US ethylene margins narrow, heavier feed cracking to ensue

The recent spike in ethane costs has pushed spot ethylene margins to record lows, opening up economics of cracking heavy natural gas liquids (NGL).

“At lower-priced ethylene and higher co-product values, we may see producers shift to heavier feedstock where possible, to reduce ethylene output. Ethane margins continue to be better than naphtha. However, this could be a proactive step to avoid an oversupply problem, even before it makes clear economic sense,” said ICIS senior consultant James Ray.

US ethylene spot margins from ethane feedstocks have been further squeezed in the last several weeks, as ethylene spot prices have fallen and ethane feedstock costs have risen.

Ethylene spot prices had fallen to historic lows as production from new capacity had overtaken demand from new downstream capacity.

Since late 2017, about 3m tonnes/year of new ethylene capacity and about 3.5m tonnes/year of new polyethylene (PE) capacity have started up.

The new crackers have been running well, but several of the new PE plants have struggled to reach full operating rates.

“Ethylene capacity has to rationalise, or everyone lives with these margins until significant polyethylene production comes online or exports do in 2020,” a Gulf Coast-based NGL broker said.

One ethane cracker has already shuttered. A Chevron Phillips Chemical (CP Chem) unit was idled in mid-May.

Ethylene spot prices bottomed out in early May at 12.0-12.5 cents/lb, their lowest point since January 1999. Spot prices rebounded in late May and early June as operating rates for the new PE plants picked up, but have fallen back near historic lows on the imminent start-up of more capacity.

NEW SUPPLY COMING ON

The new ExxonMobil cracker in Baytown, Texas, is in commissioning and expected to begin production this summer.

Also upcoming is an Indorama project which is a revamp of a previously idled cracker in Lake Charles, Louisiana.

The 440,000 tonne/year cracker is scheduled to start up in July and reach full production rates in the third quarter.

Ethylene spot prices were assessed on 22 June at 12.375-13.000 cents/lb.

“The low ethylene price may be driven by a significant amount of ethylene being freed up by large merchant producers as contracts expire when their customers develop their own cracking capabilities,” said Ray.

The low prices have squeezed cracker margins.

Spot ethylene has been trading at a narrow margin or below ethane production costs, depending on model. Spot ethylene has been trading at below naphtha production costs since early 2018.

Margins recovered slightly in late May as ethylene spot prices rose but have fallen in June as ethylene spot prices fell.

Cracker margins for ethane-based spot ethylene are at their lowest point since ICIS records began in January 2000. This is due to the combination of lower ethylene spot prices and a rise in ethane prices.

The price of ethane has nearly doubled over the last year, rising from around 17 cents/gal to just under 34 cents/gal.

MARGINS NARROW

Cracker margins for naphtha-based spot ethylene remain negative. But due to a recent decline in upstream crude oil values, the difference between naphtha-based and ethane-based margins is narrower.

Costs for heavier NGLs also have tracked crude oil values lower, which improves economics for cracker feedstocks like propane and butane.

Cracking propane and butane produces less ethylene and 
more co-products than cracking ethane, while propane and butane prices remain below naphtha prices.

Prices for co-products such 
as propylene and butadiene (BD) have not been pushed lower 
due to the new cracking capacity, as most of it is built for ethane feedstocks.

Many of the older crackers which added ethane cracking capabilities can utilise heavier feedstocks, but the new crackers are often 100% ethane-based as adding infrastructure to allow for the handling of co-products becomes cost prohibitive, according to Ray.

The additional co-products and reduction in ethylene output may make propane and butane more attractive for cracker operators.

Ethylene production costs for propane feedstock remain above ethane feedstock, but production costs for butane feedstock are slightly below costs for ethane feedstock, market sources said.

Major US ethylene producers include Chevron Phillips Chemical, DowDuPont, ExxonMobil, INEOS Olefins & Polymers, LyondellBasell and Shell Chemical.

Additional reporting by Joseph Chang