Petrochemicals and Polymers: Quarter two performance
Global petrochemical markets continued to migrate into a harsher operating environment, with escalating costs increasingly impeding demand in the second quarter. Tightening global energy markets maintained intense cost pressure on petrochemical feedstock costs in many cases competing against robust seasonal demand for transportation fuel. European markets faced the steepest ever increase in olefin contract prices as they renewed in April, defining a higher cost base downstream. Renewed stringent COVID-19 restrictions in China, the lengthening conflict in Ukraine and tightening monetary policy extended downside risk to demand, evidenced in sharp cuts in GDP projections. Fragile demand impeded pass through of recent cost escalation in full, capping profitability of petrochemicals production. Localised disruption to production offered support to margins in Western Europe where supply shortened against subdued demand. Exposure to competing fuel markets heavily determined profitability trends, with margins of aromatics complexes integrated to reformers escalating to record highs whilst economics of toluene conversion were unworkable against high gasoline values.
Tightening markets spurred by a broader boycott of Russian energy streams alongside a wider risk premium led Brent crude oil prices to leap 60 percent from December to peak at a ten year high approaching $120 per barrel in March. The deepening conflict in Central Europe held prices consistently above $100 per barrel for three consecutive months into June. Gas prices in global markets escalated sharply ahead of steady firm crude oil prices as near term restructuring of European energy markets required a larger share of world LNG cargoes. Contrasting demand for fuels and petrochemicals led feedstock costs to detach from latest upturn in fuel values into the summer season. Relative weakness in petrochemical demand moved crack spreads for naphtha to historic lows, falling into negative territory in May. Propane offered further cost savings as slow seasonal heating demand depressed prices to a 15 percent discount to naphtha.
A prolonged period of escalating costs has progressively taken its toll on demand for a broad range of petrochemicals, with affordability increasingly emerging as widening concern in commodity markets. Consumers have reigned in discretionary spending in response to escalating inflation that has propelled living costs ahead of growth in wages. Tightening monetary policy necessary to curb longer term inflation is now seen as an increasing downside risk to near term economic growth. Extension of the zero COVID-19 policy in China compounded cost led pressure on demand. Retail sales in China contracted for three consecutive months broadening downside risks to economic activity.
The NexantECA Quarterly Business Analysis program has offered widely respected assessment of trends in production economics of leading petrochemical markets for over 50 years. The recently published report indicates recent trends in cost, price and margin in response to turbulent operating environment.
Asian petrochemical markets strengthened into quarter two, with supply shortening against fragile demand. Extension of the zero COVID-19 policy in China saw renewed lockdowns imposed across China in April. Although duration of lockdowns was considerably shorter than those previously seen, market sentiment was heavily depressed. Retail sales in China contracted almost seven prevent on the year in May after dropping for three consecutive months. Frail margins suffered since the second half of 2021 have heavily curtailed operating rates despite continued expansion of capacity. Naphtha cracker margins in China remain near historic lows, averaging close to cash cost breakeven since November. Firming margins into quarter two were largely led by short term disruption to supply. Fragile demand stalled the latest upturn in Asian prices demonstrated through the opening months of the year and persistent upstream cost pressure confined margins well below their long term average.
Widespread disruption to production of petrochemicals headed by a busy period of scheduled maintenance turnarounds shielded petrochemical markets in Western Europe from demand displacement. A deteriorating economic climate compounded pressure on demand spurred by deepening cost pressures. The lengthening conflict in neighbouring Central Europe held crude oil prices persistently above US$100 per barrel and elevated gas prices to fresh record highs. Fragile demand for petrochemical feedstocks relative to buoyant transport fuel demand offered some relief to the cost of key feedstocks including naphtha and propane. Tightening markets broadly offset upstream cost pressures to support an upturn in average industry profitability. However exposure to different feedstocks varied profitability immensely across the industry. The NexantECA petrochemical profitability index rebounded 30 percent from quarter one.
Intense cost pressure and deteriorating economic climate curtailed consumption of a broader set of petrochemicals, with weakening demand becoming apparent in commodity sectors. Key contract prices posted the largest ever monthly increase in April, burdening consumers with further costs. Confidence in the broader economic climate deteriorated as accelerating inflationary pressures spurred tightening monetary policy. Euro zone GDP growth projections were reigned in, with annual growth for the year expected to stall towards 1.5 percent. A busy period of maintenance turnarounds made it hard to assess the emerging risk of downstream demand erosion, but greater evidence of displacement of commodity demand clouded market sentiment.
Shortening supply countered pressure on markets as demand yielded to intense cost pressure. Limited availability of olefins constrained derivative production across the industry. Production at crackers contributing a quarter of regional ethylene capacity was disrupted. Seven crackers with a combined annual capacity of 3.5 million tons per year were idled for scheduled maintenance turnarounds. Supply side pressures were most apparent at the peak of a busy maintenance season in April, tightening markets into the second quarter.
Petrochemical markets in the United States remained well balanced as supply shortened alongside slowing demand. Rapidly accelerating inflation rates stunted economic growth as the Federal reserve drastically tightened monetary policy. Real GDP contracted 1.6 percent in the opening quarter of 2022, curtailing consumption of petrochemicals. Pockets of seasonal demand such as construction activity and polyester bottle requirements countered mounting pressure from the deteriorating economic climate but evidence of demand displacement in commodity sectors such as packaging was increasingly apparent. Offtake into the automotive sector remained depressed with fresh large declines in automotive sales reported in April and May. Mounting price volatility and an increasingly uncertain demand outlook curtailed loading of export cargoes despite arbitrage opportunities remaining open.
Cost advantage of feedstocks derived from gas diminished as a critical shortage of gas in global markets removed inertia from gas prices in the United States which escalated to a 14 year high in May. Ethane prices leapt 60 percent from January to trade at ten year high in May. U.S. ethane crackers suffered the heaviest Q on Q loss in 20 years, with cash margins tumbling $200 per ton as escalating costs cleared gains built in tight markets emerging from COVID-19 pandemic. Deepening cost pressure depressed the NexantECA petrochemical and polymer profitability index 7.5 percent from the first quarter.
United States Ethylene Profitability (Ethane Cracker, $ per ton)
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The Quarterly Business Analysis provides key insight into production economics for a broad range of commodity petrochemicals, polymers and C1 chemicals. The analysis presents a review of costs, prices and margins for typical production assets, providing a valuable view of regional and value chain competitiveness and is is available for each key price setting region - Asia Pacific, Middle East, Western Europe and the United States. A quarterly report provides insightful commentary to illustrate current trends, related to recent market developments. The accompanying database is updated monthly.
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