The second wave of new ethane crackers in North America is likely to be postponed until 2025 if crude oil prices do not recover within five years, claims a report by IHS Chemical, which will have the effect of tightening ethylene supply and boosting the profitability of naphtha-based producers in Europe and Asia. The impact of declining oil prices on petrochemicals will depend on how quickly those prices return to the high levels of recent years, commented Don Bari, vice president of technology and analytics at IHS Chemical, adding that oil price volatility is creating a nightmare for companies planning investments.
“The long-term recovery case, should it come to fruition, has the most significant implications for the market. Since oil dynamics drive marginal production cost and price-setting mechanisms for many chemicals, plastics, and fibres, a prolonged oil-price recovery could diminish the feedstock advantage of ethane relative to a more cost-competitive naphtha.” In the long-term case, IHS Chemical’s premise is that moderate economic growth would continue for several years, oil demand growth would slow, and technology would continue reducing oil production costs and increasing supply, even at lower oil prices. The resulting worldwide oversupply of crude oil could keep prices from recovering to trend for more than 10 years.
The first major effect would be slower growth in US natural gas liquids production and the postponement of ethane cracker projects, says the report. The ethylene market would tighten, pushing up operating rates and prices, and increasing market volatility. “Ethylene cracker operating rates would be driven to near-record highs, since the second wave of ethylene capacity additions wouldn’t come online until 2025, and global ethylene demand growth will be strong,” said Bari.
Assuming a long-term recovery, ethylene demand would grow at an average annual rate of 4.5% during 2015-20, and capacity would grow at just over 3%, says IHS Chemical. During 2020-25, ethylene demand would grow at an average annual rate of 4%, and capacity would grow at under 1%. The result would be severe supply shortages similar to those of the late 1980s, says Bari.
For ethylene producers in Europe and Asia, a long-term recovery in the price of oil would be a great boon. Naphtha crackers would run at high rates, their margins would strengthen, and more naphtha crackers would be built in China and other emerging economies. As naphtha-based producers moved down the cost curve, North America’s ethane-based, downstream-integrated producers could see their margins shrink by US$200/ton, says Bari.
“One of the most intriguing revelations from our long-term price recovery analysis was the impact on the plastics industry, particularly plastics demand and the implications for plastics recycling. We found that low oil prices stimulate demand for virgin plastics by reducing economic incentives to recycle plastics. As less plastics is recycled, demand for ethylene further increases, which leads to more co-product production of propylene and butadiene.”
With the low oil prices of the long-term case keeping naphtha prices depressed, alternative production technologies would suffer. North America’s on-purpose propylene units would likely not be much affected, says IHS Chemical. However, China’s coal- and methanol-based olefin producers would lose most of their advantage, given the tight economics involved, and there would be no new methanol-to-olefin (MTO) or methanol-to-propylene (MTP) capacity additions for several years.
Methanol capacity additions would still occur in locations with advantaged feedstocks, they would proceed more slowly, and rationalisations would also be likely.
The report does not address the relative likelihood of the short-, medium-, or long-term cases, Bari says. “We’re not trying to say what oil will do. We’re saying, if the [oil-price] recovery takes a certain path, these are the structural things you will see happening. It’s about being prepared for a non-traditional or volatile recovery.”
26-Aug-15 
