US ethane to double by '19, squeezing margins – Cowen

17 February 2017 18:17 Source:ICIS News

These black spheres are made of polyethylene

BARCELONA (ICIS)--US chemical producers will suffer from big increases in ethane prices as demand exceeds supply from the second half of 2018, according to a new report by investment bank Cowen & Co.

As the current wave of new chemical production capacity comes onstream from 2017-19, demand will steadily outstrip supply, leading to hikes in ethane prices from current levels of around 20-25 cents /gal to reach as much as 55 cents/gal or more, according to Cowen's report, called "NGL Bubble Bursts: Chemical Earnings At Risk".

Cowen forecasts that a deficit of 200,000bbl/day of ethane by 2019, which could lead to ethane prices breaking their link to natural gas and becoming more aligned to naphtha. This could lead to significant earnings headwinds for US chemical producers in terms of volumes as well as export economics. To be competitive internationally, production economics must be advantaged compared to other regions.

As the new wave of US production comes onstream, competing with capacity increases in the Middle East and China, earnings before interest, tax, depreciation and amortisation (EBITDA) margins for US polyethylene (PE) production could shrink to below 20 cents/lb ($441/tonne) from current levels of over 35 cents/lb. This margin compression will begin to take shape in early 2018 and reach its apex in the second half of 2019, the report said.

Companies most negatively affected would be Dow Chemical, LyondellBasell and Westlake. However, some upstream integrated oil, gas and chemical majors might stand to have chemicals losses offset by higher natural gas liquid (NGL) prices.

According to Cowen, there is a misconception that $60/bbl crude pricing will stimulate enough NGL production growth to sustain a high level of surplus ethane rejection through 2019, with only gentle price rises. 

Cowen's anaylsis suggests the low price of oil over the last 12-18 months has slowed growth in drilling activity and has put NGL supply growth below its original trajectory.

“Much of the focus of today's drilling activity is on oil, which is not as ethane rich. As a result, drilling is not adding as much NGLs to the pool,” adds the report.

Cowen analysts also believe that lack of infrastructure development will stop recovery of much stranded ethane. “Because of the locations of the ethane, we find that there will not be enough pipeline capacity to get all of these rejected barrels to the US Gulf Coast, where they are needed.”

The report points out that when the new wave of US ethane-based projects were first proposed in 2012/2013, the price differential between oil and natural gas was at its highest levels, giving the US a massive cost advantage over oil-based production prevalent in Asia and Europe.

However, as the new wave of US ethylene and PE supply comes onstream, domestic overcapacity will force producers to export more, pushing global prices downwards. 

“At the same time costs will rise on the tightening supply/demand environment for the consumed feedstocks, leaving a situation where margin could compress sharply as ethylene capacity comes online,” says the report.

 The following table lists the cracker announcements made for the US.

Company

Capacity

Location

Start-up

Chevron Phillips Chemical

1.5m tonnes

Cedar Bayou, Texas

Q4 2017

ExxonMobil Chemical

1.5m tonnes

Baytown, Texas

H2 2017

Dow Chemical

1.5m tonnes

Freeport, Texas

mid-2017

Formosa Plastics

1.59m tonnes

Point Comfort, Texas

NA

Occidental Chemical/Mexichem

544,000 tonnes

Ingleside, Texas

Q1 2017

Indorama

370,000 tonnes

Lake Charles, Louisiana

Q4 2017

Shintech

500,000 tonnes

Louisiana

early 2018

Sasol

1.5m tonnes

Lake Charles, Louisiana

H2 2018

Axiall/Lotte

1.0m tonnes

Lake Charles, Louisiana

early 2019

Shell

1.5m tonnes

Monaca, Pennsylvania

early 2020s

SABIC/ExxonMobil

world-scale

Texas or Louisiana

NA

Total Refining & Chemical

1m

Port Arthur, Texas

end 2019

PTT Global

1m

Belmont county, Ohio

2021

Formosa Petrochemical

1.2m tonnes

Louisiana

NA

Williams

1.5m tonnes

Geismar, Louisiana

NA

Odebrecht

World-scale

Wood county, W Virginia

NA

Image above: The black spheres are made of polyethylene, the largest derivative of ethylene. Source: Gene Blevins/REX/Shutterstock

By Will Beacham