The recent collapse in Asia butadiene prices, as implied in the charts below is likely mostly supply-driven, given all the new heavy feed ethylene capacity that has been added in China and its impact on associated butadiene supply. On the demand side, there are negative impacts both from the overall slower growth in China and from the forced cutbacks in auto production because of the semiconductor shortages – ultimately this feeds back into tire demand. Further, with the Delta variant slowing consumer activity in Asia this has likely resulted in below trend tire replacement. See more in our daily report.
Before the wave on new ethylene capacity came online in the US there were several low-cost expansion projects all of which added the ability to crack ethane and some of which brought constraints around feedstock flexibility. Consequently, it is less clear than it used to be just how much US ethylene capacity can flex to exploit the very attractive light naphtha economics today. Very conservatively, we would estimate that 5-6 million tons of capacity can flex easily and about the same again with some planning and some logistic adjustments. Among the public companies, both Dow and LyondellBasell are well placed, and likely have at least 1 million tons each of flexible capacity – in both cases, there is a need for propylene and LyondellBasell has significant butadiene/C4s capacity. For context, at current prices, both companies are likely looking at an additional ethylene margin benefit in the US of $2.5-3.0 million per week for as long as this opportunity exists. This would be 0.3 cents per share per week for Dow and 0.7 cents per share per week for LyondellBasell – a rounding error in current earning but more free cash regardless. The chart below shows the unprecedented benefit in the US and see our daily report for more.
Last week we talked about the robustness of the US propane market and the China PDH headline is another example of offshore propane demand that we believe will keep US propane prices high, and probably high relative to ethane. This will mean that ethane stays favored as an ethylene feedstock but it will keep US PDH costs higher than they have been over the last 5 years. With propane and naphtha staying out of US ethylene plants we are seeing strength in butadiene, as domestic demand picks up and production remains constrained. Butadiene could see price support for some time as the ethylene economics are unlikely to change, especially if we see more Permian output in 2Q and into 2H 2021 as this will keep ethane supplies high.