May 26, 2018

Global Trends in the Olefins Industry

The long period of high olefins margins globally has had the expected effect of generating a major global capacity build, which will in turn drop operating rates quite significantly over the next five years.  Global economic growth remains strong, although some issues such as the confrontation on trade tarrifs between China and the United States, and accelerating debt levels globally hint at overheating and a likely drop in economic growth post 2020.  The Middle East producers with the most advantaged feedstock still have the lowest costs, although prices have remained sufficiently high to provide good returns for naphtha-based operators around the world, and also keep the new coal-based market entrants in China in operation.

Russia’s economy started to recover in 2017, mainly due to increased energy export revenues.  The situation remains difficult however, with international relations worsening due to the alleged poisoning of a former Russian spy in the United Kingdom.  The economic problems in South America also appear far from being resolved, with the Venezuelan economy and political situation descending into chaos, and the corruption trials in Brazil still dominating the political landscape.

China’s drop in headline economic growth figures does not seem to have impacted on consumption growth for petrochemicals, with polyolefin demand and especially the polyester industry performing very strongly over 2017.  

The differentials between olefin values narrowed slightly in 2017.  Ethylene prices increased further from 2016, and propylene prices averaged around 80% of ethylene values, having been closer to 70 percent in 2016.  Butadiene prices were significantly higher than ethylene over the first half of 2017, but plummeted to below even the price of propylene in the second half.  Propylene values have been depressed by the surge in production from MTO/MTP in China, and more importantly PDH in several regions.  Increased gas cracking however tightened supply, while strong derivative markets created increased demand, allowing the propylene market to rebalance.  Regional supply imbalances also increased however, with US exports increasing and Western Europe becoming increasingly short.  Butadiene values remain volatile, with a run-up in late 2016 continuing through the first half of 2017, before dropping sharply.  Downstream fundamentals, notably the increasing vehicle parc in the developing world remain strong, and most of the volatility coming from natural rubber supply and the tendency to overbuild and deplete inventories of butadiene and its derivatives.

Nearly all of the cracker projects proposed in the U.S. Gulf have subsequently been confirmed, and almost ten million tons per year of new ethylene capacity will be online in the United States by the end of 2019.  Only Shell has so far confirmed a new cracker project away from the U.S. Gulf area, locating instead close to the source of the greatest gas supply growth in Pennsylvania.  Other companies such as Badlands NGLs are pursuing a similar model but remain some way from finalising a project.  It remains to be seen how Braskem will be able to progress the West Virginia cracker project following the withdrawal of the parent group Odebrecht.  Thailand’s PPTGC seems closest to finalising the second new cracker outside the US Gulf area, having selected Ohio for a new one million tons per year cracker complex.

The surge in ethane supplies in the United States has led to low prices and strong margins for U.S. ethylene producers.  The quantity of new capacity coming online in the U.S. Gulf area will however put considerable strain on ethane supplies.  Earlier projections in gas supply growth have not been entirely realised due to the cutback in shale exploration which resulted from lower oil and gas prices since 2015.  The current expected cracker developments will increase ethane consumption by around 50 percent from 2017 to 2021, and increasing throughput at the existing ethane export facilities will add another ten percent.  The additional 10 million tons per year export facility proposed by American Ethane would bring the total increase in ethane demand from 2017 up to around 100 percent, although the terminal could run at lower rates in its initial years of operation.  This level of ethane consumption growth is in line with the highest estimates of total achievable ethane production, which would also necessitate the extraction of all available ethane, and its transportation to the USG from some distant gas and oil fields.  Even counting the ethane which is currently rejected in sales gas, the required growth in ethane production is well beyond the forecast increases in oil and gas production.

A considerable quantity of ethane is currently being rejected in sales gas in gas producing regions around the United States; however its extraction and transport incurs a considerable increase in costs and this will impact overall U.S. ethylene competitiveness towards 2020.

Following the first shipment of U.S. ethane to Europe in March 2016, there are now three terminals in Europe receiving ethane imports, and two of these sites sell ethane on to additional crackers.  Reliance’s fleet of VLECs (very large ethane carriers) is also operational and serving its Dahej, India terminal and connected 500km pipeline network which carries ethane to three of its crackers on the West coast of India.  Along with the ethane import infrastructure, Reliance also commissioned a new cracker at Jamnagar which is among the largest in the world, following on from the long-awaited OPal cracker which was commissioned in 2016.  Indian companies also continue to add FCC propylene capacity.  In the Middle East, gas supply developments are supporting a significant increase in ethylene production in Iran, which has considerable ethylene and derivatives capacity currently underutilised due to feedstock restrictions, and also a heavy project pipeline for new ethylene developments.  Elsewhere in Asia new ethylene projects are primarily naphtha-based, and mostly linked to new refineries which both provide the feedstock and the means to optimise the value of by-product streams.

Plans for capacity development in South America are advancing slowly, partly due to the competitive threat from the upcoming capacity in the U.S. Gulf Coast, and partly due to severe economic problems in Brazil and Argentina, and the corruption scandal enveloping Petrobras.  Rather than the previously proposed major Comperj refinery and cracker development in Brazil, the next development will instead be to substitute some imported ethane for naphtha feed at an existing cracker.  Venezuela’s severe economic and political problems effectively preclude near term olefins developments.

The period of ethylene capacity rationalisation in Western Europe has ended, and the remaining producers were able to significantly increase output during 2016.  Supply in Central Europe is effectively stable, although with some interest in developing PDH as in Western Europe.  SIBUR’s ZapSibNeft project in Siberia will produce almost two million tons per year of polyolefins when operational.  Construction was reported to be 73 percent complete in early 2018.

Aside from some brief periods of high prices due to spikes in local demand for heating, U.S. NGL pricing remains highly competitive and olefin producers around the world continue efforts to procure larger quantities both for PDH and to improve the cost position of their steam cracking operations.  INEOS, which was the first company to engage in transporting ethane from the U.S. has now announced a new butane tank in Europe which will be used to transfer butane from deep sea sources such as the United States to one or more of its European crackers.

While butane cracking provides roughly similar butadiene yields per ton ethylene to naphtha cracking, the broader shift to propane cracking does not, and the market for crude C4s is increasingly tight.  This became apparent in 2016, exacerbated in some cases by major cracker outages.  Butadiene values remain high, if volatile, and projects to exploit contained butadiene which is currently destroyed, such as in Saudi Arabia, are expected to re-emerge.  The prospect of large new liquids cracking projects in the Middle East, along with the wave of new crackers in China suggests C4 supply will ease post 2020 however.  There now seems little or no opportunity for new investment in butylene dehydrogenation, with almost all of the recently built capacity in China either closed or converted to conventional C4 extraction.  The butane dehydrogenation plants in Russia however continue to operate profitably.

Find out more in Nexant's new report, Market Analytics: Olefins - 2018


Stewart Hardy, Senior Consultant