Global Steam Cracker Economics: 2022 Trends in Focus

Author Christopher Cothran, Analyst - Chemicals

This year demonstrates a variety of factors impacting global steam cracker economics with greater clarity. In the aftermath of the onset of the pandemic, incredible shifts have occurred, from economic activity restrictions and supply chain exacerbations to far-reaching geopolitical implications affecting multiple industries.

We have tracked global steam cracker margins as they rapidly change, while healthy margins become narrow, or in some cases, negative, with some margins rising to multi-year highs.

As noted in our May 2022 blog, price volatility has spanned the energy complex, with critical spikes in Europe and the US. Unprecedented price swings yield additional risk, prompting a general lack of clarity that can cause price expectations to prop commodities. Crude and natural gas have exceeded multi-year highs this year.

The NSD price recently exceeded $137/bl, far above 2021 averages. As prices settle, they continue to do so at elevated levels. While Henry Hub natural gas has come down from a recent high of $9.49/MMBtu to $7.49/MMBtu, this is nearly three times the five-year average, excepting short-term price spikes during Winter 2021.

A sustained rise in the energy complex weighs on margins. This varies by region. Feedstocks such as naphtha have various uses that span multiple industries, some of which are highly responsive to the emerging dynamics in Europe and Asia on geopolitical factors.

US ethane margin and key prices

The chart above takes a snapshot of 2022 thus far in the US. The typical correlation of ethylene prices to ethane-based steam cracker margins in the US began to decrease and has continued to accelerate in that line on the gradual decrease in ethylene pricing over the timeframe, reflecting sluggish demand and tougher production economics.

Margins briefly turned negative in the last 30 days, recovered slightly, and now a deeper negative margin for US steam crackers may be looming.

These factors can be highly regional. As of 19 July, the cash margin for steam cracking naphtha in Europe is $500/t, whereas the cash margin for naphtha in northeast Asia is currently at -$350/t, where even ethane margins have turned negative.

In the past few days, ethane margins again turned negative in the US, yielding -$80/ton cash margins, less negative than -$34/t for butane cash margins 20 July. LPG in Europe is also fetching high margins, but as with fuel oil and ethane, they are secondary feedstocks relative to naphtha.

We have noted shifts in the key regional feedstock correlation to steam cracker cash margins relative to ethylene. These dynamics have shifted in 2022 for all three regions at a higher rate than historical patterns indicate. This year has shown a strong negative correlation of ethane price to ethane margins, rapidly declining from -0.87 as a year-to-date (YTD) figure to -0.27 from 2 May.

The stronger ethylene: ethane margin dropped from 0.93 to 0.6. This reflects that although the YTD average shows a robust historical correlation pattern, this situation has changed markedly in the last three months.

In Northeast Asia for the same period, the weak ethylene to naphtha margin increased while the naphtha price to naphtha margin negative correlation nearly eroded. Northwest Europe shifts show an increased negative correlation of naphtha price and naphtha margin while the ethylene to naphtha margin decreased substantially.

NWE modeled sensitivity analysis

As we depicted in the US analysis, a 20pc increase in the ethylene price resulted in the most significant ethane margin increase. In contrast, in Northeast Asia, naphtha resulted in the most significant impact on a modeled steam cracker’s naphtha margin, with ethylene a close second next to the other co-products designation.

The lower regional demand has left more naphtha Europe-focused, yielding the highest naphtha cost of production sensitivity, with ethylene a clear second.

Although energy prices were rising to five-year highs in the run-up to the situation in Ukraine, the complexities spiked prices, and the responses have elevated them.

An adjustment to a new prevailing current appears to have come under debate, as shutting off Russian energy would have far-reaching impacts, negatively affecting Eurozone economic performance, per reports. This impacts steam cracker economics, impacting the entire supply chain from energy development to consumer product spending.

Steam cracker economic risk increases on rising complexity and other disruptions. Port closures, rail delays, container shortages, derivative production challenges, and other issues can impact the ethylene and co-product value chain. Depending on prevailing currents, they may bring woe or weal, highlighting the delicate balance producers must navigate to remain profitable.

Supply-demand is the ultimate dynamic that determines margins. The utilization of feedstock elevates costs, and these costs are dependent on the demand for those chemicals. The product, co-product, and derivative prices are dependent on the demand for their demand.

In our Global Steam Cracker Economics monthly publication, we delve into the cash costs for three key regions on a month-over-month and a forward three-month perspective.

This provides greater insight on the comparative cost of production for regional steam crackers. As little of ethylene is sold as ethylene, the comparative impact of derivatives determines the true cost and benefits of a steam cracker. At the end of the day, ethylene production margin benefits may completely erode if demand for a high-cost chemical affects what derivative-integrated steam crackers opt to produce.

A handful of factors can lead to stark changes in global steam cracker economics. Price volatility, at times with historic amplitude and variation frequency, demand shifting regional opportunity zones, the evolution of price correlation and de-correlations, and cost of production complexity that can vary markedly by region, feedstock, and timeframe are factors of note.

What does tomorrow bring? Variable margins in the US are forecast to decline as much as 20% from their slight advantage through September, perhaps with exacerbating moments of negative margins, even for ethane. Higher LPG and naphtha variable margins in northwest Europe are anticipated sometime during August, then declining through September, yielding the best margins across feedstocks for the three regions.

We forecast sustained negative margins in Northeast Asia, which could continue to stimulate lower operating rates and disincentivized merchant ethylene sales.

Gaining insight into emerging market dynamics is crucial to securing accurate market intelligence. 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 steam cracker economics will shift.

If you would like to read more about this monthly forecast service and request trial access, please review the Argus Global Steam Cracker Economics product page and contact Argus for more information.

If you would like to read more about this monthly forecast service and request trial access, please review the
Argus Global Steam Cracker Economics product page and contact Argus for more information.

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