Chemical Conversations: Global Steam Cracker Economics

Author Argus

Chris Cothran, talks to leading olefins expert Sarah Rae, and analysts Dhanish Kalayarasu and Josie Jain about Argus Global Steam Cracker Economics:

  • A snapshot of steam cracker economics trends for the Americas, Asia and Europe
  • Major supply and demand changes on the horizon
  • Anticipated project delays
This podcast is delivered by Argus’ chemical experts using data and insight from Argus Global Steam Cracker Economics.
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Chris: Hello, everyone. Thank you for joining us for this Chemical Conversations Podcast. Today, we'll review developments pertinent to Global Steam Cracker Economics. My name is Chris Cothran. I'm a lead analyst on the Argus Media Global Steam Cracker Economics publication here in Houston, Texas. Today, I'm joined by my colleagues, Sarah Rae, who's Argus Media's VP, propylene derivatives, as well as analysts, Dhanish Kalayarasu in London, and Josie Jain in Shanghai.

I'd like to start off by giving a snapshot of the latest in Global Steam Cracker Economics, for Americas, and we'll go around for a couple of key regions. In the context of Americas, really what does it look like in terms of price and margin trends? Well, in the U.S. Gulf Coast, the cash costs for ethane-based steam cracking dipped on September 2nd to 24 cents per pound. It's the most competitive feedstock in the region still, but butane is slightly competitive on a cash-cost basis. But on a margin side, it's important to note that, there's limited flexibility in North America. Over 60% of existing capacity relies on ethane or, on a regular basis, with LPG, and particularly propane 28% and naphtha at about 20% max possibility, particularly with legacy units. It's important to note that the flexibility in the U.S. is decreasing as under construction and proposed units are highly reliant on ethane feedstock. So, the ethane-based cash costs is the most relevant.

Now, on the margin basis for ethylene, margins have turned slightly negative again last week, and remain negative for the other feedstocks. On the cash cost basis, LPG and ethane are still competitive, but on the ethylene margin basis, ethane is still advantaged. However, over 92% of the ethylene capacity in North America is either integrated with derivative units or just does not sell merchant ethylene on a regular basis. So, the evident cash costs advantage is less apparent. If you look at ethane prices for last week, they've sort of trended downward, but it's still an elevated rate. In September 2021, they were $265 a ton and ethylene prices then were $950 a ton. In the last few days, ethylene prices dipped below $530 a ton and ethane is much higher on the back of the natural gas price rise.

In terms of forecasting, we show per our modeling, ethane prices remain elevated despite the downward tick in the last week, albeit not as aggressively in the previous months, perhaps hitting $510 a ton. The evident cash cost advantage for ethane is likely to widen versus the other feedstocks, but not that significantly. Of course, derivative economics will play a key role in producer decisions overall to reduce operating rates. And we've seen reports of just that occurring because of the negative margins on the ethylene side. So, that's a snapshot of the Americas, what's going on there. I'd like to switch over to Europe.

So, in the context of Europe Dhanish, particularly for modeled NorthWest Europe Steam Crackers, what do the next three months bring for price and margin trends and, you know, what are some of the factors supporting those? Is there also any reporting or coverage in the industry at Argus where producers are responding in a particular way to those factors?

Dhanish: In the past two months model margins for European crackers remain positive, except for gas oil. So, U.S. imported ethane had the highest margins comparatively to all other feedstocks until two months ago. After 13 consecutive months, butane is showing a better margin as compared to U.S. imported ethane. And butane margins increment was fueled by the combination of decreased butane price relative to the other products and stable butadiene price. Moving forward over the next three months, U.S. imported ethane is expected to return to being the highest margin feedstock for ethylene cracking in the Western European region, followed by butane and then naphtha. Ethylene, propylene, butadiene prices, they're expected to take a slight decrease before stabilizing. World outlook on feedstock prices are on the bullish side. It's currently a long market for both ethylene and propylene mainly because of the weak demand in Europe. And it is expected to stay long for a while. Low rain water levels is also a big issue here although they are forecasted to increase in the coming weeks. Cracker rates are slowing down due to lower demand and producers are trying to reduce exposure to gas given the gas market currently. And Europe has been exporting both ethylene and propylene to control the length, to maintain a balanced position. They’re exporting marginal tons, bits that are not required to try to keep the market balanced.

Sarah: Is it also true, isn't it, that the flexibility on European crackers varies a lot from one cracker to the other? So, imported ethane having the best margin that's only available to a very limited number of players. And I think that's important to say in the context of this podcast, yeah?

Dhanish: Sarah, you're right. Thanks. Yeah, every cracker is designed differently to take in different feedstocks.

Chris: I'd like to switch to Asia. In the same context for model Northeast Asia Steam Crackers, what do you see Josie in the next three months for price and margin trends there? And what are the key factors supporting those trends? And is there any indication of what producers may do in response to those factors?

Josie: The Asia ethylene prices are expected to go up in near term, while the feedstock margins are forecasted to remain active for most feedstocks. And the near-term market is supported by the restocking activities in Asia. It is anticipated that China's demand will have slight recovery from September onwards prior to its Golden Week and year-end holiday seasons. While the demand is increasing as higher crude spurts restocking activities, supply has been further curtailed, with the region entering a heavy shutdown season along with continued production cuts at most Asia crackers. Regional supply and demand balance is likely to tighten following scheduled maintenance activities, which can prop up the near-term margins. But the consumption recovery is still questionable because the dynamic zero pandemic policy is due to take place in China, and it will take some time to regain consumption confidence after lockdowns. And the price will still face challenges in the next three months because of the new cracker capacity by the end of this year. And producers have expressed their concerns of poor demand and continuous bad margins in downstream sectors. We expect most crackers to continue running at reduced rates, which hopefully could cushion the declines of prices in the near term. And some of them are integrated with the downstream plants, which can compensate in the negative margin in a way also. So, in all, the demand is the key. Whether the current uptrend in ethylene persisted, will highly depend on the year-end demand.

Chris: I'd like to ask Sarah about any significant supply and demand changes that could occur on the horizon based on current conditions. What is likely to impact margins for example, in Europe the most? Is there a significant opportunity or challenge that could impact other regions because of this?

Sarah: Hey, Chris. Well, that's an interesting question, isn't it? I don't think we see major changes to the supply and demand balance. There's an awful lot of new capacity that's been added to the ethylene balance over the last two years, with 2022 being the last big year of capacity additions coming through. In the U.S., we don't see much prospect for change in terms of the forecast going forward. U.S. is oversupplied currently. And I think there's some fairly hard decisions being faced by producers about how to handle that length, whether to just cut back rates or actually to take a cracker offline somewhere. And we expect spot US ethane ethylene to continue to oscillate around the cash cost of ethane.

I think PE is key in the U.S. A lot of this new capacity is integrated downstream into PE. I think we're hoping or expecting the inventory levels that have been worked through, and that should hopefully towards the end of the year and into the early next year, bring an increase in demand. Part of the problem in the U.S. is actually getting the tons out of the country. Much of this new capacity was built for export. And as a consequence, internal logistics in the U.S. means that this material is finding it difficult to find its way out of the country. Going forward, that should start to be solved over time, but that will take time.

And the other issue for the U.S. exporters is where to send that product to. So, Europe is one possibility, but a lot of these guys have plants in Europe as well. So, are they going to cannibalize their own global market? And some of the other guys also have plants out in Asia, in China, you look at LBI, or CP Chem. These are global brands and are not necessarily wanting to just make everything in the U.S. and export it. So, I think it's a tricky year, year and a half coming up, maybe even two years. But it can't be unexpected. COVID has really delayed this impact of new capacity till this year. And I think maybe it's coming at a bad moment in terms of the global economic position, which seems more fragile, currently. But it can't be a surprise that we are where we are.

Chris: And certainly sort of the negative economic conditions and the post-pandemic recovery. I'm curious if you think that you're going to have significant project delays in terms of sanctions because of these uncertain conditions. It seems like not clear a picture at present.

Sarah: I think that's true. Certainly in the U.S. we don't expect cancellations or major project delays. I think Shell have got their unit starting up. It's a challenge to start that one up because it's standalone ethylene, polyethylene, so you have to bring both up together. But other than that, I think that that's not necessarily a thing. Maybe in some of these projects further out, we'll expect to get delayed. So, if you actually haven't started spending a lot of money on a project at the moment, and it's not slated to come on until 2025 or 2026, we can easily imagine some of those getting pushed out.

I think the other side of it is, even if you're not looking at project delays, what about rationalization? And I think that's a possibility. So, there's some of these older plants, the weaker of two lines or you've brought on a new unit, you then close down the old unit. I think we could see some of that play out. It's difficult to actually pick and choose who might do that because it's very often an individual company taking a decision for their own health, not something that's entirely predictable from an external perspective. I think when we look back, we will have seen some rationalization.

Chris: That wraps up our time for this podcast. I want to thank Sarah, Dhanish and Josie. And thank you everyone for listening in.

This podcast is delivered by Argus’ chemical experts using data and insight from Argus Global Steam Cracker Economics.
Get more information and request a free trial

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