Fitch Ratings has said that the recent drop in global crude prices could negatively affect chemical company financials, however it does expect ethane crackers to maintain a cost advantage in the long term despite the increased competitiveness of naphtha feedstock. Some downward pressure on cash flow is also anticipated and challenges are also expected under a condensed expansion construction schedule.
Due to the sharp drop in global crude oil prices, naphtha prices have declined further than US ethane feedstock prices and this has put downward pressure on ethylene cracking margins in the US. However, with the decline in naphtha prices and corresponding decline in ethylene prices, naphtha based coproduct prices have also declined, effectively putting pressure on cash margins of ethylene produced from the heavier feedstocks. In addition, Fitch has said that it doesn’t expect Brent crude prices to remain in the US$50/bbl range in the long term. US crackers’ cost advantage should expand again as the spread between naphtha and ethane widens, but not back to the peak levels of 2012.
Fitch has estimated that projects totalling 16 million tpy of additional capacity, or 58% of current annual US capacity, have been announced. A vast majority of the capacity expansions are still slated to come on line in 2017 and are located in Texas, possibly creating a skilled labour and supply shortage in the region. The combination of significant construction cost overruns and lower cash flows may reduce balance sheet flexibility even further than previously expected, especially for the smaller companies that are currently building capacity.
Fitch’s post expansion view remains that the lack of US ethylene product chain demand growth, or of sufficient export demand, could cause a period of underutilisation. In a stress scenario of prolonged slump in ethylene margins, companies lacking product chain diversification would be most at risk. However, with Fitch’s current outlook, capacity expansions are seen as a credit positive, all else being equal.
Edited from press release by Claira Lloyd
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