According to the IHS, the recent decline in global prices is causing some petrochemical supply chain destocking, but is also sowing the seeds for better economic conditions, lower petrochemical prices and improving global petrochemical demand. These trends are ultimately leading the tighter market conditions.
Dave Witte, senior vice president and general manager of IHS Chemical, commented: “Since oil serves as the marginal production cost and price setter for many chemicals, plastics and fibres, a decline in the oil price typically leads to lower product prices. At the same time, the lower prices and broad macroeconomic benefits of lower energy will ultimately lead to higher petrochemical derivative demand. Simultaneously, we see assets that derive margin from a wide gas to oil differential, such as those in North America and the Middle East, experiencing margin decline. Large, capital intensive projects already under way will continue in these cost advantaged regions. However, we expect a lull in future investment plans as chemical producers wait for forward clarity and for some of the market volatility to ease”.
The largest volume and perhaps the most market indicative petrochemical is ethylene, which is the basic building block for many downstream chemicals, plastics and synthetic fibres. Improved demand for consumer products from higher GDP eventually translates into higher ethylene demand as much of the resulting plastic production ends up in consumer products. Yet, the HIS scenario analysis said lower oil prices will initially lead to destocking as producers wait for signs of a price bottom even as demand accelerates.
On the supply side, lower crude oil prices will change ethylene production costs over time, impacting the global ethylene market. In 2015, according to IHS Chemical, current global ethylene operating rates will still remain below 90%, and the positive effect on global demand will amount to less than 1 million t this year.
However, by 2016, depleted inventories, together with faster consumption growth, would generate additional global ethylene demand that is more than 1 million t above the previous higher crude oil price based forecast. The greater demand growth would add up to 3.5 million t by 2020.
Witte said: “More importantly, the supply pressure on global ethylene producers will intensify if higher demand volumes materialise, which will cause operating rates to rise above 90%. Combined with potential investment delays, utilisations could possibly climb as high as 95% by 2023. This exceedingly high operating rate would represent a five to six point increase in operating rates and would be one of the most significant outcomes of the lower oil price projections. During the years 2017 to 2020, IHS expects it would signal tight market conditions that the industry has not witnessed in many years, and would drive margin expansion opportunities for producers”.
According to the IHS scenario analysis, the differential between oil and gas based feedstock prices in the various regions (Europe, Asia, the Middle East and the Americas) divides cost advantaged from cost disadvantaged chemical producers in a very competitive market. Whether the analysis focuses on the elementary feedstock choices (naphtha, ethane or propane), power costs, alternative values for use in crude oil refinery products or heating markets, successful producers must find means to create a competitive advantage at the level of relative oil to natural gas price. Advantaged producers, and even their customers, IHS said, capitalise on these advantages through investments in new multi billion dollar production facilities.
Witte said: “With as much as 75% of the cost of producing petrochemicals related to hydrocarbon values, those companies with a cost disadvantage may invest to acquire lower cost raw materials, or attempt to relieve competitive cost pressures through product differentiation. But typically, they cannot overcome the cost disadvantages, and as a result, will likely experience lower margins. There is a bright spot, however, as we expect market participants might be surprised by the strength of global petrochemical demand growth spurred by the lower energy prices. Returns on capital related to existing facilities will be higher than expected, but the incentive to invest in new, gas based facilities will not be as attractive as outlined in original capital plans”.
Adapted from a press release by Emma McAleavey.
Read the article online at: https://www.hydrocarbonengineering.com/petrochemicals/13022015/petrochemical-market-volatility-243/