Global steam cracker margins can compress and expand at high frequency. In the US, modeled steam cracker economic performance has come under pressure as once healthy ethane-based cash margins continue to decline.
Ethane margins have continued to compress for the last four months. Reported factors underpinning this are higher ethylene production and storage levels, flattening demand, and supply chain exacerbations. According to AFPM, April ethylene inventories doubled since 1Q 2021. Inflationary and economic growth factors weigh global margins and impact the product value chain.
The chart below depicts modeled steam cracker margin fluctuations compared to fundamental feedstock-product price dynamics in the US. Correlation analysis of the regional ethane and ethylene versus ethane-cracking feedstock cracker margins show a reverse of historical trends in the timescale of just the last few months.
Although ethane-based steam cracker margins have typically closely followed the price of regional ethylene, this has increasingly switched to ethane, which is highly correlated to natural gas prices. Henry Hub natural gas prices continue to climb as of this blog post. This climb increasingly props ethane, causing a further compression in steam cracker margins in the US. The natural gas price spike is historic and prolonged, indicating more significant fundamental factors are impacting the market. EIA attributes this to low inventories, strong power sector demand, high LNG exports, and slow natural gas production growth. The situation is forecast to prolong throughout 2022.
Ethane-based cash margins for modeled steam crackers in the US narrowed to just $30/t on 3 June. The May modeled steam cracker cash margin for ethane was just $89/t. This narrow margin (average of >$500/t for 2021) reflects a worsening of the economics of the typically profitable ethane-to-ethylene production route. Comparing the US Gulf Coast regional ethane and ethylene data series from 1 March to 1 June shows a reverse of the typical feedstock, product to margin correlations.
From December 2021 to 10 March 2022, ethane correlated to the cash margin at r=0.09, and the ethylene and ethane cash margin correlation was r=0.90. From 10 March 2022 to 1 June 2022, the correlations shifted to a negative -0.8 for ethane and 0.385 for ethylene. As the chart depicts, ethane price rises on the back of feedstock natural gas increases have formed a virtually immediate and inverse relationship with ethane-based cash margins. In contrast, the ethylene: cash margin correlation has weakened. The rapidity of the ethane correlation is approximately twice that of the ethylene de-correlation.
The inverse relationship to ethane prices is currently the strongest indicator of US steam cracker margins. Beyond the price dynamics, this is compounded by 86pc of regional steam crackers being fitted to prioritize ethane cracking. The other feedstocks are sub-economic, fetching in some cases substantial negative margins.
These dynamics can be highly regional. As of 8 June, the cash margin for naphtha cracking in Europe is $594/t, whereas the cash margin for naphtha in northeast Asia is currently at -$166/t. Many Asian steam crackers have opted to reduce rates as the ethane-to-ethylene production route is not currently economical.
While Europe has greater flexibility to switch between feedstocks, some 49pc of total capacity is dependent on naphtha. In Northeast Asia, naphtha represents a minimum of 75pc of the feedstock demand for steam crackers. Europe's current generous naphtha margin is attributed to faltering demand in Asia, where crackers are under pressure, leaving more naphtha supplies Europe-bound.
Narrowing or negative margins can prompt reduced operating rates, particularly for those crackers that rely on merchant revenue from ethylene sales rather than utilizing the output to produce higher-end products for additional margin.
As we depict in the chart above, a 20pc increase in the ethylene price still substantially impacts the cost of production on a per-ethylene ton basis, with ethane remaining the second-highest factor. However, as ethane prices have skyrocketed and ethylene prices stagnated with minor variation and minimal growth, ethane continues to lead the margin determination. Derivative economics is another key, but less so with ethane cracking relative to other feedstocks because typical ethane yields are prioritized to produce ethylene.
In northeast Asia, where a minimum of 75pc of steam crackers are fitted to crack naphtha, as of 8 June 2022, the feedstock cost for full-range naphtha is the highest sensitivity for modeled full-range naphtha-based steam cracking (see chart below). Co-products have a higher relative share of the cash margin determination in this region. The naphtha cost is the most significant indicator of steam cracker cash margins in northeast Asia.
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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.