INSIGHT: Scale of demand shock is unprecedented, impact from the refinery down

Author: Nigel Davis

2020/03/26

LONDON (ICIS)--It is the scale of the demand shock that is unprecedented. Demand for crude products has crashed - What is the impact likely to be on the supply of refinery propylene and C4s, and of aromatics from the cat cracker?

And what of the supply of oil-based cracker feedstocks?

Refinery integrated crackers face feedstock supply restrictions. It is not clear how widespread this is at present, but some producers are said to be constrained.

Also, while naphtha cracking may have become hugely profitable on paper, as in late 2008, who is buying the tonnes of ethylene, propylene, C4s and aromatics from these giant plants?

Cracker operating rates are under extreme pressure. There is talk of shutdowns.

Given the measures that are being taken globally to limit the spread of the novel coronavirus, supply and demand uncertainty is a cause of deep concern for most players.

Producers and consumer are working from hand to mouth now but need to try to map demand over the coming months and quarters.

Those scenarios will have to change, probably next week, then the week after, as the virus spreads through Europe, the Americas and much farther afield.

PETCHEMS SET TO SUFFER
Petrochemicals production will suffer on a number of levels from the reduction in refinery run rates, but some producers may gain from the dramatic shift in oil-related feedstock costs.

Yet while current business might be good, with improving margins, the sustainability of that position in the midst of rapidly declining demand, is difficult to envisage.

Daily webinars from ICIS are designed to provide a series of views on current market conditions, some analysis of the fast changing global market environment, and a few pointers for the future.

Currently, there are more questions than answers.

Take polypropylene (PP). My colleague John Richardson suggested on Thursday that a best case outcome for the olefin in the 2020 to 2022 period is a fall in demand of 5%, equivalent to 22m tonnes, compared with the ICIS pre-crisis forecast for the market.

A worst case scenario might see demand fall 6% and consumption 50m tonnes lower.

Propylene supply is threatened by the potential for a fall in shale gas production and refinery cutbacks.

Fluid catalytic cracker (FCC) units in the refinery will not be run as hard in a period of much reduce gasoline demand, thus crimping the supply of propylene and C4s.

Reduced refinery runs would also reduce naphtha availability and, hence, propylene production from steam crackers.

Source: ICIS Supply and Demand Database

Richardson also mentioned the potential fall in methanol production, on the lack of demand and shipping problems, which would feed through into China’s methanol-to-olefins (MTO) production.

The global ethylene price floor would be reset as a result.

Feedstock issues could constrain polypropylene (PP) demand, which currently is quite mixed.

There is virtually no demand for the copolymers used in auto production, Richardson added, yet homopolymer PP non-woven demand has gone through the roof.

There is a stocking up effect for copolymers used in packaging and potentially a long-term consumption boost for random copolymer PP used in the packaging of takeaway food.

“I believe PP demand must be substantially down because the global economy is coming to a halt, for example, US second quarter GDP growth is expected to be 25-30% lower year on year,” Richardson said.

His best case for 2020-2022 PP demand is minus 5% compared with last year, a negative shift in demand of 15m tonnes.

His worst case scenario is a difference of minus 6%, or a market 33 m tonnes smaller than expected only a short while ago.

Take another naphtha cracker co-product, butadiene.

The significant reduction in automobile production has a direct impact on butadiene-based rubber consumption, and the outlook for butadiene (BD) in the second quarter, and potentially the remainder of 2020, is not good.

The Europe BD monthly contract reference price fell 27% for April, down to a four-year low, the primary driver being the steep fall in the crude oil price and subsequently naphtha.

The point in contract negotiations this week was that the feedstock price fall was the known while the supply and demand picture was the unknown.

One contract player suggested that the demand outlook for April was likely to be much, much lower that for March.

In Europe, right now, most BD derivatives units are running normally but concern is growing about the chain of events that will affect business.

The European market was supported by the devastating outage at TPC’s C4s extraction facility in the US last November and the shut down of China and Asia markets earlier this year because of the clampdown on the coronavirus outbreak.

But as China producers come back online, exports from Europe could suffer.

BD market uncertainty reflects that encountered across multiple products in multiple markets at present.

The collapse in demand will work through from the refinery impacting supply and demand across multiple product chains.

Insight by Nigel Davis