Changing Ethylene Dynamics Across Global Markets

Alan: Hello, and welcome to this "Chemical Conversations" podcast brought to you by Argus Media. In this edition, we'll be sharing a global equity market update ahead, really, of the AFPM annual conference in the U.S. in March, and also the European Petrochemicals Luncheon conference held in Rome also in March. We'll basically be going around the regions to get an overview of the market situation, and then reflect on our short-term forecast, which is reflected in our outlooks which are produced on a monthly basis, and then on a bi- and yearly basis in our analytics.

I'm Alan Williamson. I'm the lead consultant for olefins in Europe. And I'm joined this morning by Toong Shien Lee. Hopefully, I've got that right. Toong Shien, who's our associate editor for olefins in Asia. This afternoon, I will be joined by Michael Camarda, who is our lead olefins editor for the U.S.

Now, to my simple mind, Asia is really the driver for petrochemicals industry these days. It's the biggest market. It's got significant production, which is increasing all the time. And it's a real centre for the petrochemicals industry. So, it makes sense, I think, to start in Asia. So, TS, can I ask you, can you give us a quick update on what's the current market balance in Asia, and what are the significant issues that we should be aware of in short term?

TS: Hi. Thank you, Alan. Thank you for having me here. So, yeah. Let's start with the market situation in Asia. So, current supply is actually quite long in the Northeast Asia because of the Iranian cargoes on top of the weak downstream demand. And on top of that, we have a restart of cracker and new start of cracker in China, which include Wanhua and also BASF Zhanjiang. That also increased the additional supply in the Northeast Asia market. So, Wanhua used to be a net importer in last year, but this year, once the cracker is restarted, we see that the appetite to import was greatly reduced. At the same time, the new start of BASF Zhanjiang in South China also led to reduced imports interest in that region. So, overall, the demand is still fairly weak. The supplies are still long in the Northeast Asia regions.

Alan: Okay. Thanks, TS. And is there a significant maintenance program this year in Asia, and what impact would that have?

TS: Yeah. I'm glad that you asked about this question. Also, I learned that this year, right, we'll see Japan will be having a heavy turnaround season starting from March onwards. A total of five crackers will go for maintenance, and supply from Japan will be affected. But as supply is still long with weak demand, as I mentioned just now, particularly in China, most market players have already factored in the reduced supply from Japan. So, the impacts might be minimal, according to most market players. To give you a better idea of what is Japan's positions in the ethylene market, Japan is the second largest exporter of ethylene in Asia after South Korea.

Alan: Okay. Yes. So, it doesn't look like we will really see any real relief on exports from Asia, particularly to Europe. But I'll come on to that later. So, are there any other issues really impacting the Asia market? We hear a lot about tariffs and changing trade flows as a result of tariffs, but also other issues like...I think there's a new VAT come on in China. Any comments on that, TS, on what its impacts may be?

TS: Okay. So, this will lead to my next point also. So, other than turnarounds in Japan, I think what is more crucial could be the reduction in environment in Asia Pacific region. We see that the persistent narrow naphtha to ethylene spread since February have weak on production margins and several...and a few South Korean crackers have already reduced their run rates further. And some are even planning to reduce more in March. So, this will further ease off the supply issues in the region.

For tariff-wise, tariff definitely has really reduced the incoming of ethylene cargos from the U.S. since last year. But as Asia supply remains long, the reduced supplies from the U.S. might not be a bad news after all. Other than that, China will also welcome another seven new crackers this year, and South Korea will have one more new start-up by end of the year. And we expect that rapid expansions in China will still take place in 2026, and carry on until 2027 and 2028.

Alan: That's interesting. So, I didn't actually know that there was a new capacity coming on in Korea. So, we hear a lot about rationalisation in Japan and South Korea, and also this anti-involution — I hope I pronounced that right — act in China. I mean, how much capacity do you actually see coming out over the next couple of years, TS?

TS: The talks on rationalisation, particularly in China and also in Korea, are still going on. So, more details might surface gradually as the year passes. So, for now, we don't really have exact ideas on the capacities-wise. Things will be clearer by end of this year, especially for Korea's side. For Japan, plans on rationalisation have already been factored in earlier on clear planning. Hence, the impacts might be very limited. For China, the anti-involution plan is still unclear for now. But plans to phase out the smaller crackers are definitely one of the top priorities as the country looks to improve cost efficiency and the overall petchem economics. For Southeast Asia, we also see that there will be one cracker in Singapore will gradually go for a shutdown by end of March, probably because of the margin concerns, too.

Alan: Okay. Thank you, TS. So, just one last point for myself. You hear a lot about crude to olefins capacity being added. But of course, over the last few years, quite a bit of ethane-based capacity has also been added based on imports from the U.S. Now, with the friction with the U.S. over tariffs, do you see any change in this? Do you think there will be more crude to olefins built or will the ethane-based capacity still come, in your opinion?

TS: My honest opinion will be that the crude to olefins and the ethane crackers might see a slowdown, particularly in China because of the friction. And also, not to mention that the current petchem situation, the downturn of the cycle, is really waving on the future investments. So, we have already seen some of the new ethane crackers being delayed or even being cancelled. The prominent one will be the satellite cracker. So, in the future, I would say that naphtha crackers will still be the main crackers to start up in China. Ethane and crude to olefins might face slower progressions moving forward.

Alan: Okay. Yeah. Thanks, TS. Is there anything else you feel we should add for Asia that may impact the rest of this year and maybe into next year that we should be aware of?

TS: I think I have pointed out all the important ones. The one that we need to focus on will be the South Korean rationalisations, and also maybe the future rationalisation in Southeast Asia, too.

Alan: That's great. Many thanks, TS. Appreciate it. So, maybe that gives me the opportunity to then move on to Europe. It looks like, certainly, for '26 and forward, we're not going to see much change to the kind of flows from Asia, from China particularly to Europe. I think that plays into the current market demand situation here, which is very, very, as we say, weak and cautious consumer demand, which has never really recovered from the financial shocks of the energy crisis. And I think with the ongoing political and geopolitical problems in the world, I think European consumers remain very, very cautious. And in fact, the governments here are really struggling with the sheer cost of living.

And this basically is impacting, I think, the current market balance. We've seen quite a bit of rationalisation. We're definitely into a rationalisation and resizing and consolidation phase. I think the last major one we saw in Europe was around 2012 to 2014. This one's probably going to be larger, but we are going to have some new capacity come in. So far, we're now into the Mossmorran cracker in the UK, which closed actually earlier this month. We're pushing nearly 4 million tonnes of rationalised capacity since 2020, according to the Argus capacity database. And we expect another 1.1, 1.2 to close by the end of 2027 that have already been announced.

And I also like to remind people that we currently have about a further 1.1, 1.2 of capacity idled with a cracker in the Netherlands and a cracker in Portugal currently not running and haven't been running for nearly a year now in terms of the Netherlands and a bit longer in terms of Portugal. So, that's pushing 20% of capacity here in Europe. We will get some capacity back in terms of a new cracker, the INEOS Project ONE cracker in 2027. That one will reduce the overall net closure to 3.5 million tonnes approximately, excluding the idle capacity, which will come on top.

And that very much goes to what we see in the short term here in Europe. We have seen the market, shall we say. It's not tight, but it's certainly rebalanced in the first quarter of this year. Demand has been weak. It was very weak at the end of last year. We've seen some improvement, but very, very, very cautious improvements. Certainly, people are very reluctant to rebuild stocks, which was a little bit anticipated. However, I think the most important thing on the horizon in the short term for Europe is quite a large cracker turnaround season, which by our calculations will mean approximately 23% of European capacity will be offline in April, which will be the peak. This is, I think, the largest that we've ever seen by Argus record, certainly over the last decade. And we'll be going into new territory with actually no crackers running in the gleam [SP] pocket, which will be the first time, I think, certainly on a planned basis that this has ever happened. So, it will be interesting to see what happens to flows along the quite important ARG pipeline, etc.

As a result, there is some anticipation that we may see some restocking or certainly stocking ahead of these turnarounds. However, we know that derivatives will also be planned. And I think also we'll probably see an increase in imports. And based on your update, TS, it does look like imports of certainly polymers and finished goods from Asia will not really be impacted. And of course, this afternoon, we will find out whether the U.S., which is now the largest supplier of imported ethylene and has been for some time, will be able to produce and send the required imports. It certainly looks like that will be the case.

Other issues really impacting Europe and what's really helped to speed up the cost of this rationalisation program is really Europe's ongoing energy costs crisis. Clearly, energy costs have come down from their peak in 2022 at the start of the Russia-Ukraine conflict. However, they're still now higher than they were historically, based increasingly on imported LNG. And we expect this to continue.

The other issue, of course, which is impacting energy costs, but also costs overall for Europe is really the European trading system on carbon. ETS, as it's often referred to, by our calculations based on the current benchmark up to the end of 2025, this per tonne of ethylene basis is probably adding at least 60 to 65 euros a tonne of additional cost, which is quite a significant amount for the European producers to swallow. This will go up quite significantly, it looks like, with the new benchmark, which we expect to be announced by the end of this quarter. Current indications in the EU, this could be a further decrease in the benchmark or the free allocations by 20% to 27%, which would significantly increase the cost for, unfortunately, the majority of producers which sit above that benchmark, and will probably lead to further rationalisation. But this will not be in 2026.

So, for our particular view on the short term, we feel Q1 will continue to remain fairly balanced. But as we move into Q2, things could become tight as we move into the historical peak demand season for Europe. So, it will be an interesting first half of the year, but then the second half of the year, we see very little maintenance, and we expect things to come more back into balance. And really, at that point, we'll get a real underlying feeling for how the industry is doing based on the new capacity with the nearly 4 million tonnes that has already left the system and what it will look like going forward when the further capacity closes. But we really will be in a situation with the idle capacity to judge that, I think, later this year.

Hopefully, demand will not fall off quite as quickly in the second half of the year, especially if people manage to keep stocks under control as we will then have the capacity to a major stock rundown towards the end of the year, which we saw at the end of last year, which was extremely painful for many in the industry.

I think that's kind of the overview for Europe. A lot now will depend on whether the U.S. can step in, I think, on imports and how the U.S. situation is doing. And as I mentioned earlier, I hope to cover this in this afternoon's call with Michael, our lead olefins editor for the U.S. In the meantime, I'd very much like to thank TS for joining me this morning and covering Asia. Greatly appreciate it, TS.

TS: No. Thank you. Thank you very much, Alan.

Alan: And I hope our listeners will now stay with us and join me for the second half of this podcast with Michael Camarda, our lead olefins editor for Americas. See you shortly.

Hi, Michael.

Michael: Hello. Good morning.

Alan: Morning, sir. Thank you for joining.

Michael: My pleasure.

Alan: So, Michael, just obviously following on from here, we'd be fascinated to get an update from yourself on the U.S., how you see the current market balance, etc., and from a European perspective, as a major supplier of ethylene now, how you see that progressing. So, over to yourself, Michael.

Michael: Sure. Yeah. I mean, there's definitely an excess globally for ethylene. And the U.S. and North America is not an exception right now, despite our general gas-based feedstock advantage. I think I could point to the most recent inventory data from AFPM. It was 3.7 billion pounds, which is 1.6 million metric tonnes. You know, that's basically a world scale cracker in inventory. This eclipsed the prior inventory high, which was from seven years ago, by 17%. You know, it's pretty stunning. You know, we didn't just get to an all-time high. We really smashed through one last quarter. And by all the looks of it, you know, it's very possible that in the first quarter of this year, if we can find space for it, we may set a new record for inventories.

So, in terms of pricing, we've seen prices last quarter were at basically three-year lows. We were down to about $364 a tonne by mid-November, by far the cheapest region in the world. Those numbers matched where we were in April during the kind of exogenous Trump tariff events. We kind of matched those levels. And to go below, you'd have to go back to the summer of 2023. So, we really have a very high inventory situation right now. We're long. And even we had a little small winter freeze back in January, and prices were practically unmoved. Even though you saw ethane feedstock costs, which is a large percentage of what makes up the ethylene price, surged 40% in a week's time. And our prices just budged barely for ethylene. So, really, there's not a whole lot abating in terms of our oversupply.

LyondellBasell, last quarter, they had told us that they had run their crackers at 90%, which is still about roughly about 5% higher than most of the average rate for the rest of the world. And then they said that their overall olefins and polyolefin segment, that they're going to increase rates in the first quarter of this year. So, again, everything kind of points to a long situation. And this is coming even when margins are suffering. If you look... Again, Lyondell presented some really good information that the integrated margins averaged $580 a tonne, which was 30% below the historic average of $830 a tonne for the integrated ethane to polyethylene margins. So, the U.S. is running harder, but we're still feeling it, at least versus our historic averages, even if we are doing better than the rest of the world.

Alan: Now, that's interesting. So, really, you know, the U.S. really is a supply centre for the globe now. I think you said something very interesting early in the week to myself and some other members of the team, really, around, I think Europe has now taken over as kind of the major export location for the U.S. Is that right?

Michael: Yes. I mean, if you look at... You know, as far as I understand, Europe has rationalised — you probably know better than I do — I think, somewhere between 15% and 20% of their capacity. And, you know, with that, the U.S. is kind of filling in the void of some of those crackers. The story, I think, that Italy presents is the most striking. Italy took in 12 times more ethylene in 2025 than it did in 2024 to fill in for, I believe, the two crackers there that had shut down, but their integrated derivative units had continued to run. So, yes, the first three countries that the U.S. sent ethylene to this year was...it was Belgium, the traditional importer, you know, the INEOS there, Italy in second place, and then Portugal with Sines there and Repsol in third. And that's the first time in 18 years that the first 3 countries receiving U.S. ethylene were all from Europe. So, it is quite stunning what's going on.

Alan: Oh, absolutely. And I guess, with a pretty heavy turnaround schedule in Q2 in Europe, then we'll probably be pulling from the U.S. even more. So, I believe new export capacity has been added in the U.S. So, is there really a limit to how much can be shipped out of the U.S.?

Michael: There's still more flexibility to increase the exports further. They increased by about, I think, 45% earlier this year, or last year, but it's just if it's there. And it's really the vessel availability, I think, that constricts it more than even the terminal export capacity itself these days. So, we always have to compete with ethane as well for ethylene because they both go on the same vessels.

Alan: Yeah. Right. Makes sense. Yeah. And I guess, obviously, there's probably even a limit to how much you can actually physically get in to Europe. There's not too many terminals. No, but that's good to know. That's good to know. I guess, you kind of alluded to margins, etc. So, is the U.S. feeling the same kind of pressures, or are there any other different pressures that we're feeling globally from the current, you mentioned, tariffs uncertainty, etc.? I mean, what is the mood like in the U.S. at the moment, Michael?

Michael: We still know we're in a trough. Again, these are the lowest integrated margins in the last decade. And you have industry veterans saying that this is the worst thing they've ever seen, people doing this a lot longer than I have. Though it seems like there is maybe some light at the end of the tunnel. I think that kind of came this year or just actually just last month from Dow, who, if we can recall, last April had decided that they were going to put on hold their Path2Zero project up in Canada, which they were citing.

And of course, you've got to put yourself in the mindset of last April. It was the tariff chaos. Right? But the story is, of course, more than that. It was kind of good timing to perhaps kind of pin it on tariffs. But Dow said that they were going to...and they'd already invested a significant amount of money in this cracker. I mean, they never said they were going to cancel it, but they said that it was going to be basically on hold until market conditions improve, or at least that they could tell us that those market conditions improve. And frankly, I thought that that was going to be a fairly long, indefinite delay with no real update.

And believe it or not...and again, it was to my surprise back in January. They told us that they will now be starting that cracker up in late 2029. So, roughly a two-year delay. So, I think that's really illustrative for this market, and lets us know that they see that we're going to finally get more toward the up cycle here. It's just going to be about two years longer than we initially had anticipated. And Dow is trying to, again, open that cracker up for that upside to capture it when the market is turning.

So, I think that was probably the most interesting thing I've seen lately in terms of... Because it's been for years, everyone's saying, lower for longer. Oh, well, you know, someday it's going to turn. And I think this is the first real significant, you know, put your money where your mouth is kind of moment from a major player on when this is actually going to turn around. So, I think, yes, it's a little bit grim. It's not as grim as Europe, not as grim as parts of Asia. But I think we finally see a little bit of hope there with that announcement from Dow.

Alan: No, absolutely. It is an interesting change because new capacity additions in the U.S. has really slowed down after a recent wave. I mean, is there a limit to how much cost it could be built in the future if things do improve, Michael? Is there any limits on ethane, or do you see it continuing to be freely available? It's a bit of longer-term question.

Michael: I think it's still going to be more towards the end of this decade. I think, you know, Dow wasn't wrong in where they're pointing to. We've seen, you know, back in October of this year, ExxonMobil, who had kind of toyed with the idea of building a new ethylene and polyethylene facility in Calhoun County, Texas, they delayed their decision also indefinitely. And we have not heard any new updates on timing with that. So, it's still very much the overall sentiment in the market.

The one cracker that we do have in terms of...you're asking about what's building...what's coming is the Golden Triangle Polymers project, which is a joint venture between CPChem and QatarEnergy, a 51-49 deal. And, you know, that JV was formed in 2022 when things were a little bit rosier for the markets. I'm not sure. They have not decided to cancel it. And obviously, it's via the HDPE units for that facility are set to open by midyear this year. And that could provide a little shot in the arm for ethylene spot prices.

Last year, we saw Dow open up one of their new polyethylene units back in June. And that did send prices up about 40% in two weeks as the market kind of absorbed that new demand. And, you know, given that it's CPChem, you're probably going to see them...they have the ethylene flexibility where they're going to probably want to open up their derivative units first, work out the kinks in those things. And if everything's good, you know, then the cracker...it's about 2 million tonne per year cracker. This is not small at all. Will come online probably by the end of this year, mid to end of this year, depending on how those HDPE units work up. So, yeah, we are still seeing...this is the newest capacity addition in quite some time for the U.S. But I'm not sure they feel probably as good about it now as they did back in 2022 when they approved it.

Alan: Absolutely. Times have changed slightly, I think, globally, as you've...we've kind of mentioned. No, that's great. So, I guess, just a final question. I mean, this is obviously going out ahead of AFPM, which is kind of the major industry conference in the U.S., I think in March. I mean, is there anything else you'd like to add for potentially North American listeners, Michael, at this stage?

Michael: No. I mean, to be honest, I mean, the ethylene markets have been relatively subdued. We haven't had... You know, the winter storm we had wasn't as big a deal as previous winter storms, either through better winterisation or just it wasn't quite as cold. Prices, you know, they're not really reactive to even unplanned shutdowns when they come. And again, that just speaks to the very high inventory environment, the record high inventory environment we have. And that always kind of, you know, steals you against the unplanned and the unknown in terms of pricing. So, you know, I kind of see prices probably staying under 20 cents for quite some time unless we can really start to work down this inventory, which honestly, in the near future, I'm not really seeing happening.

Alan: Okay. Perfect. Well, thank you very much, Michael, for joining us and for the commentary. So much appreciated.

Michael: My pleasure.

Alan: So, this then concludes today's podcast. We hope you found it interesting. And if you have any subsequent questions or comments, they're always welcome. Also, if you would like to learn more about our market coverage, including our monthly market outlooks for each region and in addition, our 10-year global forecasts in our biannual analytics, or if you simply like to meet us at AFPM, then please get in touch via our website. In the meantime, I'd just like to thank you for listening, and goodbye.