Steam cracker margins are an indicator for petrochemical markets. While a variety of factors drive margins, recent energy price volatility and production changes bring margins into focus, creating an opportunity to revisit the factors that make an impact:
- Capacity availability and utilization
- Feedstock prices
- Product prices
- Co-product prices
- Energy prices
Global steam cracker margins expand and compress frequently. Local impacts can drive optimization decisions regionally and affect the international trade of ethylene and other derivatives. Crude oil and natural gas-based products are essential to this consideration. Crude based naphtha and fuel oil feedstocks are widely used worldwide, in addition to natural gas based NGLs such as ethane and LPG (propane and butane).
Changes in capacity, including total output, utilization rate, and product slate through feedstock switching, co-feeding or blending, affect the ethylene output for a steam cracker and impact margins. The US is known to have the most feedstock flexibility. Asia has the least, while Europe has a significant capability that has been built in recent years to switch between naphtha and LPG (mainly propane).
With shifts in feedstock cost dependent on the energy backdrop and the region’s flexibility to crack different feeds, switching feedstocks altogether or diversifying feedstocks used to produce a more significant percentage of ethylene from advantaged feedstocks can help improve margins. In the short term, the prompts of anticipated advantaged feedstock will provide insight into expected margin performance for regional steam crackers, as we outline in the newly launched Argus Global Steam Cracker Economics report.
For the US region, ethane is the key steam cracker feedstock. Ethane feedstock cost alone, subtracting co-product credits, can represent 61pc of the variable costs of a modeled US steam cracker, an average of a range that varies with market conditions.
The flexibility a steam cracker has in optimizing feed selection varies at the facility level. This flexibility can determine how much the facility can respond to feedstock cost swings due to changes in feedstock and energy market dynamics. Crackers will optimize to maximize cash flow. At times, they may opt to maximize ethylene yield, as this is a primary petrochemical produced on-purpose. But this may not always be the case and depends on the unique situation of each steam cracker facility.
The assumed feedstock cost advantages for regional steam crackers will also drive potential changes in the volumes of valuable co-products. These co-product volumes will also affect the steam cracker facility’s margin calculation and can include a combination of propylene, butadiene, raffinate-1 and pyrolysis gasoline.
For many steam crackers, the co-product price can determine whether ethylene cash margins are positive or negative. Although not produced on purpose as ethylene is, key variations in propylene and butadiene can significantly impact the net cash cost.
Beyond feedstock costs, energy prices such as natural gas can impact the cost to run a steam cracker’s boiler and for the facility’s electricity. These can play a significant role in determining profitability. Extreme price events may prompt producers to opt to reduce output or plan maintenance turnarounds during windows of elevated energy prices, or power outages may prompt unscheduled supply disruption. Such activities can have follow-on effects for ethylene and co-product supplies.
We invite you to review our reference and modeling approach document that demonstrates the components of our method of tracking and forecasting global steam cracker margins for three key regions. The three-month forward view is beneficial in considering how demand may change between LPG and naphtha in the quarter ahead.