Measuring Crude Prices And Asian Petchems Profitability

Business, China, Economics, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins

By John Richardson

YESTERDAY I posted this slide on LinkedIn, in response to a lot of concern amongst the more than 150 or so delegates at the 5th ICIS Asian Polyolefins Conference in Bangkok about the impact of rising crude prices on profitability.

The chart shows spreads between naphtha costs, CFR China injection grade HDPE prices and the prices for selected co-products (see below for the full details about the methodology behind the slide). The orange bars represent the spreads with the blue line Brent crude prices. Oil prices obviously drive the cost of naphtha.

The slide shows the great value of ICIS pricing data and the data crunching done by our ICIS Consulting and Analytics teams.

Now let me explain in detail the significance of what this slide is telling is about the past, and the risks for the future.

The 2014-2017 margins boom

The first big oil price shock of the 2000s occurred between 2005 and 2008. In 2008, as oil prices climbed to an average of $97/bbl from $72/bbl the previous year, spreads fell to $427/tonne from $720/tonne.

Then came, of, course, the Global Financial Crisis, the collapse of crude and its subsequent rally in 2009-2013.  Spreads actually held up OK as they averaged $738/tonne during those years.

The last few years have seen record high spreads. Spreads averaged $1,219/tonne between 2014 and October of this year.

Spreads are of course not margins, but point towards margins, which ICIS also assesses. See the slide below for our assessment of historic Northeast Asian HDPE integrated variable cost margins. This includes all the co-products, minus feedstock and production costs.

This helps to underline my point on Monday that much higher crude on increased geopolitical tensions is a major risk for Asian cracker earnings next year.

Let’s assume that the worst doesn’t happen. There isn’t a new war between Israel and Lebanon and there is no major clash between the Iraqi government and the Iraqi Kurds. This still doesn’t necessarily mean that the crude rally which began in July will not continue into 2018.

One reason is that Crown Prince Mohammed bin Salman must deliver to Saudi Arabia’s very youthful population now that he, and his branch of the royal family, have greatly increased their control over the government. The surest way of doing this is to push oil prices higher that would generate the funds to pay for more job creation and social programmes.

Secondly, higher oil prices would also raise the revenues from the Aramco IPO that is due to take place next year.

Background behind the slide

It takes approximately 3.3 tonnes of naphtha to make one tonne of ethylene, the core product for any steam cracker and then very close to one tonne of ethylene to make a tonne of HDPE.

So it’s simple to multiply the prevailing naphtha prices in 2000-2017 by 3.3 tonnes. You can then compare the spreads between these total costs of naphtha to make a tonne of ethylene/HDPE with China CFR China HDPE prices.

This points towards how profitable the Asian PE industry has been since 2000 on a standalone basis (As discussed last week, in every year since 2000 on a standalone basis, money has been lost).

But this isn’t how the industry operates, as more than 90% of Asian PE capacity is integrated through to naphtha and other liquid or gas feedstocks – i.e. the PE producers own and operate their own crackers.

So you need to add the co-product credits that you also make when you crack 3.3 tonnes of naphtha to make a tonne of ethylene. You also get, roughly speaking again, 0.52 tonnes of propylene, 0.33 tonnes of C4 olefins, 0.75 tonnes aromatics plus fuel-type products.

I have thus added multiples of the prevailing propylene prices, butadiene prices (ICIS pricing doesn’t track the pricing over C4 olefins) and an average of benzene, toluene and mixed xylene prices.

I didn’t add any values from fuel-oil type products, or any extra money a naphtha cracker operator might make from selling ethylene into the highly volatile, but often very lucrative, Asian spot ethylene market.

PREVIOUS POST

Global Economy Is Less Able To Withstand A New Oil Price Shock

12/11/2017

By John Richardson HISTORY has a tendency to move very slowly, inching forward i...

Learn more
NEXT POST

China Govt Policy To Shape Petchems Demand, Pricing In 2018

17/11/2017

By John Richardson NAPHTHA feedstock costs are on the way up, which is of course...

Learn more
More posts
Global polyethylene oversupply, the highest in 19 years, hasn’t gone away
03/07/2020

By John Richardson BRENT crude futures surged by 80% during the second quarter and enjoyed their bes...

Read
China could be in complete polypropylene self-sufficiency by 2022
28/06/2020

By John Richardson SORRY to labour the point but this comes from a genuine concern for the readers o...

Read
Asian polyethylene price recovery faces multiple challenges
25/06/2020

By John Richardson THERE are reports of significant cuts in Middle East polyethylene (PE) operating ...

Read
China’s long-term ambition for paraxylene self-sufficiency seems close to being realised
21/06/2020

On Friday, I examined how China’s paraxylene (PX) net imports could fall to as little 8m tonne...

Read
China’s big declines in 2020 PX and PP imports: the impact on its major trading partners
18/06/2020

By John Richardson CHINA’S refineries and petrochemicals plants came roaring back to almost fu...

Read
Paraxylene demand collapses as higher China production threatens 6m tonne fall in imports
15/06/2020

By John Richardson DON’T SAY I didn’t tell you that a decline in stock markets would happen. The...

Read
Coronavirus will severely damage the developing world unless we take the right steps
12/06/2020

By John Richardson IT IS a fantastic achievement. “Over the last 25 years, more than a billion peo...

Read
Main Street versus Wall Street and the crisis in the developing world
10/06/2020

By John Richardson RISING equity and oil markets do not necessarily point to a V-shaped recovery. I ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more
X

Uncover exclusive industry upates from ICIS

Interested to uncover more articles related to this topic? Explore additional news, insights and intelligence, tailored to the markets you are interested in by accessing exclusive content from ICIS.com

DISCOVER MORE