Viewpoint: 1H 2020 US ethylene oversupplied

US spot ethylene prices may continue their recent decline into 2020 as two major Gulf coast ethane crackers totaling 2.75mn t/yr of capacity started up in December with two smaller crackers slated to come online in early 2020.

Fundamental oversupply of the US ethylene market is the main driver behind price declines and could keep prices weak into 2020. To find an outlet for supply US ethylene producers are looking to Enterprise and Navigator Holdings' new 1mn t/yr ethylene export terminal at Morgan's Point, Texas. The terminal is coming online on schedule with the first cargo loading for Asia in December, but US ethylene exporters face an uncertain trade environment.

China, always the main intended export market for US ethylene, is unlikely to remove its 25pc tariffs on the monomer until a comprehensive trade deal is finalized. "Phase 1" of the US-China trade deal did impact some polymers, but did not remove tariffs on ethylene. This tariff has effectively closed the arbitrage for US ethylene to China, sending US exports into neighboring countries, particularly Taiwan. The arbitrage to China would open if US ethylene were to fall another 3-4¢/lb, or if Chinese domestic prices increased by a similar amount.

The recent decline in US prices comes on the heels of US spot prices doubling in the third quarter amid new PE demand and traders covering short positions following an explosion that took a cracker offline for over two months. Ethylene at Mont Belvieu, Texas, on 1 July stood at 14¢/lb and began rising on demand from the startup of ExxonMobil's 650,000 t/yr polyethylene (PE) unit in Beaumont, Texas. Spot ethylene extended gains on 31 July, when an explosion of a propylene recovery unit attached to the back end of ExxonMobil's 1.179mn t/yr cracker at Baytown, Texas, lifted prices to 20¢/lb.

The weeks following the blast prompted a rush on ethylene from Boardwalk's Choctaw, Louisiana, system. The rapid ethylene withdrawals depleted brine levels too quickly at the Choctaw ethylene cavern, prompting a force majeure. Only when the force majeure lifted did Mont Belvieu ethylene tumble from the 2019 peak of 29¢/lb on 2 October to less than 20¢/lb by 15 October.

Start-up delays at new Gulf coast crackers thwarted supply expectations in the second half of 2019. Five new crackers totaling 4.67mn t/yr of new ethylene capacity were slated to come online in 2019.Through early December, only Lotte/Westlake's 1mn t/yr cracker in Lake Charles, Louisiana, had started up, representing only 22pc of this year's expected expansion.

The largest capacity startup of 2019 is Sasol's 1.5mn t/yr cracker in Lake Charles, Louisiana. That plant started up in late August but could only achieve 50pc operational rates. The facility was then shut down on 30 November to perform maintenance on acetylene reactor catalysts, work that finished on 17 December, after which the company reported 90pc run rates, sending ethylene prices to under 16¢/lb at Nova and under 15¢/lb at the Choctaw cavern.

Formosa's 1.25mn t/yr cracker began its 3-week start up on 21 December, the very back end of its original second-half 2019 target. Indorama's 420,000 t/yr ethylene unit in Lake Charles achieved stable production in early May before shutting down in June and is now expected to restart this month. Shintech's 500,000 t/yr cracker in Plaquemine, Louisiana, was supposed to begin commissioning in February 2019, but only began by mid-October and has yet to be confirmed as fully operational.

The US remains in a structural oversupply of ethylene that may deepen as cracker startup issues are resolved, keeping prices from rising into 2020. Current inventories, while much lower than they were to start the year, are still around 35pc above the level needed for supply to be closer to demand with sufficient cushion for unforeseen events.

New demand from US polyethylene units may keep ethylene prices from falling to all-time lows, with four of six planned units already online. The final two units, Formosa's and Sasol's, are expected to start up in early 2020.

By Michael Camarda