Quarterly Business Analysis Quarter 3 2008
Petrochemical Margins Recover
The third quarter saw feedstock prices peak at unprecedented levels, then retreat with crude oil falling below $100 per barrel in August as demand weakened in Western Economies. Although downstream petrochemical operations have certainly benefited from the easing in feedstock prices, the impact on the demand side has been severe with slow orders and inventory draw-downs affecting many derivative chains. The decline in feedstock pricing has recovered petrochemical profitability to a typical mid-cycle level from the low level seen for quarter two.
Regional Petrochemical Industry Cash Margin Indices
DEMAND
Demand for petrochemicals has continued to slow, with West Europe looking likely to have moved into a technical recession after contracting in the second quarter. The United States has continued to be impacted by the fall out in the credit markets, with demand (and production) further impacted by hurricane outages at refineries and petrochemical production units during the quarter. Demand also proved weak in Asia during the third quarter, partly due to shutdowns at manufacturing units in the Beijing area and the continued availability of material from the high inventories built up to see out these shutdowns.
CRUDE OIL
Crude oil prices accelerated to record highs in the third quarter. Brent crude oil prices in July reached near $150 per barrel, before falling back below $100 in August. Average quarterly prices for the third quarter however remain in line with that seen in the second quarter. Prices have continued to show extreme volatility, with financial markets causing prices to gyrate during September, apparently independent of any real problems in the physical market. The growing burden of energy costs on economies within the OECD has become more apparent, with oil demand reported down four percent in the United States for the first half of 2008.
Crude Oil and Petrochemical Feedstock Prices
(United States Quarterly average)
FEEDSTOCKS
Crude oil markets and strong gasoline prices have continued to maintain naphtha prices at new record highs in the third quarter. Japan set the ceiling for naphtha prices, hitting $1250 per ton in early July. LPG prices have continued to ease relative to naphtha on slow seasonal heating demand. While natural gas prices have fallen in the United States, the benefit has not been seen through to ethane which saw prices rebound after failing to track increased gas prices in quarter two.
CRACKERS
Feedstock selection has been less critical in the third quarter, with increased ethane pricing and decreased gasoil valuations flattening the cost curve from the dramatic profile experienced in the United States in the second quarter. LPG was the favoured feedstock in all markets, with considerable effort being put into maximising use of this feed, and thereby impacting on propylene and butadiene supply. Cracker profitability meanwhile has improved markedly from the weak position seen in the second quarter as contract prices for olefins in all regions adjusted upwards in response to feedstock cost pressures.
United States Ethylene Production Costs
(Leader cash cost Q3 2008)
DERIVATIVES
The weak market has impacted on intermediates and polymers in the third quarter as the industry recovered some pricing power for basic chemicals. The picture was somewhat healthier in Asian markets with polymer prices managing to rise ahead of ethylene as the latter came under pressure from imported cargoes from the Middle East.
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 Program (PPE).
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©2008 Nexant, Inc.
