US ethylene margins negative as ethane climbs

Gross cracking margins for US ethane crackers remain stubbornly negative with ethane prices at a 10-year high and more ethylene supply poised to enter the market.

Cracking margins for US ethane have been negative for five of the last seven weeks, including each of the past three weeks, the longest negative stretch since the second quarter 2020 peak of the Covid-19 pandemic.

The start of July gave US Gulf coast cracker operators hope for relief when ethane prices fell by 19.75¢/USG, or 30pc, to 46.875¢/USG in a just a few days. This put ethane cracking margins back in positive territory at 2.5¢/lb, although a relatively narrow margin for Gulf coast cracker operators whose profitability relies on low-cost US ethane. Last year, ethane margins averaged 28¢/lb.

After that brief respite, ethane rose by 40pc in less than two weeks and stood at 65.375¢/USG by 18 July, cutting the ethane cracking margin to -2.7¢/lb, the lowest since the logistics-driven ethane price spike of September 2018.

With ethane prices remaining at the highest in a decade, higher ethylene prices are needed to improve cracking margins. But the supply-demand outlook offers little hope for significant price gains.

More ethylene supply came on line just last week when Bayport Polymer's 1mn metric tonne/yr ethane cracker in Port Arthur, Texas, began commercial operations. Not all this new supply will be absorbed immediately, as Bayport Polymer's new 625,000 t/yr Bay 3 polyethylene unit in Pasadena, Texas, is not expected to start operations until October, with product expected by the end of the year. Shell's 1.6mn t/yr ethane cracker in Monaca, Pennsylvania, is expected to begin commercial operations this quarter as well, adding further ethylene supply to the market.

US ethylene inventories in the first quarter reached a record high, according to the American Fuel and Petrochemical Manufacturers (AFPM). Second quarter data will be released next week.

Demand fundamentals for ethylene also look weak in the near term. Demand from polyethylene (PE) production steadily declined this month as buyers pushed out new orders. Last month, total US PE sales declined by 7.3pc from May, according to the American Chemistry Council. Production in June exceeded sales, adding more than 100mn lb to PE inventories, even as PE producers cut operating rates because of lingering logistics challenges, particularly railcar availability.

Cracker operators are more prone to rate cuts or shut operations when negative margins linger. This applies even more for merchant cracker operators who sell solely to third-party customers, as they do not have on-site derivative operations to supply.

By Michael Camarda