vast quantities of US PE capacity will begin to arrive in the global market.
- Even before then, PE margins might decline as PE pricing catches up with the falls in oil and so naphtha, and today’s broader global economic problems. These problems could so easily become a new global economic crisis. We should know either way in the next few months, if not weeks.
At this stage, just to note: The chart on the left shows the ICIS estimations for historic margins, whereas the chart on the right just shows spreads between PX feedstock costs and PTA prices, as we as yet don’t provide weekly PTA margins (it takes 0.67 of a tonne of PX to make a tonne of PTA). This basic spread does not, of course, include the additional acetic feedstock costs and PTA production costs.
So what is likely to happen in PE, if not this year then certainly next year? Prepare for a decline in global margins to the point where variable costs are only just being covered.
The thinking behind this view is contained in our new study – 5 critical questions to answer to survive in today’s petrochemicals markets. In summary here:
- The economic Superycle is over. The failure of Western central bankers and politicians to respond to this has created the potential for the next global economic crisis. We confront vast quantities of debt that will never be repaid and deflation, thanks to badly misguided policy decisions. No section of the petrochemicals industry can operate in isolation to the wider global economy.
- US PE producers will run their new plants very hard in order to keep their lenders happy. A few dollars of debt repayments are better than no debt repayments at all. Look at US shale oil as an example of how this is already working.
- US PE producers either own, or have big commitments to purchase, ethane feedstock. So they could essentially price PE off ethane in a race to the bottom in global markets.
Your first instinct might be to dismiss this kind of thinking. But instead please, please take a look at PTA and all of today’s other struggling petrochemicals value chains. If you are either in these value chains yourself, or know of other companies that are playing in these spaces, some research is clearly in order about how history could repeat itself.
Sure, though, you might still want to follow that first instinct. But if you don’t have a contingency plan that you can quickly put into action if things start going very badly wrong, what are going to tell your investors and employees?