Quarterly Business Analysis Quarter 2 2009
CRUDE OIL PRICE RALLY IMPEDES RECOVERY OF PETROCHEMICALS
While strong Asian consumption of petrochemicals suggested the worst of the global downturn may be easing, a renewed rally in crude oil prices applied intense feedstock cost pressure, maintaining thin margins across the petrochemical industry.
The economic performance of the petrochemical industry has deteriorated sharply over the last year, following curtailed demand from the frail global economy. There are many different perceptions amongst players within the petrochemical industry as to how long and deep the current downturn in the industry may be. The second quarter of 2009 saw industry performance stabilise, with a modest increase in volumes as demand in some industry sectors and regions (most notably Asia) picked up. However little improvement to profitability was achieved, as crude oil prices rallied and lengthy markets prevented producers from fully passing costs through to consumers.
Demand for petrochemicals varied quite considerably across geographic markets in the second quarter. Western economies remained very weak, following an annual rate of contraction in the European Union and United States economies of almost five and six percent respectively in the first quarter of 2009. Estimates of second quarter GDP in these economies were less alarming, but even the most optimistic reports failed to identify any significant growth. Meanwhile unemployment rates continued to rise sharply and major corporations including General Motors and Chrysler filed for bankruptcy protection. Fundamental weakness in the underlying economies severely restricted domestic consumption of petrochemicals in Western economies. Meanwhile Asian demand firmed in the second quarter, bolstered by strong consumption in China, as a range of government initiatives to stimulate their domestic economy bore fruit.
Asian petrochemical markets were squeezed increasingly tight though the second quarter as a busy period of maintenance at numerous crackers across Asia restricted domestic olefin supplies against the firming demand side. The biggest single supply cut occurred as Shanghai Secco halted production at China’s largest cracker for about ten weeks to allow expansion to 1.2 million tons per year. Operating rates at many crackers unaffected by maintenance were also turned down as rapidly strengthening feedstock prices squeezed cracker and integrated derivative margins close to breakeven. Meanwhile, despite extensive cuts in operating rates, Western petrochemical markets were at best balanced.
The deficit in domestic production greatly increased demand for imports of petrochemicals into Asia. However, regular import supplies of olefins and derivatives from the Middle East were disrupted at the same time by restricted availability of gas supplies. Petro Rabigh and Yanpet cut operating rates at their petrochemical complexes in Saudi Arabia to about 70 percent, and Jam petrochemicals cracker in Iran operated at just half its capacity on shortage of gas feedstock. Producers in Western Europe and the United States dramatically increased exports to Asia, thankful of any opportunity to offset to their weak domestic demand.
Crude Oil and Petrochemical Feedstock Prices
(Monthly Average)
While positive news reports on the global economic situation were good news from the perspective of petrochemical consumption, optimism for an imminent recovery in crude oil demand triggered a renewed rally in crude oil and petrochemical feedstock prices. Brent crude oil prices surged almost 40 percent through the quarter, climbing above $70 per barrel in June. A heavy feedstock cost burden was swiftly restored to petrochemical producers, after a brief period of relief in the first quarter, during which crude oil had traded at a four and a half year low of $44.5 per barrel.
Feedstock selection was a critical source of competitive advantage as naphtha prices strengthened considerably relative to lighter LNG feedstocks. Average South East Asian naphtha prices increased almost fifteen percent above the first quarter, pulled up by firming gasoline prices. Meanwhile LPG prices eased considerably relative to naphtha, with European markets witnessing the reversal of an eighteen percent premium in the first quarter of the year to an eighteen percent discount through April and May. Ethane prices in the United States came under less pressure, as the natural gas from which it is extracted continued to trade at a very low value relative to crude oil on long supplies. Average ethane prices in the United States fell to a sixty percent discount to Asian naphtha prices.
While petrochemical feedstock prices generally increased, lengthy olefin markets restricted olefin price initiatives in Western Europe and the United States. Average ethylene contract prices in April and May actually fell almost $30 per ton below the first quarter average in the U.S. Ethane cracking offered the lowest cost route to ethylene in most regions of the world. Leader ethane cracker margins in the United States fell to a two year low of $200 per ton, but remained close to the long term historic average. The cost advantage of ethane cracking over naphtha cracking remained at a hefty $200 per ton, while the advantage of propane over naphtha widened close to that of ethane. Those producers with feedstock flexibility continued to minimise their throughput of naphtha, as naphtha cracker margins tumbled close to Laggard cash cost breakeven. The swing to lighter feedstocks contributed to tightening propylene markets.
United States Ethylene Production Costs
(Leader cash cost Q2 2009)
While long markets had depressed the profitability of petrochemical value chains in all regions in the first quarter, firming feedstock costs compounded the situation in the second quarter. Margins in all regions outside the feedstock advantaged Middle East remained thin in the second quarter, with European producers experiencing their hardest time since the early 1980’s downturn. Producers in the United States faired slightly better, due to ample availability of competitively priced ethane. Meanwhile Middle Eastern producers mostly benefited from the renewed strength of crude oil prices, with average profitability increasing almost thirty percent on stronger netbacks to Asia and Europe.
Regional Petrochemical Industry Cash Margin Indices
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©2009 Nexant, Inc.
