Fears of US ethane price spike overblown - analyst

06 September 2016 20:41 Source:ICIS News

And ethylene will remain tight as unplanned outages among ageing crackers are here to stay, says the head of research at New York-based Alembic Global Advisor. Above, Dow Chemical's plant in Freeport, Texas, uses ethane to make ethylene. (Photo source: Dow Chemical)

HOUSTON (ICIS)--Fears that US ethane prices will spike in the upcoming years are overblown, an analyst said on Tuesday.

Meanwhile, ethylene will remain tight in the short- and medium-term, as unplanned outages among the nation's ageing cracker fleet are here to stay, said Hassan Ahmed, head of research at New York-based Alembic Global Advisor. He made his comments in a research note.

Planned and unplanned outages as a percent of installed capacity now stand at 6.6%, he said. That compares with an average of 6.2% during the past two decades.

The increase in outages is due to the age of US crackers, Ahmed said. More than two-thirds of US capacity is more than 30 years old.

Unplanned outages could rise further as US producers run their plants harder to maximise returns.

"Medium to long term, we see ethylene utilisation rates being at tight levels through at least the end of the decade," Ahmed said.

Looking at ethylene demand, Alembic used a 1.2X multiplier of GDP growth to forecast growth.

Taken together, ethylene demand growth from 2015-2019 should outstrip supply growth, he said. As such, Alembic expects the ethylene cycle could peak as early as this year.

US producers stand to benefit disproportionately during this cycle because they rely predominantly on gas-based ethane as a feedstock, while much of the world uses oil-based naphtha, Ahmed said. During past ethylene peaks, the US did not enjoy such a large cost advantage as it does now.

While ethane prices are expected to rise, Ahmed still expects that advantage to persist.

Under the most draconian circumstances, Alembic expects ethane prices would reach 40 cents/gal. That forecast also assumes that propane will impose a price ceiling on ethane.

Alembic's base-case scenario calls for ethane to reach 28 cents/gal in 2016 and 35 cents/gal by 2018. This assumes Brent would reach $55/bbl and natural gas would reach $2.75/MMBtu.

Current ethane prices are 17.50 cents/gal, according to ICIS.

In all the scenarios through to 2018, the US should maintain its ethane surplus, Ahmed said.

Forecasting beyond 2018 is difficult because it is unclear whether new crackers will start up on time in the US, Ahmed said. Looking ahead, most companies are taking a more cautious approach towards adding new ethylene capacity past 2018 because of the decline in oil prices.

By Al Greenwood