An interesting development in this market has occurred in North America due to the rapid pace of shale gas production where considerable amounts of natural gas from shale and other unconventional sources are being produced, together with accompanying natural gases such as ethane and propane, as per a report by Companies & Market Research. These supplementary natural gas liquids (NGLs) are lowering available North American propylene supplies and in turn reducing the competitiveness of the ethylene chain. As the supply of propylene in North America tightens the propylene industry is witnessing a change in the feedstock dynamics elsewhere in the world. The cracking of light feedstocks produces significantly less propylene co-product than the cracking of heavy liquids. As a result, propylene production from ethylene crackers has declined in the United States, driving propylene prices higher than ethylene prices for the first time in decades. This trend in increasing propylene pricing is expected to continue in the foreseeable future due to rising demand in propylene and ever increasing availability of lighter feedstock volumes becoming available from shale gas deposits. In China and Europe the high price of crude oil is also discouraging the use of naphtha. To address the changing feedstock dynamics and deal with the high price of crude some operators are embracing on-purpose propylene technologies that are able to produce high quantities of propylene by using alternative feedstocks such as coal and natural gas liquids. Proliferation of such technologies has been witnessed in the Asia-Pacific and North American regions. For example in Asia-Pacific, over 50% of new capacity will be achieved by on-purpose technologies. In North America, 100% of the new capacity is expected to come from developments in this area. As the demand for propylene increases and uncertainty in its supply becomes even more of a challenge, the use of on-purpose technology is anticipated to rise in the future.
Global propylene production capacity will increase to 165 mln tpa by 2030 from current levels of 109 mln tpa, triggering a radical shift in historical supply relationships, as per oil and gas analyst Wood Mackenzie Ltd. While propylene traditionally has been a by-product of both ethylene from steam crackers or refined fuel products from oil refineries, these sources have not been able to keep up pace in recent years with global demand growth. The US$120 bln global propylene market has regularly been in a shortage situation over the past few years, leading to high prices, and therefore, a loss of market share relative to competing materials, as per Stephen Zinger, head of WoodMac's chemical research for the Americas. These supply shortfalls have been particularly acute in China, where demand growth exceeds investments in traditional sources of propylene, and in North America, where the shift to shale gas-based ethane feedstocks have reduced propylene yields from steam crackers. These supply shortages from steam crackers and refineries have triggered substantial investments into alternative technologies to boost global propylene supplies, including methanol-to-olefins(MTO), methanol-to-propylene (MTP) and propane dehydrogenation (PDH). These investment will, over the next five years, not only create near-term threats of oversupply in China and North America, but will also permanently alter the paradigm of propylene’s global supply and market pricing dynamics.
The wide adoption of PDH technology is likely to happen in North America, where ample supplies of domestic shale gas are adding downward pressure to the cost of propane used as feedstock for PDH units. In addition to other new PDH units, and expansions under consideration by C3 Petrochemicals (Ascend), Formosa Plastics, Petrologistics, REXtac, Williams Energy Canada; Dow Chemical Co. and Enterprise Products Partners LP each are spending more than US$1 bln to construct and start up new PDH units by early 2016, as per ogjonline.com. Following start-up of the first two new PDH units, North American propylene prices are likely to start on a downward trend as the market becomes saturated with supplies, according to Zinger. WoodMac expects this trend to dramatically change after the start-up of these new PDH units and several new propane export terminals, causing propane prices to rise and the spread between propylene and propane to return closer to historical levels. From between 2005 and 2030, the market share of PDH and MTO-MTP-sourced propylene will increase from nonexistent to more than 25% of total North American supply, representing a permanent change in the paradigm of marginal propylene supplies to the market.
As the largest importer of propylene and propylene-derivative chemicals currently, China is seeking to adopt a long-term propylene self-sufficiency strategy with a focus on PDH investments, which began with Tianjin Bohai Chemical Industry Co.'s commissioning of the first PDH unit in late 2013. In addition to four new PDH units scheduled to start production this year, almost a dozen additional PDH plants in China are currently under investment consideration. But China's plan for propylene self-sufficiency also includes investments in MTO and MTP technologies, which will capitalize on the country's vast coal reserves, according to Vince Sinclair, head of Asia chemicals research for WoodMac. China is expected to add 12 more MTO plants in operation, with dozens more still under investment consideration. Propylene prices in Asia already have started to weaken as a result of these new domestic supply investments in China. Between 2005 and 2030, the market share of propylene sourced from PDH and MTO-MTP technologies will increase to about 45% of China total capacity, pushing the country toward full self-sufficiency and negatively impacting export-oriented producers in South Korea, Saudi Arabia, Taiwan, Singapore and India, which currently serve as China's largest sources of propylene-derivative imports. Another driver behind the wave of investments in China's on-purpose propylene capacity is a strategy on the part of independent propylene-derivative manufacturers to reduce their dependence on imports and domestic supply from the oligopoly of state-owned majors. As per ICIS, increased capacities of at least 1.5 mln tpa of propylene are expected to come on stream in the key market of China. 3 PDH plants, located in east China are scheduled to begin operations in H1-2014, more than tripling China's existing 600,000 tpa propane-based propylene capacity. Most of the units will be supplying propylene feedstock to their downstream affiliates which are currently major importers. That means these end-users will be less reliant on imported propylene next year. Start up by polypropylene(PP) producer Shaoxing Sanyuan Petrochemical's 450,000 tpa PDH unit in Shaoxing, Zhejiang province, has been followed by acrylic acid producer Zhejiang Satellite Energy Co's 450,000 tpa PDH unit in Pinghu, Zhejiang province. The biggest impact on east China's demand-supply balance is likely to be the start-up of Ningbo Haiyue New Materials Co's 600,000 pa PDH unit, as the company does not have any derivative operations yet and all its propylene supply will be sold to the domestic market.
While North America and China are addressing their propylene shortfalls with alternative technologies and feedstocks, it is forecast that Europe will solve imbalances to its propylene supply with additional imports. "European crackers are shifting to lighter feeds where possible as evident by the announced intentions to import ethane from the US by Ineos, SABIC, and Borealis, while others continue to study similar options explains Alex Lidback, WoodMac's head of chemical research for Europe, the Middle East and Africa. He added that currently there are two PDH units in Europe, but all indications are that new PDH and MTO-MTP investments are not viable options.
On-purpose technologies have risen in importance as the costs of heavy feedstock used in steam crackers and Fluid Catalytic Crackers (FCC) have increased substantially, driven by crude oil price increases, as per Market Research Reports. These two sources account for the largest shares of propylene production, but high costs have deterred producers from using heavy feedstocks in steam crackers. In regions where ethane feedstock provides a much cheaper alternative to heavy feedstock for steam crackers, the propylene industry is likely to suffer, as light feedstock produce negligible quantity of propylene. In FCCs, increases in gasoline price drive producers to use chemical grade propylene for octane blending, rather than selling it to be made into polymer-grade propylene. These difficult operating conditions have encouraged producers to use on-purpose technologies to manufacture propylene as main product, with lower-cost feedstocks. The most popular on-purpose technologies are Propane Dehydrogenation (PDH), Olefin metathesis and Methanol to Olefins/Propylene (MTP). In the Middle East, plants based on these technologies already account for more than one-third of propylene capacity, while in Asia-Pacific, North America and Europe, the number of plants based on these technologies is increasing slowly. According to Publisher forecasts, plants based on on-purpose technologies are forecast to account for 63.1% of capacity expansion globally over the next five years. China will lead the global propylene industry over the next five years, with the largest consumption and production increases. With a rapidly industrializing and urbanizing economy, automotive, packaging, electronic sectors have grown at a fast pace in China. The economic growth is expected to continue for the next five years, albeit at a slower pace than in recent years, and propylene demand is also expected to increase. China will expand its propylene capacity at the fastest pace of any country over the next five years, forecasted to account for 68% of the Asian capacity addition and 45% of the global capacity addition over the next five years.