Ethylene market trends

Cyclicality in the petrochemical business is an ongoing challenge for all market participants. Imbalances in supply and demand create product shortages or product length, which in turn result in significant changes in profitability along various end use chains. Managing cyclicality in the petrochemical business will most likely continue to be one of the greatest challenges facing global olefins producers and consumers. Volatility in energy and feedstock markets, shifts in economic growth and therefore the rate of demand growth, successful execution of new plant startups and the overall operating performance of existing assets, are all key variables that are difficult to predict and yet have a significant impact on market cycles and bottom line performance for the companies involved.

While on paper the severe oversupply started in 2009, with surplus ethylene capacity reaching 15 million t, the cash margins for certain segments in the market did not respond as anticipated. In fact, for markets such as polyethylene in North America, integrated polyethylene chain margins based on ethane cracking were equal to cycle peak profitability.

Ethylene capacity growth trends

From 1995 through 2008, ethylene capacity in the Middle East increased by more than 13 million t. The buildup of the petrochemical industry was driven by governmental efforts to lessen its dependence on crude oil exports, maximise the returns on all hydrocarbons, and diversify its industrial base.

Surplus capacity analysis

CMAI is forecasting a severe decline in sector margins for ethylene and major ethylene derivative markets through 2011. Between North America, Europe and Asia, CMAI projects as much as 6 million t of capacity will be taken out of service during the downturn and remain offline through 2014. Some portion of this capacity will likely be shut down on a permanent basis.

Ethylene market cost position

Strong crude oil markets worldwide have driven up naphtha prices. This, combined with relatively favourable natural gas prices in North America, enabled North American producers, on average, to remain very competitive in 2009, which has continued this year. In this position, as long as demand remains strong and regional market prices remain high, North American producers can take advantage of opportunities in the international market.

US ethylene demand

Domestic ethylene demand has been largely stable since 1997 but has recently declined due to changing consumer consumption patterns and the economic crisis. Most ethylene is consumed in non-durable applications, such as packaging, so it is sensitive to consumer spending and GDP growth. As worried consumers cut back on spending with the onset of the 2008 financial crisis, it was directly reflected in ethylene demand.

US operating rates

The current level of annual ethylene demand in the US has declined by approximately 4 billion lbs from the 2006 level. However, US producers have shut down approximately 5.7 billion lbs of production capacity over the last three years so operating rates have not unduly suffered. In fact, US producers have reacted much more quickly than the rest of the world to the growing global excess ethylene production capacity. After bottoming out in 2008, operating rates started to recover as capacity was reduced in response to declining demand. However, global operating rates are not expected to reach their lowest level until later this year, two years after the US market. Similarly, cash margins for US producers bottomed out in 2009 while average global margins are not expected to hit bottom until 2011, again, two years later than in the US. US producers, by having taken aggressive steps to ‘right size’ production and expand their ability to utilise more advantaged NGL feedstocks, are well positioned for the future. And as their cost advantage will allow them to balance domestic demand swings with exports, US producers are in a solid position going forward.

Authors: Mark Eramo and John Stekla, CMAI, USA

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