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.
The US ethylene market strengthened slightly in early July, most likely because of supply disruptions as it is hard to see how domestic demand could improve from here. There is not much room to increase prices further if the export market is the balancing mechanism through July and August, as prices remain depressed in Asia and any arbitrage would close quickly if prices in the US moved any higher. Despite the rising NGL prices discussed in today's daily report and on Sunday, the US has plenty of margin left in ethylene, and prices could go lower if that is necessary to move additional volume. While we talk in the opening paragraph about increased inventories of finished goods in anticipation of the year-end holiday season and continued supply constraints, and how this is leading to a shortage of warehouse space, we suspect that everyone upstream of the finished good suppliers is also looking at adding or maintaining a larger inventory cushion than they have in recent years. We still believe that it is a tough call today as to whether you should sell surplus ethylene or store it as we head into hurricane season in the US.
The chart below focus on the ethylene cost curve and show that the US currently retains a distinct cost advantage despite escalating domestic feedstock costs. The current cost advantage in the US is sufficient to move ethylene derivatives into most markets profitably and while US spot prices for ethylene may not quite reflect the levels needed to stimulate exports today – US ethylene costs certainly do. The restart of the Nova unit in Louisiana may put some further downward on US ethylene prices but as we discussed yesterday, given the weather risks in 3Q it is an interesting dilemma today over whether you sell surplus ethylene or store it on the basis that spot prices will rise because of production outages – this time last year the “store it” decision would have been the right one as spot prices rose through 3Q.
The charts below focus on ethylene and the significant decline in Asia prices, now to levels that suggest negative cash margins. While we may see some cutbacks in production, especially if ethylene from the US can be secured at prices that are even lower than we see in Asia today, most producers will run until they cannot cover variable costs, and given that some of the imbalance, in China especially, might be short term in nature, it is unlikely that we will see any drastic production decisions yet. While the capacity additions in China have been extreme, demand is subdued domestically as consumer spending has not returned to its pre-pandemic trend and the shipping and port problems are hindering export demand.