Quarterly Business Analysis Quarter 2 2008
FEEDSTOCKS SINK PETROCHEMICAL MARGINS
The second quarter has seen a feedstock squeeze hit the petrochemical industry, as crude oil prices escalated to unprecedented levels. With downstream prices constrained by an inability to pass through costs, the petrochemical industry saw profitability collapse to a record low. This lack of profitability has forced action on the industry with producers announcing across the board price increases to recover cash positive operation. These increases may well prove destructive on the demand side, but something needed to give to recover profitable petrochemical operation, and any reduction in demand could help take heat out of feedstock and crude oil prices.
Regional Petrochemical Industry Cash Margin Indices
Nexant’s global petrochemical margin index tumbled 60 percent from the first quarter of the year to record its lowest ever value. So much for 2008 being in an industry up-cycle, although advantaged Middle East producers would agree that times have never been better.
DEMAND
Demand for petrochemicals has slowed in the first half of the year, with domestic consumption in Western Europe and the United States particularly hard hit. Inflationary pressures depressed consumer confidence, with the cost of living coming under considerable pressure from fuel, food and mortgage costs. Fears of a global recession remained as the United States economy slowed, with growth slipping to an annual equivalent rate of just 0.6 percent in the most recent two quarters, marking the lowest two consecutive quarters growth for more than a decade. Steady Asian demand meanwhile continued to provide abundant export opportunities for producers in the United States, although European producers failed to benefit as the strength of the euro displaced them from export markets.
CRUDE OIL
Crude oil prices accelerated to new highs in the second quarter. Brent crude oil prices through April and May averaged $116 per barrel, a jump of 20 percent from the first quarter. The growing burden of energy costs on economies within the OECD has become more apparent, with a reduction in demand for oil products; however continued robust Asian demand more than offset any OECD reduction.
Crude Oil and Petrochemical Feedstock Prices
(United States Quarterly average)
FEEDSTOCKS
Surging crude oil markets and strong summer gasoline prices propelled naphtha prices to record highs in the second quarter. Japan set the ceiling for naphtha prices, hitting $1150 per ton in mid June. Extreme pressure on naphtha cracker margins reduced consumption of naphtha in petrochemicals, depressing naphtha values relative to crude oil. LPG prices meanwhile eased further relative to naphtha on slowing seasonal heating demand. In the United States, ethane prices actually fell on improved extraction availability. This improved ethane supply has depressed ethane prices eight percent from their peak in the final quarter of 2007, despite natural gas prices increasing by almost fifty percent.
CRACKERS
Feedstock selection was crucial to competitiveness through the second quarter, as the surging crude oil prices hit heavy cracker feedstocks such as naphtha and gas oil considerably more than gas cracker feedstocks including ethane and LPG. Ethane cracking has remained the lowest cost route to ethylene and its cost advantage over heavier feedstocks widened considerably. In the United States, the cost of producing ethylene from gas oil was almost twice the cost of producing ethylene from ethane. Ethane cracker margins improved by more than five cents per pound and reached a near record level, with cash margins in excess of twenty cents per pound. Conversely naphtha crackers margins slumped by eight cents per pound to their lowest ever, with Laggard producers close to variable cost breakeven.
United States Ethylene Production Costs
(Leader cash cost Q2 2008)
DERIVATIVES
The weak market has particularly affected the polyolefins sector, with West European polypropylene producers even conceding price reductions through April and May despite increasing cracker feedstock costs. With variable margins falling towards variable cost breakeven for commodity polymers, producers have been left with no choice but to apply across the board increases to prices. It remains to be seen how this will impact on demand.
Leader Polymer Cash Margins
(Quarterly average, $/ton)
Nexant's "Quarterly Business Analysis reports" review regional trends in production economics for commodity petrochemicals and polymers in Western Europe, United States and Asia Pacific. The reports are published as part of ChemSystems/Petroleum and Petrochemical Economics Programme (PPE).
For further details please contact Andrew Powell at +44 207 950 1576 or email to apowell@nexant.com
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