US ethane cracking margin turns negative

Gross cracking margins for ethane on the US Gulf coast turned negative this week for the first time in two years amid stubbornly high ethane prices, ample ethylene supplies and dwindling polyethylene demand.

US ethane cracking margins on 24 June were calculated at -2.38¢/lb using an Argus model, the first negative ethane margins since the second quarter of 2020 during the depths of the Covid-19 pandemic.

If ethane cracking margins stay negative for an extended period, reduced runs heard to be occurring at some crackers may turn into shutdowns, sharply reducing ethylene production.

Ethane comprised 74pc of the US cracker feedslate in the first quarter, according to the latest data from the American Fuel and Petrochemical Manufacturers (AFPM). Even with negative margins, ethane remains the best US feedstock option, as propane, butane, and naphtha margins remain deeply negative.

For months, US ethane prices closely followed natural gas prices that climbed to a 13-year high and then retreated following an 8 June explosion at the Freeport LNG export terminal in Texas. But last week an unexpected price divergence emerged, dashing the hopes of US cracker operators that their razor-thin margins may expand.

US natural gas prices fell by a third from a 6 June peak of $9.32/mmBtu to $6.22/mmBtu at the end of last week. And ethane prices began to follow suit, dropping from a multi-year high of 68¢/USG on 7 June to 59¢/USG on 21 June. But in the last week, US ethane prices jumped by 11pc, while US natural gas prices fell another 9pc.

"I can't figure how June ethane could be so short, especially since cracker runs have already been cut due to polyethylene export constraints and thin margins," one market participant said.

One possibility for ethane's recent decoupling from natural gas is an extremely active ethane export market. Vessel tracking shows at least five very large ethane carriers (VLECs) loaded out of the Morgan's Point ethane terminal in June and another two VLECs loading out of the terminal in Nederland, Texas. With each vessel loading, large spot volumes also are being sold, adding to price strength. All the front month activity has put ethane into steep backwardation, with prompt prices trading at a 4.5¢/USG premium to August.

Ethylene spot prices have done nothing to help the margins of US cracker operators struggling with high ethane cash costs. US ethylene spot prices have fallen by 15pc in the last two weeks as crackers returning to operation add to already ample ethylene supply. US spot EPC ethylene stood at 30.25¢/lb on 13 June and was assessed at 25.75¢/lb yesterday. In the last two weeks, Motiva Chemical's 700,000 metric tonne/yr mixed-feed cracker in Port Arthur, Texas, returned to operation from an unexpected shutdown. Dow's 907,000 t/yr LHC-8 ethane-propane cracker in Freeport, Texas, also came back on line.

The near-term outlook for cracker operators remains bleak for both supply and demand. Bayport Polymers' 1mn t/yr cracker in Port Arthur, Texas, is anticipating on-specification ethylene production by mid-July. The unit began its start up on 18 April and is heard to be feeding in ethane as of last week, adding to US Gulf coast ethane demand. Demand from polyethylene is showing signs of weakening, with falling global PE prices and worries of a possible recession adding to negative demand sentiment. Demand for food packaging remains strong but demand for other types of packing is beginning to decline, underscored by accumulating inventories at major US retailers.

By Michael Camarda