INSIGHT: Ethylene supply and demand colour early 2014 outlook

31 December 2013 15:00 Source:ICIS News

By Nigel Davis

LONDON (ICIS)--Demand is the issue for ethylene producers in Europe and the US at the end of 2013 while in Asia most market concern centres on supply.

US ethylene demand is expected to grow with improving economic output in 2014 while in Europe producers will have to continue to adapt behaviour to demand patterns that will be influenced by the slow climb out of recession.

A heavy cracker maintenance schedule in 2013 gave European producers flexibility to cope with downstream uncertainty, influenced by Europe’s weak economies and increased imports from low-cost producing regions. A lighter turnaround schedule in 2014 removes that lever and suggests that operators will have to be more agile and even better than they have become at managing inventory levels.

The view of one ethylene trader, reported in ICIS this month, sums up the situation neatly. “We are predicting next year to be difficult, we will take very little risk – it won’t be great on ethylene.”

Other market participants clearly would prefer to adopt a 'wait and see' approach. Cracker operators and olefins consumers maybe don’t expect market conditions to get any worse but they have few reasons to be cheerful.

High costs mean that structural change continues to be necessary. Operators also are in the process of introducing greater feedstock flexibility to try to bring operating costs down further.

Europe is a high-cost operating environment for energy-intensive industries such as chemicals. The predominance of naphtha cracking may give cracker operators greater margin flexibility but not the significant advantage that competitors in the Middle East and now in the US have based on low-cost ethane.

In the US, ethylene market discussions have centred on where the ethane-advantaged margin is taken.

This ethylene buyer summed up the situation: “Right now, they [ethylene producers] have 30-40 cents/lb of margin and we have 10-12 cents/lb at best. “There’s no reason for it.”

Not surprisingly, standalone polyethylene (PE) and polyvinyl chloride (PVC) producers among others are pushing for closer US ethylene contract and ethane prices.

They are not a happy bunch but don’t necessarily expect much to change. The disconnection between the Henry Hub natural gas price in the US and prices generally for petrochemicals is likely to persist until either more gas is exported (as LNG – liquefied natural gas) or the oil price falls. Neither is immediately on the cards.

US ethylene producers and those companies integrated downstream into the major intermediates have enjoyed significantly stronger margins and grasped opportunities to lift exports.

There may be pressure on margins later in 2014 as some new ethylene supply comes on-stream but the planned big capacity increases are still a few years off.

Supply is the big issue in Asia moving into 2014, with a heavy cracker maintenance schedule affecting six crackers in Japan from February to June.

New downstream units in South Korea are expected to have an impact on ethylene supply/demand balances as are derivatives capacity additions in China.

Methanol to olefins facilities are due on-stream in China in 2014 but these integrated facilities are not expected to have much influence on overall ethylene supply.

Rather, the expected tightening of regional ethylene supply in the first half of 2014 has put upward pressure on prices for markets such as China and led to some longer-term contract buyers taking their chances on the spot market.

There may be wider ethylene availability in Asia in 2014 should Iran be able to step up production and if volumes become available for export.

But feedstock supply in Iran is said to be limited and rising domestic demand for derivatives might work against increased ethylene exports.

The big Borouge 3 project in Abu Dhabi is due on stream in the first quarter of 2014 with the ethane cracker up first and the downstream PE, polypropylene (PP) and low-density polyethylene (LDPE) units to follow.

“Any delays in the start-up timing of the downstream facilities could potentially result in surplus ethylene (exports) to Asia,” a trader said.

Reporting by Nel Weddle, John Dietrich and Yeow Pei Lin

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By Nigel Davis