US styrene project a watershed moment

The announcement by INEOS Styrolution of possible plans to build a new world-scale styrene plant in the US marks a stunning turnaround for an industry that only recently was struggling with weak margins.

Ethane-based margins for US styrene contracts have risen sharply over the years, according to ICIS. For integrated producers, they rose to 25.17 cents/lb ($555/tonne) so far this year from 18.06 cent/lb in 2012. For standalone producers, margins rose to 19.06 cents/lb year to date from 9.01 cents/lb.

Looking ahead, expectations are that strong margins should persist for at least five more years, according to a market participant.

Many factors have led to this improvement in US styrene margins. The styrenics industry has become more consolidated, with fewer producers selling the material in the US. The number of producers in a market is one of the factors that influences margins for a product, said James Ray, ICIS senior consultant.

The market source said non-integrated capacity in China could become consolidated as new world-scale units come online. There could even be some consolidation in the EU.

STYRENICS SHIFT

The nature of those producers has also changed. In the past, styrenics producers were part of larger, more diverse companies.

The styrenics divisions of these larger companies had to compete with their sister segments for the resources of their parent companies. Moreover, business and investment decisions were driven by factors affecting the larger parent company and not those specific to the styrenics market.

That changed over the years as companies either spun off their styrenics businesses or incorporated them into joint ventures. Dow Chemical’s Stryon business was spun off to create Trinseo. INEOS Styrolution itself was once a joint venture made up of INEOS and BASF before the former bought out the stake of the latter.

Once styrenics companies became independent, they had the freedom to make decisions based on the fundamentals of their market and in the best interest of their product.

Until the announcement by INEOS Styrolution, companies had exercised caution when it came to adding new capacity.

Trinseo has said that styrene margins were not high enough to justify a new plant.

This discipline kept the number of styrene plants steady in the US even as demand slowly increased because of population and economic growth.

This led to higher utilisaton rates, the other main factor behind rising margins, Ray said.

Given the success of this restraint, it would seem odd that a producer would break from it and build a new plant.

ETHANE ADVANTAGE

In its announcement, INEOS Stryolution did provide some justification for building a new plant. It would use best-in-class technology and benefit from low-cost feedstock.

Ethylene is one of the two feedstock for styrene, and companies continue to announce new crackers to take advantage of rising supplies of low-cost ethane.

INEOS Styrolution’s plant would benefit from these growing supplies of low-cost ethylene.

The outlook for primary feedstock benzene is a bit more complex. The US is short of benzene and the switch to lighter feedstocks has lowered the output of the aromatic from crackers.

On the other hand, US refineries are running at high rates to produce gasoline for export markets.

Refineries produce benzene from their catalytic reformers. Globally, stricter fuel regulations could limit the amount of benzene that can be blended into fuel, leaving more available to sell to petrochemical producers.

China is building several new refineries, and these would increase global supplies of benzene.

MODERN TECHNOLOGY

Technology, another factor cited by INEOS Styrolution, would make the plant more reliable and cost efficient, Ray said.

The company’s existing styrene fleet in the US uses technology from 1978-1980, Ray said. In fact, the US styrene plants in general are old, making them prone to unplanned shutdowns.

New technology, combined with low-cost feedstock, could give the plant a sustained competitive advantage, allowing INEOS to supply its customers reliably around the world. Other factors could have also played a role.

RISING MARGINS

INEOS Styrolution did not mention styrene margins, but these have been rising steadily in the US. Margins may have reached a level that could justify a new plant for the company. After all, while the styrenics market is mature, it is still growing, albeit slowly. After years of adding no new capacity in the US, that cumulative growth could reach a point that would warrant a new plant.

Also unsaid was the role played by recent tax reforms in the US. Among other incentives, the reforms allow for full expensing of certain capital expenditures (CAPEX) through 2021. That in itself is not a strong enough reason to build a world-scale petrochemical plant. But it could be enough to help nudge a company to at least consider a project.

INEOS Styrolution could also be making a strategic decision. If it builds a new plant, it could dissuade other North American producers from making an investment, the market participant said.

So far, INEOS Styrolution has not announced a final investment decision. The company’s announcement simply said it will commission an engineering study to build a world-scale styrene monomer plant in the US Gulf Coast.

It did not name a specific site. Regardless, the company’s announcement still marks a turnaround for a market that has struggled for years.

Additional reporting by David Love