The expected delay in Sasol’s 1.5m tonne/year ethane cracker project in Lake Charles, Louisiana, raises the risk of major overcapacity in US ethylene in the second half of 2019 and a potential ethane price spike.
This, along with a difficult global macro environment, could make 2019 a far more challenging for US producers than many expect from an earnings perspective.
“We assume Sasol’s cracker to be operational no earlier than the end of Q3 2019 or early Q4 2019… The later start of the Sasol cracker continues to play into our narrative of challenging industry conditions leading into and through much of H2 2019. We believe this puts any strong second half recovery of earnings at greater risk,” said Charles Neivert, analyst at Cowen, in an 8 February research note.
On 8 February, Sasol pushed back the estimated start-up date for its new cracker to July 2019, a five-month delay from its most recent estimate.
Downstream, the 470,000 tonne/year linear low density polyethylene (LLDPE) unit at the complex reached mechanical completion in December 2018 and produced its first material in 2019, but full operation is not expected until February, and projected start-up dates for several other units have been pushed back.
The 300,000 tonne/year ethylene oxide/ethylene glycol (EO/EG) unit is expected to start up in June, and the 420,000 tonne/year low density PE (LDPE) in August. Alcohols and ethoxylates units will come on November 2018-January 2020.
The Sasol cracker start-up looks to coincide with Formosa Plastics’ cracker start-up projected for the fourth quarter, each of them requiring about 100,000 bbl/day of ethane of feedstock, the analyst noted.
“We expect there will be some strain on the ethane system as a result and lead to the possibility of higher ethane prices. It would also be just about 3 months after the start of the Shintech and Lotte/Westlake crackers which together will require about 100K BPD of ethane as well,” according to Neivert.
A day earlier, on 7 February, Neivert downgraded several chemical stocks – DowDuPont, Eastman, Celanese, Methanex and AdvanSix - from “outperform” to “market perform”, citing greater headwinds from feedstock, capacity and macro issues.
Along with the strain from potentially higher ethane prices, ethylene looks set to be significantly oversupplied in second-half 2019.
As the 1.0m tonne/year Westlake/Lotte and the 500,000 tonne/year Shintech crackers start up earlier than the Sasol and Formosa crackers in first-half 2019, those net buyers of ethylene will cut back on purchases, putting their current suppliers’ product back on the open market, he pointed out.
“Between the two companies, their respective crackers will throw about 2bn lb of ethylene into the market. This could lead ethylene prices back to the mid-teens (per lb) as well as pressure ethane price higher,” said Neivert.
US ETHANE SPIKE POTENTIAL
In the second half of 2018, US ethane prices saw a spike from around 25 cents/gal to well over 50 cents/gal FOB (free on board) Mont Belvieu by early October as a number of crackers ramped up operating rates.
“The fly-up we witnessed with ethane price in 2018 seems to have drifted from investors’ consciousness for 2019. We see the strong possibility of another round of high ethane prices in 2019,” said Neivert.
Ethane volatility in 2018 lasted eight to 10 weeks but a 2019 episode could last longer on a greater demand increase in a tighter timeframe, he contended.
The 2017/2018 cracker start-ups increased ethane demand by 300,000 bbl/day over a 16-month period while the 2019 capacity expansions are expected to boost demand by 330,000 bbl/day in just nine months, the analyst pointed out.
While US chemical company managements have expressed optimism on an H2 2019 recovery following an inventory destocking cycle, the analyst warns a host of macro factors are conspiring against this scenario.
“All of the difficulties we envision will be amplified by the increasingly challenging macro environment, especially in China and Europe,” said Neivert.
Central to his thesis is that the industry issues of capacity increases, raw material costs, inventory destocking, China, Europe, trade and oil prices are “inextricably linked and will play off of each other, constraining earnings growth and not allowing any real momentum to develop to drive earnings consistently higher”. ■
Additional reporting by Tom Brown