Global cracker margins under seige

Here are late-cycle dynamics playing out in petrochemicals alongside margin compression from new capacity additions in the US.

ICIS cracker margin data show how times have changed from the highs of 2016/17 for operators in Europe and the earlier glory days for ethane-based producers on the US Gulf.

The earlier margin differences illustrated how competitive ethane crackers in the US could be as low-cost ethane from shale oil and gas exploration and production became more widely available. They helped encourage investment in US shale-based chemical assets and the boom in ethylene and polyethylene output that we are witnessing now.

The weakening trends for cracker margins (shown here are variable margins, in US $/tonne of ethylene calculated from the ICIS cracker margin model available on the ICIS Dashboard) can be seen from mid-way through the second quarter of 2017. Contract-based naphtha cracker operators had been more profitable through late 2015, 2016 and 2017 in the higher (at the time) oil price environment and through a period of relatively strong demand.

The balance of cost and demand-driven price began to deteriorate for naphtha cracker operators in northwest Europe and northeast Asia in the first half of 2017 and, while gains were made following the weakening of crude from early 2018, the impact of reduced demand and more US capacity was becoming more apparent. The results continue to be reflected in the Q4 2018 profit falls still being reported by petrochemicals sector majors. ExxonMobil’s fourth quarter 2018 chemicals earnings in the US were down 64%, while the non-US chemicals was down 8%. The company said in late January that its chemicals margins in the quarter fell year on year as a result of lengthier supply from new capacity.

Shell’s chemicals earnings were down 42% in the quarter and 21% in 2018 as a whole on lower base chemicals and intermediates margins. Oil prices fell by
40% in the fourth quarter, LyondellBasell noted. Its fourth quarter earnings before interest, tax, depreciation and amortisation (EBITDA) were down 30% while full year EBITDA was 4% lower.

The Olefins and Polyolefins, Europe, Asia and International segment was hit by delayed demand and destocking in anticipation of lower pricing. Negative impacts also included reduced automotive demand, low water levels on the River Rhine and an extended maintenance period at its site in Wesseling, Germany.

Olefins and Polyolefins, Americas, EBITDA were down 18% year on year in the fourth quarter. Olefins results were down on a lower ethylene price, Polyolefins results were lower mainly due to weaker margins and lower volumes, LyondellBasell said.

EARNINGS DECLINE

Industry major Dow, due to be spun off from DowDuPont this April, is expecting a major decline in first quarter 2019 earnings driven by weaker polyethylene and polyurethane margins.

The major US ethylene and polyethylene producers have, for some time, pointed to the expected dip in the cycle, brought on by the additional US ethylene and polyethylene capacities, and capacity additions in India and elsewhere. But they are also being hit now by slower global economic growth, China’s slowdown, and, importantly, the US/China trade war.

“We have consistently been forecasting a period of margin compression in both the polyurethanes and polyethylene chains due to capacity additions across the industry. These dynamics have turned out largely as expected,” said Ed Breen CEO of DowDuPont, on the company’s Q4 earnings conference call.

CEO-elect of Dow, Jim Fitterling, said that the bulk of the new US polyethylene capacity had come on-stream later in 2018 and that operating rates would improve through 2019.

“We’ve got to rebuild some margins in the quarter,”