INSIGHT: Rising feedstocks, energy costs pressure petchem price increases

Author: Nigel Davis

2021/09/28

LONDON (CIS)--High and volatile natural gas costs and a rising oil price can only mean one thing for petrochemicals: upward price pressure.

Petrochemical prices have pushed much higher this year as economies have expanded rapidly following COVID-19 lockdowns in 2020.

Various factors have helped buoy prices for the major commodity petrochemicals and polymers, including supply chain uncertainty in its many forms.

Now it is uncertainty of supply that is pushing up natural gas prices in Europe with a knock-on impact in Asia. China has banned coal imports from major supplier Australia and coal and gas costs have surged.

In the US, Hurricane Ida forced the closure of oil production platforms in the Gulf of Mexico; it also helped push natural gas prices higher.

Feedstocks and energy account for more than 90% of the variable costs for producing one tonne of ethylene on a typical steam cracker; the price of natural gas is translated directly into the cost of producing the ammonia needed for fertilizer and chemical production.

The cost of electricity determines the profit margin for producing one tonne of chlorine and caustic soda in a typical chlor alkali plant.

In certain parts of the world, ammonia plant production is being ‘curtailed’.

Meanwhile, chlor alkali producers can possibly take advantage of ‘load shedding’ opportunities on their electricity supply. There is talk of surcharges being applied to product prices because of the increased costs.

As the Brent price hit $80/bbl on Tuesday morning (28 September) the prospect of upward pressure on petrochemical prices loomed larger.

The strength of crude futures drove up naphtha prices in Asia, for example, which were at a three-year high on Monday.

US West Texas Intermediate (WTI) crude rose to reach its highest level since July this year, settling 2% higher on the day.

US olefins producers have the higher cost of ethane and other natural gas liquids (NGLs) to contend with; their margins have been squeezed although they retain a distinct production cost advantage compared with oil-derived feedstock based firms.

Ethylene prices in Asia were higher on Tuesday because of increased naphtha costs.

The upward pressure on crude oil prices remains a concern because production from rigs in the Gulf of Mexico has still to come back online following shutdowns due to Hurricane Ida. US sour crude supply is expected to be impacted for months.

US Gulf petrochemical and polymer prices have been rising sharply on higher feedstock costs and the strengthening US economy. The upward march of feedstock and energy costs provides impetus for possibly further increases.

In August, the US Gulf ICIS Petrochemical Index (IPEX) was up 7% month on month. It was 95% higher year on year and 56% higher than in August 2019.

The IPEX is based on a weighted basket of prices for 12 of the major petrochemicals and polymers. It is calculated on a regional and a global basis.

The Global IPEX rose by 1.95% month on month in August, tracking price increases seen in most major petrochemicals and plastics markets in the US Gulf and Europe.

Prices in northeast Asia were largely stable, up by only 0.3%. Individual commodity and polymer prices in the US Gulf rose the strongest in August with jumps for butadiene, benzene and propylene.

With the exception of ethylene and methanol, all the petrochemical and plastics prices used to calculate the index in the region rose in August.

The European index also rose, increasing 2% month on month in August.

Butadiene (BD), benzene and propylene posted the largest jump and polystyrene (PS), polypropylene (PP) and polyethylene (PE) showed the only falls.

The northeast Asia index posted the most moderate rise in August, with BD and PE leading the increase.

The Global IPEX index for August was 68% higher year on year and up 33% on August 2019.

Insight by Nigel Davis