Naphtha more competitive as ethylene feedstock during COVID-19
Asia’s buyers look for spot opportunities
Cracker margins remain in the spotlight
PODCAST: Rising hygiene products demand and falling naphtha prices present opportunities for petchems
The sharp fall in naphtha values during the coronavirus pandemic has made it more of a competitor to ethane as a feedstock for ethylene production in Asia, Europe and South America
By June, US producers began to see ethane's advantage re-emerge as oil prices showed a slow rebound, but ethylene producers in largely naphtha-dependent regions could maintain competitiveness if crude retreats.
Asian ethane and LPG-fed crackers have seen negative margins on falling naphtha and ethylene prices in the first half of the year.
Arbitrages eyed Asian market participants will be watching for arbitrage opportunities through the rest of the year, as buyers keep term contract volume at minimums for more spot market opportunities. European and US producers were seen as having abundant supply to sell to other regions, though some companies reduced rates across their systems to manage downstream derivative inventories.
Annual US ethylene export capacity had been limited to 300,000 mt before this year, with a single terminal operated by Targa Resources.
Then first-quarter export cargoes rose 62% to 99,648 mt, reflecting the January start-up of Enterprise Products Partners ’ joint-venture terminal in Houston with Navigator Gas, US International Trade Commission data showed. Belgium, Indonesia and Taiwan received 87% of those ethylene flows, USITC data show. The new terminal was expected to reach its 1 million mt/year capacity in the fourth quarter. The US exported 289,107 mt of ethylene in 2019.
Asian crackers were expected to maintain high operating rates through the rest of 2020, assuming economic recovery as lockdowns ease and support from polymer demand.
Increased spot supply was expected after cracker restarts by Malaysia’s Pengerang Integrated Petroleum Complex and South Korea’s Lotte Chemical in July and September, respectively.
Ethylene's long-term low US spot and contract ethylene prices repeatedly set new lows in the first half as COVID-19 crushed demand.
The spot FD Mont Belvieu price fell to 8 cents/lb for more than a week in April from 22 cents/lb in January, the lowest since S&P Global Platts began assessing it in 2004. The US ethylene contract price hit an all-time low of 20.5 cents/lb in April, but rebounded to 24 cents/lb for May. Spot prices have since rebounded as ethane prices strengthened on oil and gas production cuts. US spot non-LST ethane prices reached a 2020 low in March of 9.25 cents/gal and more than doubled to 22.75 cents/gal by early May.
US light-straight-run naphtha prices, which hit a 2020 high of 133.50 cents/gal in early January, plummeted to 24.25 cents/gal by the end of March and had rebounded to more than 81 cents/gal in early June.
European producers saw similar naphtha price moves. January's average of $527/mt CIF NWE nosedived to a $247/mt average in March and $138/mt in April, a 21-year low, Platts data showed.
European ethylene prices peaked this year at Eur802.50/mt FD NWE late January, and fell 65% by mid-May to Eur278.50/mt FD NWE, its lowest level since Platts began assessing it in 1994.
“Raw materials with feedstocks will start to recover before end of year, but not significantly,” a European market source said.
Asian prices also saw wide swings from late January to late April, with the CFR Northeast Asia marker down 60% and CFR Southeast Asia down 59% to $330/mt. By June prices had sharply rebounded to $805/mt CFR Northeast Asia and $755/mt CFR Southeast Asia after China and India lifted lockdowns.
S&P Global Platts Analytics expects NYMEX WTI crude at $15/b in June, rising to the mid-$20s/b by the fourth quarter and $30/b by Q1 2021. That scenario would maintain naphtha’s advantage through the third quarter and into the fourth.
Bob Patel, CEO of LyondellBasell, said producers with mixed-feed crackers in global networks can switch feedstocks to maximize cost advantages, but there was a catch. Ethane yields the most ethylene of all feedstocks and its derivatives make the world’s most-used plastics. Cheap naphtha may make a lower ethylene yield worth it, but naphtha also yields co-products like butadiene, for which demand has plummeted.
“We will crack liquids up to a point where we can move the butadiene, and I think that has already globally been restricting the amount of naphtha that is being cracked,” Patel said recently. “It will continue to be a constraint through most of this year, especially the disposition of butadiene.”
— Kristen Hays, Ora Lazic, Chris Liu
Propylene market faces supply challenge from new Asian capacity
Continued volatility expected in the US
Impending start-ups in China
Improved global demand for propylene in the second half of the year — as countries emerge from lockdowns to tackle COVID-19 — will come at a time of fresh supply challenges from new capacity in Asia.
In Europe, market participants said they expected the pick-up in demand for propylene to be propelled by the resurgence of the automotive and construction industries, which were brought to a standstill in recent months.
Demand from packaging, medical and personal hygiene applications, which was strong throughout the first half, was expected to remain healthy going forward.
In addition to weak demand, significant drops in upstream naphtha prices, which fell around four-fifths in value between January and April, exerted pressure on propylene values in the first half. Polymer grade propylene spot prices FD NWE fell 37% from the beginning of the year, reaching $580/mt on April 30, the lowest level since March 2016.
The near-term expectation was that European steam crackers and fluid catalytic cracking units will continue to operate at reduced run rates despite a favorable naphtha -propylene spread as producers manage their stock levels, which may lead to tighter propylene supplies. The reduction in run rates has mainly affected supply in the inland market, especially for chemical grade, as European refineries have reduced output due to a decline in jet fuel demand.
The fall in European prices has narrowed the spread to US propylene prices, limiting arbitrage opportunities from the US, which could see supply tighten at the coast. A fall in imports will introduce more balance to the supply and demand equation in Europe, easing some pressure off falling prices.
US market sees continued volatility US propylene market participants anticipated continued volatility for the second half of the year due to supply and demand destruction amid the coronavirus pandemic.
In the first quarter, spot and contract polymer -grade propylene (PGP) prices fell to 11-year lows. Enterprise Products Partners said in the second quarter that construction was underway on its new 750,000 mt/year PDH plant at its Mont Belvieu, Texas, NGL hub, for which LyondellBasell will be the anchor customer.
Refinery-grade propylene (RGP) prices fell to an 18-year low, driven by high refinery utilization rates. Domestic refinery utilization rates were at 82.3% at the time of the 18-year low, according to US Energy Information Administration data.
RGP prices quickly recovered as utilization rates fell to the high 60s%. Rate reductions resulted in the tightening of upstream propane supplies and supply of derivative propylene, which propped up prices.
Higher RGP has also narrowed the spread between PGP and RGP, sources said.
According to a market source, demand will improve when the automotive industry recovers. Recovery, however, may take some time — in anticipation that market conditions will worsen before it improves around Q4, a source said. In H2, heavier feedstock cracking could boost propylene supply and depress prices, other sources said.
Prices faces headwind from new capacity Asian propylene may receive price support from the expected recovery of demand after countries begin to ease their coronavirus lockdown measures. Gains, however, faces headwind from upcoming start-ups of propane dehydrogenation (PDH) plants in China .
CFR China propylene market declined sharply in H1, sinking to a 4-1/2 year low of $585/mt on April 6, as the COVID-19 pandemic decimated demand for downstream polypropylene.
“We expect propylene prices to rise when consumption improves in H2," a trader in Southeast Asia said.
Some sources, however, said that impending production start-ups in China may add pressure to prices. Three PDH plants and one LPG cracker with a total propylene capacity of over 2.2 million mt/year are expected to come on stream in China during H2.
China's Fujian Meide Petrochemical's 660,000 mt/year and Zhejiang Huahong New Material's 450,000 mt/year PDH plants were due to start up in Q1, but the start-ups were delayed to later this year because of the pandemic.
Oriental Energy is on track to finish building its new 660,000 mt/year PDH plant in Ningbo by H2 June while Yantai Wanhua Chemical is aiming to bring its new LPG cracker online by August.
Demand in Southeast Asia, meanwhile, is expected to be resilient as Hyosung Chemical will need to continue procuring propylene for its new 300,000 mt/year PP plant in Vietnam, as its new upstream PDH facility in Vietnam is only expected to come online in Q4.
— Melvin Yeo, Abdulaziz Ehtaiba, Lara Berton, Astrid Torres
Butadiene market looks set to stay historically weak for rest of year
Development of automotive demand remains key
Delayed turnarounds in China expected in H2
Podcast: Are petrochemicals stepping into a post-pandemic recovery?
The global butadiene market is expected to remain bearish in much of the second half of 2020, following falling prices in the first half of the year as demand from the automotive industry collapsed.
Asian supply likely to be offset by TAR delays The Asian butadiene market may remain steady in the second half of 2020, with bearish demand for downstream synthetic rubber potentially offset by delayed butadiene plant turnarounds in China.
Synthetic rubber demand is likely to remain subdued in the second half as weak automotive sales look set to continue. Asia’s largest automotive manufacturer, Toyota Motor Corp., has forecast automobile sales for the 2020 fiscal year at 7 million units, down 22% from 2019.
Several butadiene plant turnarounds in China have been delayed to the second half of the year, largely due to labor shortages and social distancing measures amid the coronavirus pandemic.
For 2020, eight steam crackers with a combined butadiene capacity of 805,000 mt/year are scheduled to be shut for turnarounds in China. Aside from two steam crackers — Yangzi and Sinopec Sabic — all other planned turnarounds have been delayed until after June. The six crackers expected to shut for maintenance in H2 2020 have a combined butadiene capacity of 545,000 mt/year.
Market sources said falling freight rates, amid weak bunker fuel, will continue to attract arbitrage cargoes from Europe. According to the latest statistics from Chinese customs, China imported around 49,000 mt of butadiene from Europe for January to March, accounting for 47% of its total imports of 103,000 mt.
Market participants are also closely eying the butadiene-naphtha spread, which has been narrowing in the first half of the year. According to S&P Global Platts data, the spread sank to a seven-year low of $96/mt on May 6. Market sources said Asian butadiene could fall below naphtha prices in the second half of the year, considering continued expected weakness.
European market looks to Asian exports In Europe, industry participants remain largely bearish regarding H2 2020 and are predicting little short-term improvement.
The downstream SBR sector looks set to have another downbeat year amid a bleak picture for the tire industry, with Europe looking to exports to fill the gap in domestic butadiene demand.
The first half of the year saw butadiene export prices hit a historic low of $50/mt FOB Rotterdam as the automotive sector shut down across Europe, leading some SBR producers to follow suit. The European industry-settled contract price for May was Eur325/mt, the lowest since Platts began reporting the settlement in early 2007.
Run rates at auto makers are expected to remain low for most of the rest of the year," a buyer said. "Butadiene demand will remain pretty depressed," the buyer said. "All we have seen is exports and I think we will see even more than normal.”
European producers and traders look set to continue targeting the Asian markets. However, recent volatility in freight rates and high inventories heard in Asia looked set to continue providing challenges for European exporters.
Domestically, much will depend on supply levels as high run rates due to profitable ethylene and propylene margins look likely to continue to add butadiene to an already long market. Cracker operators had been heard seeking alternative options for crude C4 in a bid to limit oversupply.
“The crisis hit suddenly, so it's taken people a while to react, but people are now looking at alternatives for the C4," a European producer said. "Margins in the cracker are good but this is the not the case for every product like C4."
Historically low US price environment set to continue Following historic low spot and domestic pricing, US butadiene market participants predict more of the same in H2 2020, and say the situation will worsen further before it improves in the fourth quarter.
Producers long on butadiene, combined with demand destruction caused by the coronavirus pandemic, have sent spot and contract butadiene prices on a downward spiral, to hit 11-year and 18-year lows, respectively.
With a depressed automotive industry, there is set to be little downstream demand for butadiene in the form of downstream SBR.
Goodyear Tire & Rubber Company said it took immediate steps to cut costs and stop incoming raw materials such as butadiene. “We quickly shut down production in the US and Europe, and work with suppliers to stop the flow of raw materials and other supplies to reduce expenses and to avoid tying up capital in inventory unnecessarily,” Chief Financial Officer Darren Wells said.
Given multi-year low prices, some companies in the automotive sector are looking to benefit in the second half of the year as they look to emerge from the slowdown.
“As we ramp back up we'll start to buy materials again, but we won't buy a significant amount until the third quarter so we would start to get some benefit in Q4," Wells said. "The active question is going to be ‘what's the price of these materials in Q3?’ because that's when we're actually going to be buying them.”
However, refinery rate cuts could depress supply and prop up butadiene prices. Butadiene “can get tight and push prices up, especially if there are no imports,” one source said.
— Callum Colford, Fumiko Dobashi, Astrid Torres
Global MEG markets buffeted by crude, COVID-19 demand destruction
Planned capacity expansions to further exacerbate long market
Lower upstream costs help European producer margins
The global monoethylene market has seen more convulsion than most commodities markets in recent years and, just as it had begun to settle in 2020 after the huge volatility seen in the past two years, the coronavirus pandemic hit.
Slump in costs revive Europe's competitive edge European MEG demand will be tricky to gauge for the remainder of 2020 as the impact from the automotive plant restarts is yet to be felt in the glycols segment, while PET demand is expected to remain healthy even as European countries gradually relax social distancing rules, according to market sources.
When the double shock of the coronavirus pandemic and the crude oil slump forced European countries into lockdown and enforced social distancing, spot prices fell in response to the demand destruction seen in glycols as the automotive sector suffered. The price decline came despite healthy PET demand going into the food-packaging segment.
However, the crude drop also forced a correction in key feedstock costs, enabling a period of margin expansion.
The May MEG contract price settled at $479/mt FD NWE, down $72 from April and the lowest level since February 1999, S&P Global Platts data showed. At the same time, May monomer costs dropped by $106/mt, having already dropped $214/mt in April. The feedstock margin, based on naphtha and excluding energy, financing and labor costs stood at $249/mt, the highest level since December 2018, giving European MEG producers, reliant on naphtha-cracking, the opportunity to regain or expand profits.
A rebound in crude oil prices might threaten these gains, however, and expected global recessionary pressures could dampen additional demand.
Conditions challenging for US capacity additions In the US, MEG prices were under pressure throughout 2019 as new supply came online, and that continued into 2020 even before the pandemic hit.
Sources said that, even if crude recovers in the second half of the year and demand slowly rebounds as expected, MEG prices could remain pressured. More capacity is expected to start up in 2020, adding to an already long market.
Formosa’s Nan Ya Plastics suspended construction on its new 800,000 mt/year MEG plant in Point Comfort, Texas on COVID-19 concerns in March. Other major projects were also affected.
The Texas plant is now expected to start up in late Q4, instead of June.
The new plant will push US capacity up to 2.5 million mt/year, along with the other capacity that has started up since early 2019, with most if not all of that capacity export-bound.
In the first three months of 2020, US International Trade Commission data showed outflows nearly tripled to 511,429 mt from 185,813 mt.
China was the top recipient of those flows in the first quarter, taking more than 28%, or 146,161 mt.
By March, flows to China had fallen 83% to 14,766 mt from 86,846 mt in January, reflecting China's widespread shutdowns in response to the pandemic.
At the same time, flows rose to Mexico and Belgium, the top two export markets for US MEG, as US prices fell from a 2020 high of 22 cents/lb FOB USG on January 17 to 14 cents/lb FOB in May — an 18-year low.
Asian demand not enough to absorb global supply In Asia, the outlook is dependent on overall energy values in the second half of 2020.
Fundamentals aside, Asian MEG spot prices have increasingly become dominated by futures exchange volatility. Trading volumes on the Dalian Commodity Exchange continue to grow.
Although China's demand for MEG is expected to pick up in the next two months as lockdowns ease, prices are expected to come under pressure as additional capacity comes on stream.
The downstream demand expansion in the textile industry would be lagging behind the supply growth of around 1-3 million mt/year in 2020 amid the global economic recession, a market participant said, adding that suppliers will need to run their units at reduced rates. Many new startups, particularly coal-based, are pending, with no start dates yet, observers said.
The Middle East is expected to send cargoes to Asia, where there has been comparatively better demand than Europe and the US, traders said. The US is also expected to send some MEG to China, given that there are new starts planned amid a weak domestic market there, sources said.
Some end-users said Chinese market sentiment seemed stubbornly entrenched in the negative, with most participants expecting consumption at flat to weak rates during the second half of the year. Many Chinese converters said around 30-40% of downstream industries manufacture for export, and noted that China alone could not sustain the MEG capacity growth.
— Miguel Cambeiro, Kristen Hays, Heng Hui
