Global Olefins Market Snapshot
The global olefins market was already moving towards crisis in late 2019, before the world had even heard of coronavirus. The long period of high olefins margins globally had the expected effect of generating a major global capacity build, which already shifted the olefins and polyolefins markets strongly into oversupply in late 2019. Asian integrated ethylene/HDPE cash cost margins went negative in the fourth quarter of 2019 - the first time since 2012.
The impact of global confinement measures due to the coronavirus pandemic are complex but broadly negative. While food packaging demand soared, demand in other key sectors such as automotive, construction and other parts of retail has plummeted. There will be recovery in some sectors as nations emerge from confinement, although lost economic activity and the sentiment of insecurity will continue to depress spending on big-ticket items for some time. Almost all producers announced sharply lower production in quarter one 2020, with some temporary plant closures also occurring. The overbuild of olefins capacity in Asia was already expected to lead to some rationalisation of higher cost capacity in e.g. Japan, and this may now be accelerated and increased.
Plummeting crude oil and naphtha prices provided some relief to liquids-based ethylene producers in quarter one, but the benefit was rapidly passed through to derivatives, and margins remain chronically low. The greatest effect on profitability is on Middle Eastern producers with fixed gas prices, which enjoy no benefit from lower feedstock costs, while the value of their derivatives has dropped by around 30 percent since 2019.
The government support being offered to protect economies is unprecedented, and likely to run into trillions of dollars in both Europe and the United States. While this will provide for some recovery in consumption later in 2020, olefins consumption will still contract globally in 2020, and there will be some future demand loss from the inevitable fiscal austerity that will be required to reduce government debt after the crisis. As to the longer term behavioural changes that may result from this crisis, little can be said with certainty. More home working, less air travel and private vehicle use all seem likely, but would not dramatically affect the consumption of olefins and their derivatives. While the crisis may bring a greater focus on sustainable development, the effect on recycling has been strongly negative. Recycle volumes have declined and collection programs suspended due to virus contamination risk for workers and the drastic effect of low oil prices on recycling economics. Anti-plastics sentiment has dropped from the fever pitch that was sustained during 2019. Governments faced with the economic crisis resulting from coronavirus may be less willing to pursue recycling targets and taxes on virgin polymers that place an additional financial burden on their electorates.
When economies emerge from coronavirus confinement, there may be some benefit from resolution to trade disputes, but other problems such as the economic crises in Russia, Argentina and Venezuela will remain.
Globally, olefins expansion plans are being reduced and delayed, with global oil majors in particular announcing sweeping reductions in capital expenditure in 2020. State-backed investment in oil exporting countries will also suffer. Many projects are however so far advanced that they are unlikely to be delayed and global operating rates are thus expected to continue a steep decline over the next three years, bottoming out at around 80 percent.
The pressure on the ethylene market resulting from new capacity in Asia and particularly from exports of U.S. polyethylene reversed the established pricing relationship between ethylene and propylene, with ethylene trading at a discount to propylene in Asia since mid-2019. Butadiene prices maintained a small premium over both.
Ethylene capacity in the U.S. Gulf has increased by around ten million tons per year, and incremental growth will be relatively low in the near term with fewer projects in progress. Shell announced in early 2020 that it was temporarily suspending work on its long-running Monaca, Pennsylvania cracker project as a result of measures to avoid virus contagion.
The surge in ethane supplies in the United States has led to low prices and strong margins for U.S. ethylene producers. Aside from some technical difficulties and unplanned incidents, U.S. producers have been able to operate the new plants at relatively high rates and rapidly increase derivative exports. U.S. integrated polyolefins costs remained at around half of those in regions such as Asia and Western Europe in quarter one 2020, leaving sufficient competitive advantage to support exports. The drop in shale crude production will limit NGL production at least temporarily, although there appears sufficient slack in the system (including ethylene which is currently rejected) to ensure ongoing supply. NGL prices have already started increasing in the United States however, and the much lower netback prices for derivatives means significantly lower margins, and thus likely delays to further investment.
The ethane export terminal being built by Energy Transfer Partners and an additional ten million tons per year export facility proposed by American Ethane would bring the total increase in ethane demand from 2017 up by at least 100 percent, although the terminal could run at lower rates in its initial years of operation. This level of ethane consumption growth would be challenging against a backdrop of falling oil production, although there is scope for oil production to recover before the new terminal becomes operational.
Following the first shipment of U.S. ethane to Europe in 2016, there are now three terminals in Europe receiving ethane imports, and two of these sites sell ethane on to additional crackers. Reliance’s fleet of VLECs (very large ethane carriers) is also operational and serving its Dahej, India terminal and connected 500km pipeline network which carries ethane to three of its crackers on the West coast of India. Along with the ethane import infrastructure, Reliance also commissioned a new cracker at Jamnagar which is among the largest in the world, following on from the long-awaited OPal cracker which was commissioned in 2016. Indian companies also continue to add FCC propylene capacity, although the West Coast Refinery project which was to include several million tons of olefins from FCCs now appears unlikely to go ahead. Saudi Aramco and Reliance may however pursue a similarly ambitious refinery/chemicals project. In the Middle East, gas supply developments are supporting a significant increase in ethylene production in Iran, which has considerable ethylene and derivatives capacity currently underutilised due to feedstock restrictions. The severity of the coronavirus situation in Iran, and the impact of lower energy export revenues is likely to create long delays on less advanced projects however. Elsewhere in Asia new ethylene projects are primarily naphtha-based, and mostly linked to new refineries which both provide the feedstock and the means to optimise the value of by-product streams.
The period of ethylene capacity rationalisation was suspended for some years but may again resume as a result of the major new ethane-based cracker planned by INEOS, and increasing competition in Asia where much of the surplus product from Europe has been sold in recent years. The planned ethylene capacity growth in Europe greatly outweighs investments in new derivatives, and this may renew the pressure to close some older crackers. The low oil prices do however reduce the competitive disadvantage versus olefin and derivative imports from both the United States and the Middle East.
Supply in Central Europe will be supported by some planned cracker expansions, as well as a new PDH plant in Poland. SIBUR’s ZapSibNeft project in Siberia came online towards the end of 2019, with the capacity to produce almost two million tons per year of polyolefins. Several other very large projects are under consideration in Russia, including the Ust-Luga project in the Baltic that would produce around 3 million tons per year of ethylene, and could have a very significant impact on the ethylene market in Central and Western Europe.
Aside from some brief periods of high prices due to spikes in local demand for heating, U.S. NGL pricing remains highly competitive and olefin producers around the world continue efforts to procure larger quantities both for PDH and to improve the cost position of their steam cracking operations. INEOS, which was the first company to engage in transporting ethane from the U.S. has now announced a new butane tank in Europe which will be used to transfer butane from deep sea sources such as the United States to one or more of its European crackers. This tank has been delayed beyond its original construction schedule and the planned on-stream date is not known.
The butadiene market globally was supported by a major accident at TPC in the United States, which took out 220 000 tons per year of extraction capacity in late 2019. The effect was short-lived however, with the tyre and auto sectors among the worst hit of all parts of the economy, and all markets becoming heavily oversupplied in early 2020 through coronavirus effects.
The large new liquids cracking projects in the Middle East, along with the wave of new crackers in Asia suggests C4 supply will ease further post-2020. There now seems little or no opportunity for new investment in butylene dehydrogenation, with almost all of the recently built capacity in China either closed or converted to conventional C4 extraction. The butane dehydrogenation plants in Russia however continue to operate profitably.
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Market Analytics: Olefins - 2020 provides analysis and forecast to 2045 of supply and demand of the global olefins market including ethylene, propylene and butadiene. This analysis identifies the issues shaping the olefins industry as well as provide detailed demand breakdown by derivative, supply and net trade data for 40 countries.