 "The very complex nature of polyolefins price moves: Dr Mosongo Moukwa")
There is no doubt that the petrochemical industry is in a period of uncertainly with respect to resins prices. The oil prices have tumbled, and trade flows patterns have changed. The oil markets for the remainder of 2015 will be driven mainly by fundamentals and by the supply side, in particular. The drivers are: a slowing global economy, increased production in North America disrupting long standing supply balances, reluctance of the Organization of the Petroleum Exporting Countries (OPEC) to lose market share, and significant disruptions in the oil dependent economies of Venezuela and Russia.
The Middle East has become by far the largest exporter of polyolefins, while China continue to reduce its dependence on imported resins. Analysts predict that in the coming years there will be an accelerated growth in the global supply of two building blocks: ethylene and propylene. The supply and demand equation picture of these materials is changing. For example, China is investing in coal gasefication and methanol to olefins technologies.
The discovery of abundant ethane containing shale gas has added new supplies of ethylene. These new sources, however, will only partly cover the global demand for ethylene, estimated to reach 160 million metric tonnes per year by 2020. New naphtha crackers will still be required in order to meet the demand requirements.
The price of naphtha, gas oil and other light distillate oil-based products are related to the price of oil. Thus, they are also affected by the macro economy and geopolitical uncertainty. Naphtha based ethylene crackers generate substantial quantities of by-products such as propylene and butadiene, and the price of ethylene depends upon the price the producers receive for those by products.
There has been an unprecedented investment in new plants in North American. IHS is predicting a 50% increase in polyethylene capacity over the next five years, making North America a net exporter of polyethylene. The Middle East is continuing to increase supply, while growth in China is outpacing all other regions. This will change trade patterns, put a price pressure on higher cost regions, and affect operating rates and asset utilisation.
Polyethylene and propylene
The price of polyethylene has not fallen that much. Not yet. In North America, new production capacity have not yet come on line. Thus, polyethylene producers have enjoyed profitability from cheap feedstocks. Although shale gas provides lower cost feedstock to the US petrochemicals market, the infrastructure required to deliver the product is still being put in place. Currently, the global market is being driven by supply and demand rather than cost. Even with the addition of new capacity, the global supply-demand equation will remain the main driver of polyethylene pricing.
In addition, polyethylene is a globally traded product. Its price floor is set by producers with high costs rather than by those with low costs. This is because global demand cannot be solely satisfied from low cost regions like the Middle East and North America. It also requires supply from producers at the upper end of the production cost curve. Thus, polyethylene prices in The Middle East are not significantly different than polyethylene prices around the world, even though their ethane based operations have the lowest cost structure in the world.
Today, the global polyethylene capacity exceeds demand to the point that global operating rates average in the mid-80% range. Lower oil price will benefit producers that depend on the generally high cost naphtha, particularly those in China, already challenged by producers from the Middle East. This might in turn encourage them to produce at higher rates, putting pressure on the low cost exporting regions.
The effect of oil prices on propylene is somewhat different given the nature of its feedstock supply. The value chain is also less integrated than that for ethylene and polyethylene. North American projects for on-purpose production of polypropylene are benefiting from low cost propane. According to IHS, polypropylene projects will emerge, but, the capacity growth is not expected to have as dramatic effect on North America net trade as that for polyethylene. For this reason, it is believed that the impact will not be as dramatic as for polyethylene.
Difficulty in predicting the impact of oil price
The impact of oil prices on the price of chemicals has become more difficult to predict. Applying historical product–to-feedstock price spreads to outlooks based on a given margin and return is no longer valid. This was possible years ago when past and future plants relied on the same basic technology, built in the same region, and all players had similar capital investment expectations.
Take propylene, for example. Its price was traditionally linked to its alkylation value. With rising in oil prices around 2005, the alkylation value was pushed higher, and propylene price detached from this pricing mechanism. The marginal use of propylene instead became polypropylene (PP) substituting for high density polyethylene (HDPE), and a new pricing level was established. By 2010, the US propylene market became tight as propylene demand continued to grow faster than supply. In the new tight market, propylene then moved up the value ladder to a point where its price is being set by PP competing in some applications with polystyrene (PS).
Geographical differential prices have also been altered. The world is more globalised, where the long term price setter may be situated in a different region with a different cost structure. The emergence of powerful new producers with different cost positions and decision mind sets in regions such as the Middle East and China has changed the landscape. Chemical flows, traditionally coming from North America and Western Europe, are more complex today and affect the price differential across the various regions of the world. On top of that, one can juxtapose, currency fluctuations.
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Dr Mosongo Moukwa is Director of Technology at PolyOne, USA, and was recently an Independent Consultant based in Chapel Hill, USA, and Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association.
Email: mosongo@mosongomoukwa.com
The Middle East has become by far the largest exporter of polyolefins, while China continue to reduce its dependence on imported resins. Analysts predict that in the coming years there will be an accelerated growth in the global supply of two building blocks: ethylene and propylene. The supply and demand equation picture of these materials is changing. For example, China is investing in coal gasefication and methanol to olefins technologies.
The discovery of abundant ethane containing shale gas has added new supplies of ethylene. These new sources, however, will only partly cover the global demand for ethylene, estimated to reach 160 million metric tonnes per year by 2020. New naphtha crackers will still be required in order to meet the demand requirements.
The price of naphtha, gas oil and other light distillate oil-based products are related to the price of oil. Thus, they are also affected by the macro economy and geopolitical uncertainty. Naphtha based ethylene crackers generate substantial quantities of by-products such as propylene and butadiene, and the price of ethylene depends upon the price the producers receive for those by products.
There has been an unprecedented investment in new plants in North American. IHS is predicting a 50% increase in polyethylene capacity over the next five years, making North America a net exporter of polyethylene. The Middle East is continuing to increase supply, while growth in China is outpacing all other regions. This will change trade patterns, put a price pressure on higher cost regions, and affect operating rates and asset utilisation.
Polyethylene and propylene
The price of polyethylene has not fallen that much. Not yet. In North America, new production capacity have not yet come on line. Thus, polyethylene producers have enjoyed profitability from cheap feedstocks. Although shale gas provides lower cost feedstock to the US petrochemicals market, the infrastructure required to deliver the product is still being put in place. Currently, the global market is being driven by supply and demand rather than cost. Even with the addition of new capacity, the global supply-demand equation will remain the main driver of polyethylene pricing.
In addition, polyethylene is a globally traded product. Its price floor is set by producers with high costs rather than by those with low costs. This is because global demand cannot be solely satisfied from low cost regions like the Middle East and North America. It also requires supply from producers at the upper end of the production cost curve. Thus, polyethylene prices in The Middle East are not significantly different than polyethylene prices around the world, even though their ethane based operations have the lowest cost structure in the world.
Dr Mosongo Moukwa
Today, the global polyethylene capacity exceeds demand to the point that global operating rates average in the mid-80% range. Lower oil price will benefit producers that depend on the generally high cost naphtha, particularly those in China, already challenged by producers from the Middle East. This might in turn encourage them to produce at higher rates, putting pressure on the low cost exporting regions.
The effect of oil prices on propylene is somewhat different given the nature of its feedstock supply. The value chain is also less integrated than that for ethylene and polyethylene. North American projects for on-purpose production of polypropylene are benefiting from low cost propane. According to IHS, polypropylene projects will emerge, but, the capacity growth is not expected to have as dramatic effect on North America net trade as that for polyethylene. For this reason, it is believed that the impact will not be as dramatic as for polyethylene.
Difficulty in predicting the impact of oil price
The impact of oil prices on the price of chemicals has become more difficult to predict. Applying historical product–to-feedstock price spreads to outlooks based on a given margin and return is no longer valid. This was possible years ago when past and future plants relied on the same basic technology, built in the same region, and all players had similar capital investment expectations.
Take propylene, for example. Its price was traditionally linked to its alkylation value. With rising in oil prices around 2005, the alkylation value was pushed higher, and propylene price detached from this pricing mechanism. The marginal use of propylene instead became polypropylene (PP) substituting for high density polyethylene (HDPE), and a new pricing level was established. By 2010, the US propylene market became tight as propylene demand continued to grow faster than supply. In the new tight market, propylene then moved up the value ladder to a point where its price is being set by PP competing in some applications with polystyrene (PS).
Geographical differential prices have also been altered. The world is more globalised, where the long term price setter may be situated in a different region with a different cost structure. The emergence of powerful new producers with different cost positions and decision mind sets in regions such as the Middle East and China has changed the landscape. Chemical flows, traditionally coming from North America and Western Europe, are more complex today and affect the price differential across the various regions of the world. On top of that, one can juxtapose, currency fluctuations.
__________________________________________________________________________________________________________
Dr Mosongo Moukwa is Director of Technology at PolyOne, USA, and was recently an Independent Consultant based in Chapel Hill, USA, and Vice President - Technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association.
Email: mosongo@mosongomoukwa.com