New propylene supply increases market uncertainty

Chemical companies

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C3 expansions Aug12.pngAlmost unnoticed, an important shift is underway in propylene markets.

Propylene (C3) is the second largest olefin after ethylene, with production around 75 million tonnes in recent years. Its main sources are steam crackers and refineries – neither of which see C3 as their core product.

Thus the recent increased use of ethane as a cracker feedstock in the US/ME, and the decline in western refinery operating rates, have led to supply shortages developing. The result has been that C3 prices have become very similar to ethylene levels for the first time in history.

Now, however, a new dynamic is entering the market. As the chart shows, both China and NAFTA are starting to see major increases in propylene production:

• China is adding 17MT in 2012-16 (red column), vs 6MT in 2007-11 (blue)
• The USA is adding 3MT, after seeing no new net capacity in 2007-11
• Other regions are also continuing to add production

The key issue is that most of the new US/Chinese production is not based on traditional steam cracker and refinery sources. Instead, it is coming from propane via propane dehydrogenation (PDH), and from coal via coal/methanol to olefins technology (CTO).

This could be a potential game-changer for the industry. The first PDH plants in the 1980s were essentially ‘swing producers’, which operated when propylene margins were strong. More recently, they have become an essential part of the supply portfolio, ~10% of total production, due to lower output from traditional cracker/refinery sources.

These new plants mean further change is underway:

• PDH will be driven by the spread between propane and propylene prices. Since propane is already in surplus, and is expected to continue to be long, this could well lead to relatively high operating rates for the units
• This trend towards weak propane markets also has the ability to impact steam cracker production, as potentially propane could become competitive with ethane
• Meanwhile, CTO plants will be driven by China’s need to create employment in the coal mining regions, and so can also be expected to run at high rates. Economics, as the blog has discussed before, is not the fundamental driver for China’s petchem industry

It is, of course, early days for these developments. But it is not too early for both buyers and sellers to start considering the potential impact of these expansions. 6MT comes online this year, and 8MT in each of 2013, 2014 and 2015. Thus new supply will be well ahead of demand growth.

Key questions therefore include whether C3 prices will stay at parity to ethylene, or return to their traditional discount? Alternatively, if prices remain strong, will demand growth slow as buyers switch to cheaper alternatives where possible?

Developments in C3 markets thus mirror rising Uncertainty in the wider world.

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