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Olefin Market Supply Demand Trade (Ethylene Propylene Butadiene)

Olefins Market Report

Olefins and aromatics are the basic building blocks for most of the petrochemical industry.  The most commercially important olefins are ethylene, propylene and butadiene. Olefins are mainly produced by steam cracking hydrocarbon feedstocks, with additional production from oil refinery upgrading processes and by catalytic dehydrogenation of paraffins.  Higher prices for conventional petrochemical feedstocks have driven technology development to exploit alternative feedstocks such as coal and methane.  The first two plants producing propylene from coal via methanol are under construction in China for start-up before the end of 2010.

Ethylene Demand Distribution 2008   

Ethylene Demand 2008
Propylene Demand Distribution 2008
 
Propylene Demand 2008

Demand

The olefins industry suffered a downturn of unprecedented severity in 2008, with the combined market for ethylene, propylene and butadiene contracting to 186 million tons, from its peak of 196 million tons in 2007.  The decline was due to record feedstock prices in the early part of the year, then the collapse in prices and business confidence in the latter part of the year, which triggered industry wide de-stocking, and drastic cutbacks in production of olefins and derivatives.  The volatility in naphtha prices added an additional dynamic, driving a swing towards lighter cracker feedstocks in the early part of the year, then a swing back to naphtha when its value fell further than other feedstocks in the latter part of the year.  This exacerbated the shortage of propylene and butadiene in the early part of the year, and pushed them further into oversupply in quarter four.

Aside from the inventory effects which were due to the rapid decline in prices, the decline in olefin consumption was broadly linked to the collapse in global GDP and business confidence.  While the industry was preoccupied in late 2008 that the world may be entering a long and deep depression, there is a growing consensus that the bottom was reached almost immediately in late 2008/early 2009, and that recovery is already underway, albeit slowly.   2009 GDP in most regions will average well below that of 2008, but the economic outlook, and thus demand drivers, are nonetheless improving from the desperate situation at the end of 2008.  The consumption forecasts detailed in this report reflect a subsequent marginal recovery in 2010, followed by a period of strong economic recovery up to a peak in 2014.  While ethylene and propylene are exposed to a broad range of economical influences as a result of the diverse uses of their derivatives, butadiene consumption is dominated almost entirely by the automotive sector.  This was partly the reason for the strong performance of the butadiene industry over 2006-2007, but now presents a serious problem.  The automotive industry has been the hardest hit, and looks like being the slowest to recover of all major application areas.

Butadiene Demand Distribution 2008 

  Butadiene Demand 2008

Competition

The polyolefins industry nonetheless faces a massive capacity increase, coming to market when consumption is considerably below expected levels.  The bulk of the new investments are massive and highly advantaged plants in the Middle East.  Most of the remainder are large and highly integrated plants in China, which benefit from optimised refinery/feedstock integration, low labour costs, and proximity to market.  While almost all of these projects are going ahead without delay, some other less advantaged investments are being postponed or cancelled, and large volumes of olefin and derivatives capacity are being shut down in mature, high cost regions such as Japan, Western Europe and the United States.  Operators of high cost plants face a long period of oversupply, during which the installed capacity base will become substantially larger and more competitive on average.  Some have already concluded that their plants no longer have a profitable future, and have closed them.  Many others will do so over the next three years unless global operating rates improve from forecast levels.  

Capacity Developments

Potential upside factors are large-scale delays to new projects or an unexpectedly strong recovery in demand.  While bringing such a large volume of new capacity on line in the Middle East will certainly present some challenges, the forecasts already factor in some delays.  The ability of feedstock providers such as Aramco, ADNOC and NPC to provide the massive increases in supply for the new steam crackers may also define the extent to which the new capacity impacts the global supply/demand balance.  The GDP forecasts used to generate the consumption outlook already factor in a sustained period of above-average growth rates post 2010, so the potential for additional upside to this is limited.

Ethylene Capacity Development

Ethylene Capacity Development

The outlook for the olefins business is therefore a prolongation of the current oversupply situation, with massive capacity additions outweighing consumption growth until 2013.  Further closures of uncompetitive capacity are forecast, mainly in the United States, Western Europe and Japan.   These regions will also lose their position as exporters of several olefin derivatives, and become net importers from the Middle East.  Trade in olefins themselves will remain a small factor in the overall supply regime, but is expected to increase as a result of hiccups with the numerous new derivatives plants in the Middle East, which will free up cargoes for opportunistic export to Europe and Asia.

Report Availability

The report “Petroleum and Petrochemical Economics (PPE) – Market Dynamics: Olefins” is published by Nexant as part of its ChemSystems PPE program. Subscriptions or single copies of the report are available from www.chemsystems.com.  For further details please email chemsystems@nexant.com.  If you have any comments on the analysis, please contact Stewart Hardy ( shardy@nexant.com).

Click here to see report contents.

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