The decline in propylene and ethylene values is worth consideration today as it provides proof, along with the feedstock comments in today's daily report, that US commodity chemical producers are on average facing margin pressure WoW. We noted in yesterday's research that China prices were rising amid production cuts, but demand remains a notable concern. As production rises from current levels in 1H22, this will put downward pressure on Asia chemical prices and also translate into lower US export values.
The US petrochemical production cost competitive advantage reflects a sharp decline at the feedstock level. Natural gas and natural gas liquids prices have risen faster than crude oil and Ex-US naphtha values since mid-1H21. In yesterday's report we identified the disconnect between propane and ethane pricing in the US. While both are high, propane is so high that it is now unprofitable to make ethylene from propane instead of just less profitable. The direction of the lines in the exhibit below shows the changing landscape clearly, and the only reason why the US chemical industry is so much more profitable than the markets in Asia is that chemical product prices are so robust, in part because of the high cost of freight between the regions.
The Enterprise Products propylene numbers are impressive when you considering that its PDH facility was closed for a significant portion of the quarter, and while this likely contributed to tightness in the market, the company could have made even more money in 2Q. The results show the clear tightness in the propylene market in the US and reflect the very strong momentum in propylene derivatives, which is broad-based although we have tended to focus on polypropylene in recent work. See more in today's daily report.
ExxonMobil Chemicals has announced that its Corpus Christi JV project with SABIC is ahead of its original schedule – ExxonMobil is now targeting a start-up in 2H21, ahead of its previously targeted 1H22 expectation. It is unusual for projects in the US to be ready ahead of schedule these days, and start-up delays tend to be the norm. We also take a positive view of this development upon comparison to the Shell Pennsylvania project, which still has a vague 2022 start-up expectation though its construction began before ExxonMobil. One could argue that the remoteness of the location – well away from petrochemical infrastructure has been a constraint for Shell, but the Corpus Christi location is also a greenfield project for ExxonMobil/SABIC. This will be the largest ethylene plant built in the US, though it is likely that the recent 1.5 million ton units (Dow, ExxonMobil, CP Chem) are expandable to 2.0 million tons. Dow is already discussing such a move with a new polyethylene facility at Freeport. It will be interesting to see what impact this ExxonMobil/SABIC facility has on both the USGC ethane market and the polyethylene market – 1.3 million tons of polyethylene is a large increment and SABIC will have half of the capacity and will be a new market entrant with on-shore production. Aramco has ethylene, through Motiva’s purchase of Flint Hills, and SABIC owns half of the Cosmar styrene plant in Louisiana.
This headline about China creating petrochemical deflation is largely based on the rate of capacity addition within China and that base chemical pricing in China still sits well above costs – but the argument may be flawed on a couple of levels. First, costs may not fall materially, given the increased thirst for imported naphtha and propane, as well as crude to fill new refining capacity. If crude prices fall, China will see lower costs, but then so will others. The margin issue is also in question because the wave of China’s new base chemical capacity is arriving amid a surge in demand growth, and this is why margins in Asia have not fallen closer to costs yet. China remains a meaningful importer of many base chemicals – less than two years ago for many products, but still meaningful, and it is the surpluses in the US and the Middle East that may drive deflation should supply chains stabilize and production rates remain high.