Ethylene producers in Asia are cutting back production because of the negative margins that some are seeing for much of their production. This will initially lead to higher losses as lower rates will impact plant efficiencies and raise unit costs. Cutting operating rates only works if prices rise as a consequence and if other producers choose not to cut back and seek to gain share, things get worse before they get better. The margins we show in the exhibit below are exceptionally low for Asia and are certainly at levels that would have caused many shutdowns in the past, but there are so many new players in Asia, especially in China that it may either take time or government intervention to get enough of a cutback to move prices. But if ethylene prices do improve in the region the arbitrage for moving ethylene in from the US goes up, so the US may gain more than the local producers. Also, as prices rise, someone in the region could look at marginal economics and start increasing rates. See more in today's daily report.
The run-up in ethylene spot prices in the US is interesting because it takes away most of the export arbitrage to Asia, as summarized in the charts below. Our margins models suggest that Asis is losing money making ethylene from imported naphtha today – especially in China and the arbitrage looks more interesting for US exporters of ethylene if you look at China costs as opposed to China prices for ethylene. The US remains a preferred supplier of ethylene to parts of Asia that would otherwise import from more local producers as our local cost analysis does not include a freight component. For example, an ethylene buyer in Southeast Asia could still get material from the US cheaper – even with higher US prices – than from China or other local exporters. For more on ethylene and propylene markets see our Daily
The surge in European benzene pricing (first chart below) is likely a function of lower production as refiners adjust to account for the new COVID restrictions in the region, lowering short-term demand for jet fuel and gasoline. Prices in Europe are high enough today to justify shipments from the US but are more likely to result in shipments that were bound for the US heading to Europe instead. By contrast, US refining rates are edging higher, as the holiday season has created more demand for air travel and gasoline, despite the rise in COVID.
Looking at the exhibit below, it is clear that planning for consumers of hydrocarbon feedstocks is a challenge, and this is especially true for anyone looking at new projects, adding to our view that new project announcements will slow in basic chemicals, setting up for a major upcycle after 2023. The volatility in relative feedstock prices over the last ten years likely means that you would need to be able to demonstrate profitability under a wide range of possible feedstock price scenarios, while at the same time assuming that prices are set by marginal costs. Today global prices are set by marginal costs as parts of Asia are operating at break-even economics, with the much more profitable US and Europe impacted by feedstock advantages in the US and higher freight costs for polymers trying to enter the US and European markets. The US trade balance discussed in today's Daily is partly influenced by rising prices on some imported goods because of higher freight costs. While we continue to see some basic chemical expansion announcements, there have been periods of relative feedstock costs over the last 10 years where any project would have looked unprofitable. The volatility in the chart confirms that any producer will have better and worse times throughout a facility’s operating life, and consequently, start-up timing can be everything. Losing money for the first few years of any project’s life can destroy any ROI goals.
We are seeing some stability in ethylene and propylene pricing in the US to start the week, and with the steady rise in crude prices and the Monday jump in natural gas prices, this is not surprising. As we noted in yesterday’s Weekly Catalyst, there is enough incentive to export ethylene from the US to Asia – most likely Southeast Asia rather than North Asia, and this could offer support for those with surplus ethylene in the US today.
The propylene chart below shows a significant disconnect between spot and contract prices – more than at any point in recent history, and if the US contract price does not fall it will likely be an indicator that either discounts have increased or that more volume is moving against a spot price marker. The pressure is also on to lower ethylene contract prices, but the propylene spread is far more extreme.
It is increasingly likely that Hurricane Ida will add another leg of strength to US chemical pricing more broadly, with a host of prolonged production outage news and force majeure notices, giving momentum to some price increase announcements for September, some of which looked very speculative at the time they were made. Buyers will have an eye on continued pockets of supply chain disruption, strong demand in general, particularly for those levered to holiday spending, and the not insignificant fact that we still have almost three months of hurricane season to go! Note that two of the more disruptive storms of 2020 hit in October. We talk specifically about PVC in today's daily - See price chart below.