Will Europe's crackers face need to make a switch in feedstock this winter?

Europe's steam cracker operators used to face a difficult question at this time of year: as stronger heating demand pushes up the price of LPG in winter months, when best to switch feedstocks to naphtha? www.argusmedia.com says that the dynamics of Europe's petrochemical feedstock market are changing. With the US shale boom sending a rising stream of LPG into Europe, the question now is not so much when crackers should change, but if they should make the switch at all. US shale oil is typically light and sweet, and yields more light distillates like LPG. US LPG production has surged since the end of 2012 – propane and propylene production was higher by almost 30pc in the first nine months of 2015 than in the same period in 2012, according to US government agency the EIA. As US production has increased, so too have exports to Europe, from 9.7mn bl in 2012, to 21mn bl in 2013 and to 35.8mn bl in 2014. IEA data show OECD Europe's total LPG imports have also risen, albeit at a slower pace — from 203mn bl in 2012, to 241mn bl in 2013 and to 257mn bl in 2014. The average cost of propane has fallen in northwest Europe, relative to naphtha, as US exports have stepped up. Its average discount to naphtha was $72/bl in 2012, $116/bl in 2013 and $178/bl in 2014. Even as the European winter approaches, propane is now still at a $75.50/t discount to naphtha, and Europe's crackers show little sign of switching feedstock. Along with the economic benefits, the current petrochemical demand scenario favours propane cracking because it produces a higher ratio of ethylene to propylene than does naphtha. The net propylene-to-ethylene contract price ratio fell to 0.84 this month, the lowest since May 2009. Propylene has been weakened by oversupply in Europe, a result of strong cracker and refinery operating rates and poor export demand for non-polymer derivatives. This seems unlikely to change in the short term, making propane — which produces less propylene than naphtha during ethylene production — a more attractive feedstock for cracker operators. Around 25% of western Europe's ethylene is now produced from LPG, compared with around 18pc in 2012. The medium-term outlook points to continued use of propane feedstocks. The most significant overall factor — yet also the most difficult to predict — is the impact on prices of winter temperatures. A low-temperature scenario would boost heating demand for LPG in Europe and North America, and push up prices. But this year the El Nino phenomenon dominates weather predictions and the EIA expects temperatures in the US to be 8-13pc higher than last winter. European weather is less affected by El Nino, but France's weather agency expects mild weather for continental Europe in October-December. US propane supplies are building, meanwhile, with stocks reaching record highs of 102.164mn bl in the week ending 9 October — the highest since EIA records began in 1993, almost 50pc above the five-year average and nearly 21mn bl above the same week in October last year. More is also likely to soon be heading overseas: Enterprise Products Partners, the US primary propane exporter, will increase capacity at its Houston Ship Channel facility to 526,000 b/d before the end of the year from 296,000 b/d. The European naphtha market is also likely to strengthen in coming months, reducing its competitiveness as a cracker feedstock. Weakening crude distillation margins should lead to run-cuts at Europe's refineries, and as a consequence less naphtha production just at a time when Europe's steam crackers are coming out of maintenance, tightening supplies and potentially driving up prices. Seasonal dynamics are also relevant. Naphtha exports to Asia-Pacific typically rise in winter where more LPG is used for heating, prompting eastern steam crackers to revert to naphtha where possible. Naphtha demand also increases as Europe and the US switch to winter-grade gasoline, as per Argus Media. Source Courtesy: www.argusmedia.com