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WHATS BEHIND HIGH ETHYLENE

MARGINS IN EUROPE AND ASIA?


PETROCHEMICAL SPECIAL REPORT
DECEMBER 2016
Michael Mccafferty, Petrochemical Analyst

PETROCHEMICALS
www.platts.com/petrochemicals
SPECIAL REPORT: PETROCHEMICALS WHATS BEHIND HIGH ETHYLENE MARGINS IN EUROPE AND ASIA?

Northeast Asian and European ethylene margins high These charts clearly show that the downtrend in global oil and
naphtha prices over the past few years wasnt met by a similar
Supported by tightness in NEA market reduction in ethylene prices. Instead, the post oil collapse has
resulted in vastly better economic conditions for naphtha-fed
Wild cards: economic strength in China, US ethylene production.
ethylene exports
A closer examination shows us that increasing margins in both
Cracker margins in Europe and Asia have pressed upward over regions can be attributed to supply-demand dynamics in the
the past two years, delighting producers who recently found Northeast Asian ethylene market. The regions ethylene balance
themselves in a low-profitability environment following the is tight as end-use demand continues to pull on supplies. High
2008 global financial collapse. Platts Analytics investigated the utilization rates in the region are an indicator of the tightness.
factors that led to the current high-profitability environment and
then looked on the horizon, analyzing what ethylene markets, Operating rates for North Asian ethylene producers (China,
sitting on the cusp of fundamental changes, should expect in South Korea, Japan and Taiwan) averaged 93% in 2015 and 2014,
the coming years. according to data from Japans Ministry of Economy, Trade and
Industry. Rates are expected to remain strong at 94% in 2016
A quick glance at the Platts Cracker Margin (PCM) for and 2017, according to METI.
Northwest Europe shows that production ethylene
conditions have gradually improved in the region over the Ethylene supply simply hasnt been able to cope with growing
past few years. The margin, which looks at the difference downstream ethylene demand in the NEA region. The marginal
between naphtha feedstock and output products (ethylene increase in PE capacity in NEA between 2013 and 2016 was nearly
and co-products), averaged $758/mt of ethylene produced 5 million mt. At the same time, the increase in ethylene capacity
in August, up from the doldrums of negative $400/mt at the was about 2.5 million mt, according to Platts Analytics data,
end of 2011. meaning demand has outstripped supply by a factor of two.

A similar story can be told about the ethylene market in Asia. China, the global powerhouse of commodities demand, exhibits
Using a basic metric of ethylene/naphtha (naphtha also is the this ethylene imbalance. Polyethylene production in China was
primary feedstock in Asia), one can see that the ratio has grown at 11.67 million in 2015, compared to 10 million in 2014 and 8.85
from around 1.2 at the end of 2011 to over 3 during August of this million in 2013, according to data from CEIC. That equates to
year, meaning it is becoming more affordable to crack naphtha an increase of roughly 2.8 million mt of ethylene demand since
to produce ethylene. 2013. However, over the same time period, ethylene production
in China grew from 16.225 million in 2013 to 17.145 million in 2015,
an increase of only 900,000 mt, according to CEIC. Therefore,
NWE CRACKER MARGIN Chinese polyethylene demand alone for ethylene has outpaced
1000
($/mt) production by 1.9 million mt.

China has traditionally relied on ethylene exports to help fill


500 the void, and this tightness in the Chinese market has been
amplified as neighboring export supplies dry up.

0 Japanese ethylene capacity has consolidated over the past few


years on previously poor production margins. In total, nearly
1 million mt of capacity has been mothballed. Asahi Kasei
-500
2008 2009 2010 2011 2012 2013 2014 2015 2016 Chemicals permanently shut its 500,000 ton/year cracker in
Source: Platts Mizushima in February, while Sumitomo Chemical closed its
415,000 ton/year unit in 2015.
ASIA ETHYLENENAPHTHA
4
(ratio) Supplies from South Korea have also contracted over the
past few years as the country sees higher levels of domestic
consumption. South Korea exported 300,000 mt in the
3 first half of 2016, compared to 525,000 in the coinciding
period of 2013, according to data from the Korean Statistical
Information Service.
2

The chart below exhibits how reduced exports out of Japan and
South Koreathe two main exporters of ethylene to China
1
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 coincide with higher differentials between ethylene and naphtha
Source: Platts prices in the region.

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SPECIAL REPORT: PETROCHEMICALS WHATS BEHIND HIGH ETHYLENE MARGINS IN EUROPE AND ASIA?

JAPAN S. KOREA C2 EXPORTS AND MARGINS Will the trend continue?


(000/mt) Korea/Japan ethylene exports Ethylene/Naphtha (ratio) In recent months NEA ethylene tightness has been fueled by
200 3.0
strong spot demand from the styrene monomer sector in China.
150 2.5
Trading sources recently said the NEA ethylene market would
likely remain stable as spot ethylene demand from the SM sector
100 2.0
would continue for October arrival business.

50 1.5 Chemical majors are floating their thoughts as well. Dow


Chemical stated in a second quarter earnings call that they feel
0 1.0 the trend will continue, albeit on a global basis.
2011 2012 2013 2014 2015 2016

Source: Platts, KOSIS and METI We believe that both ethylene and polyethylene rates will
remain high globally, and we continue to expect higher operating
LDPEETHYLENE rates in polyethylene than in ethylene. And, as weve seen this
2.5
(ratio) year, there may be some regional differences, James Fitterling,
Dows COO said in late July.
2.0
Platts Analytics also believes that the high margin
environment will ensue. Incremental ethylene capacity in NEA
1.5 Europe is expected to climb from 6 million mt between 2016 and 2019.
Asia Meanwhile, downstream demand in the region is expected to
1.0
climb by an equivalent amount. This will result in continually
high operating rates in the region to accommodate the
0.5
2008 2009 2010 2011 2012 2013 2014 2015 2016 growing downstream demand.
Source: Platts
However, the continually high margin environment is based on
Dynamics in the NEA ethylene market are influencing two key assumptions. The first is moderate GDP growth in China.
the European market as ethylene export terminals in The second is a status-quo in global ethylene exports.
Europe allow for arbitrage opportunities. But tighter
ethylene markets in NEA also are affecting downstream The first assumption is based on the historical relationship
polyethylene markets. Ethylene prices in the regions are between GDP growth and petrochemicals. Although China has
directly related to polyethylene prices, and the chart below seen a slowdown in its GDP growth numbers the market is
shows that as ethylene prices have increased, so have growing off a larger demand base. In fact, China experienced
polyethylene prices. However, polyethylene margin growth high polyethylene growth rates in 2015 and has experienced
has been moderate. continued growth in 2016. Nevertheless, the global commodity
markets are all highly sensitive to developments in China and
Further, even though global PE prices are highest in Europe a slowdown to 3-5% GDP would have drastic consequences to
(chart below), global prices are influenced by NEA market global markets.
dynamics. The Middle Eastern producer acts as a balance,
sending marginal production East or West depending on the The other unknown is the level of ethylene exports out of the
best netback economics. Middle East producers compare a US. The country has not been a traditional supplier of ethylene
NEA netback price to a NWE netback price. The latter requires into global markets. However, the well documented shale
a premium due to higher freight and tariff costs when turning revolution altered the US position on the global energy map.
west, instead of east, out of the Strait of Hormuz. Ethylene supplies in the US will outstrip downstream demand in
the domestic market as new world-scale crackers start up over
the next few years.
LDPEETHYLENE
(000 $/mt) Given the currently announced cracker and the downstream
2.5
units, US crackers will need to run at an average rate of roughly
80% between 2017 and 2020 to balance the market. By
2.0
comparison, the US average operating rate has been in the mid-
80% the past few years.
1.5 Eur LDPE
US LDPE
Asia LDPE However, an ethylene export terminal would provide an escape
1.0
valve for constrained ethylene. That terminal would need to be
in the range of 1-1.5 million mt of yearly capacity the supply
0.5
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 for about three world-scale polyethylene lines - to keep US
Source: Platts operating rates in the mid-80% range.

2016 S&P Global Platts, a division of S&P Global. All rights reserved. 3
SPECIAL REPORT: PETROCHEMICALS WHATS BEHIND HIGH ETHYLENE MARGINS IN EUROPE AND ASIA?

This has led Enterprise Products Partners to mull an The US exported 27,500 mt of ethylene to China between
ethylene facility. The midstream major has demonstrated January and July. In all of 2015 the US exported 18,500 mt of
the ability to quickly adapt to changing fundamentals ethylene to China, according to data from the American Fuel and
in the US NGL market by reversing pipelines, increasing Petrochemical Manufacturing Association.
processing capacity and expanding export terminals.
The company now has the largest LPG and ethane export Status Quo
facilities in the world. The next project appears to be an Whether or not a much-needed US ethylene export terminal
ethylene export facility. The only ethylene terminal in the US materializes in the medium term is yet to be seen. However, over
operated by Targa Resources and has an export capacity of the shorter term global ethylene dynamics should persist. For
300,000 mt/yr. one, several world scale crackers are slated to start up in the US
over the next 24 months and this increasing supply will not have
Enterprise has indicated that it is in contract negotiations and the necessary downstream domestic demand to balance the
no definite date has been announced for the project. But the market. Second, a significant increase in incremental ethylene
recently completed ethane export terminal took just over two supplies (from crackers) isnt expected in the NEA region until
years to complete from the announcement date. This would 2019 when several coastal crackers in China and South Korea are
lead one to believe that a new ethylene export terminal is slated to come online.
imminent, whether it is by Enterprise or another company is yet
to be seen. These conditions point to ethylene margins remaining high
over the coming years in the NEA market. And as we have seen,
But the ethylene market is already seeing the export trend tightness in the NEA ethylene market is reverberating into
develop and is shifting to exports as an outlet. downstream resin markets.

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