Chemical Conversations: Olefins Outlook

Author Argus

Cassidy Staggers, talks to leading olefins experts Sarah Rae, Ron Baughman, plus senior reporter T.S. Lee about the Argus Olefins Outlook:

Market direction and underlying trends over the next 12 months
Major supply and demand changes on the horizon
Insights to help subscribers make better business decisions

This podcast is delivered by Argus’ olefins experts using data and insight from the Argus Olefins Outlook.
Get more information and request a free trial

Transcript

Cassidy: Hello, I'm Cassidy Staggers, Chemical Analyst. Thank you for joining us for this Chemicals Conversation Podcast. Today joining me are Sarah Rae, VP of Olefins, Ron Baughman, Propylene Consultant, North America, and T.S. Lee, Senior Reporter. We will be discussing market trends, supply and demand drivers, and key insights included in our Olefins Outlook. So, let's get started.

What do the next 12 months look like for price and trading trends in the olefin market? Ron, would you like to give us some insight on the US?

Ron: Thanks, Cassidy. Let's not forget that we're in the middle of the August/ September period when hurricanes can threaten petrochemical assets on the US Gulf Coast. So far, we've been fortunate. Let's hope September passes smoothly too. For olefins though, lately cracker margins have been weak, at times even slightly negative for ethane feeds. This means cracker operators are challenged to optimize feed slates, operating rates and inventory levels for ethylene and co-products.

On the propylene side, we've seen surplus inventory levels for much of 2022 while propylene derivative demand has softened. That includes polypropylene and other derivatives such as acrylonitrile, and propylene oxide. We've seen polymer grade propylene contract prices has slipped 32% since this year's high of 72 cents per pound in March to 49 cents per pound in August. As the surplus stock levels decline, there's an opportunity for PGP prices to rise in the coming months. We think it's more likely to be a gradual rise than any sharp step change.

Cassidy: Great. Thank you, Ron. And T.S., what about trends in China and Asia right now?

T.S.: Hi. In Asia, market players are expecting that demand will only get better from September onwards because of Golden Week holiday, November 11, and year-end shopping festivals. And minimal new standalone downstream plants will also start up by end of the year which will add more demand for both ethylene and propylene. But recovery is still questionable. The dynamic zero pandemic policies still take place in China, and it will take some time for China to regain consumption confidence in the aftermath of lockdowns. And China's retail and property sales remains low in July. Christmas orders is also slower this year because of the economy slowdown in the West. Despite increases in demand, prices for olefins will still face challenges because of new crackers in China by the end of this year. And this will reduce China's reliance on imports, which could result in lower CFR China prices. They expect most crackers to continue running at reduced rates, which hopefully could cushion the declines of prices in the next 12 months with curtailed supplies.

Cassidy: Thank you. Those are great insights. Lastly, Sarah, can you tell us what's going on in Europe?

Sarah: Sure, Cassidy. I think the biggest issue in Europe now is the question about energy. Prices for gas and electricity have risen exponentially following the Ukraine-Russia conflict. And this is feeding downstream into affordability for derivatives, affordability to run plants and obviously into consumer spending. So, we're seeing a real slowdown in demand.

Seems to be hitting propylene more severely than it's hitting ethylene, with ethylene demand has fallen through the summer but there seems to be a reasonably strong baseload through the crackers and cracker margins are still positive. So, for producers, it's incentivizing them to keep running. And then to deal with the length on the co-products. Propylene being the biggest one is also causing the most problems. And we're seeing Europe export propylene at very, very high discounts compared to the local contract price. But these are small volumes in terms of the total market. So, it's still affordable for producers.

We expect margins to come down further in the crackers, looking into September and October. And I think consumer inflation is going to be a real issue in demand through the rest of the year in Europe.

Cassidy: Very interesting. Staying with you, Sarah, let's shift to more of a global picture. What do you think is really driving the length in supply and/or demand right now? You mentioned it previously but if you could dive more into that, that'd be great.

Sarah: The biggest issue on a global level is the amount of new capacity that's being added. So, in ethylene, this is probably the last year with the big wave of capacity coming. But for propylene, we are just entering into it. So, for propylene, this year, we're adding about 10 million tons of new capacity. And you've set that against a five-year average for the last five years of only 5 million per year. So, double what we normally take just as we're coming into real problems on a global economic situation.

One of the biggest issues out there is slower growth in China. The prioritization of zero COVID versus GDP. The Russia-Ukraine conflict is also another one, which is obviously leading into inflationary energy prices. And higher inflation in food is another issue. So, we've had widespread droughts over some of the major food growing areas, and we're seeing higher prices, which again, is going to hit consumer spending. So, I think this double whammy of lots of new capacity arriving just as the global economy feels more fragile is why we're seeing such a sort of a difficult market for olefins at the moment.

Cassidy: So, given the length in the market and the current for demand, T.S., how long do you think crackers in Asia can run on negative margins?

T.S.: Yeah, we expect most crackers to run at reduced rates, at least until the end of this year or until mid of next year. So, they will still need to run at lower rates as most of them are integrated with downstream plants, which can compensate the negative margin. Producers will also need to consider the term contracts with suppliers and buyers. And in China, most plants are state controlled, such as Sinopec and PetroChina. Of these companies, such as Wanhua and RongSheng are joint ventures with international companies such as Shell. So, not only in China, South Korea, Japan, Taiwan, those petrochemical companies are listed companies. And it's not a simple decision for them to consider shutting the whole complex. They must consider social impact, bank loans, and labor arrangement. Most crackers, especially those not integrated with refineries, are believed to reconsider their feedstock offtakes and production plans for next year. They might need to go for prolonged rate cuts or extended turnarounds to mitigate the losses if such situation persists longer.

Cassidy: Lastly, turning the focus to our Olefin Outlook, Ron, what are some of the key insights readers can take away from the outlook to help make better informed commercial decisions?

Ron: Cassidy, the goal of the Argus Olefins Outlook is to help guide decisions for anyone with a stake in the olefin market. Earlier this year, we added a couple of highlight boxes to our monthly olefins outlook publication. One was a section that highlighted what's changed since our prior edition. This helps frame the context that we're in at any given moment. The other presents key sensitivities that should influence the market going forward. This helps readers focus on things that will drive market movements and transactions going forward at least in the coming months. These new features often will summarize the commentary found elsewhere in the Olefins Outlook. You can think of them as a fast way to learn what matters most at the time. As we record this podcast in the third quarter of 2022, higher inflation and interest rates has really begun to influence our forecast more than in the recent past. We'll share our thoughts in future editions and podcasts. In the meantime, I hope listeners and readers will let us know what they think and how Argus can help.

Cassidy: That's all we have time for today in our Chemicals Conversations podcast. Thank you for listening. For more information, visit us at www.argusmedia.com/chemicals.

This podcast is delivered by Argus’ olefins experts using data and insight from the Argus Olefins Outlook.
Get more information and request a free trial

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