Olefins and PolyOlefins Cost Competitiveness
Global polyolefins consumption continues to grow at more than five percent per year. Despite this and the ongoing development and promotion of high performance resins, the industry is becoming increasingly commoditized, with purchasing decisions made on the basis of cost. Production economics for polyolefins show notable disparities both within and between regions of the world. It is these disparities that influence market behavior, investment, and consolidation.
For a polyethylene or polypropylene producers, integration to ethylene or propylene has become more critical than ever. Most of the leading polyolefin producers are back-integrated with a cracker and their production cost competitiveness is therefore directly in line with the cost of ethylene production. The availability and cost of feedstock is by far the most important factor for competitiveness, especially when making regional comparisons. The choice of feedstock and its pricing basis vary enormously between countries and regions, ranging from low cost ethane associated with remote oil or gas production, to higher cost ethane or LPG where alternate markets exist, and oil-derived feedstocks, such as naphtha, condensates, and gas oils. Other significant influences on the cash cost of production include plant scale, technology, and other operating costs.
Based on Nexant’s in-house database for feedstock costs, product and utilities prices, capital costs, and other inputs as detailed in the report, polyethylene and polypropylene cash cost of production estimates have been made for 2006, 2011 and 2016. One example of this, based on the integrated HDPE cash cost of production estimates for 2006, is shown in Figure 1.
It can be seen that HDPE competitiveness is strongly related to the cost of ethylene production. The plant in the Middle East, for example, integrated with an ethane cracker had the lowest cash cost of production. As crude oil prices and other energy prices move in line with market demand, ethane prices in this region are less susceptible to the oil prices. Other regions with an indigenous advantage of low gas feedstock costs, such as Venezuela, Malaysia, and other Middle East, although less cost competitive than the Saudi Arabian ethane-based plant, showed strong cost competitive position. The ethane/propane-based plant in Saudi Arabia was also very competitive, although propane prices are affected by international naphtha prices and move in line with crude oil prices and market demand.
In North America, high ethane prices in 2006 resulted in uncompetitive economics for ethane-based crackers and derivatives; naphtha-based crackers and derivatives were only slightly less competitive. Naphtha prices also settled at a premium over those in Singapore and Western Europe, supported by the strength of the United States gasoline market. South East Asian countries were amongst the most cost competitive locations outside of the “stranded gas” areas. The strong cracker co-products markets within Asia supported lower cash cost of production for ethylene, leading to greater competitiveness on an integrated basis. Japan and South Korea naphtha cracking showed the highest costs, due to high net raw material cost, fixed costs, and utility costs from high fuel prices.
Figure 1 Regional HDPE Cash Cost of Production, Integrated Ethylene, 2006
Although an analysis of the cash cost of production is a useful indicator of competitive positioning, freight, handling, marketing, and tariff charges, need to be considered to build up a relative cost position to supply a selected geographic market. Therefore, an analysis is also included in the report estimating the competitiveness of delivered costs to China - the world’s major importer of polyolefins. This shows that the plants with the five lowest cash costs of production remain the five lowest delivered cost producers to supply China, even after freight and tariff considerations. However, Chinese domestic producers become more competitive than all other imports due to the freight costs and tariff incurred.
Similar analyses for LDPE, LLDPE are also provided in the report. In addition, HDPE and PP regional cost competitiveness based on market price olefin supply are presented to offer additional insight into polyethylene cost competitiveness as some polyethylene producers purchase or transfer ethylene from third parties or shareholders at the prevailing market value.
The report “Olefins and PolyOlefins Regional Cost Competitiveness” is one of three supplements published by Nexant as part of its ChemSystems POPS Program for 2007. It provides an analysis of production costs by region over the course of a typical petrochemical cycle, with a discussion of the key factors underlying each region’s cost estimates. Subscriptions or purchase of single copies of the report are available from www.chemsystems.com .
For further details please contact David Alston at +44 207 950 1544 or at dalston@nexant.com.
Click here to see the report©2008 Nexant, Inc.
