US ethylene spot prices are tumbling as the major new shale gas expansions come on line, as the chart based on ICIS pricing data confirms:
- They began the year at $617/t, but have since more than halved to $270/t on Friday
- They are only around 10% higher than their all-time low of $240/t in September 1998
- WTI crude oil was then $15/bbl and ethane was $0.15c/gal
- On Friday, WTI closed at $70.5/bbl and ethane was $0.25c/gal
The collapse in margin has been sudden, but is hardly unexpected. It is, of course, true that downstream polyethylene plants associated with the crackers were delayed by the hurricanes. So ethylene prices may recover a little once they come online. But unfortunately, that is likely to simply transfer the problem downstream to the polymer markets.
The issue is shown in the second chart, based on Trade Data Monitor data:
- It shows annual US net exports of polyethylene since 2006
- They peaked in 2009 at 2.6 million tonnes as China’s stimulus programme began
- China’s import demand doubled that year to 1 million tonnes, but then fell back again
- Net exports have actually fallen since 2016 to 1.9 million tonnes last year
The problem, of course, was that companies and investors were fooled by the central bank stimulus programmes. They told everyone that demographics didn’t matter, and that they could always create demand via a mix of money-printing and tax cuts. But this was all wishful thinking, as we described here in the major 2016 Study, ‘Demand – the New Direction for Profit‘, and in articles dating back to March 2014.
Unfortunately, the problems have multiplied since then. President Trump’s seeming desire to launch a trade war with China has led to the threat of retaliation via a 25% tariff on US PE imports. And growing global concern over the damage caused by waste plastics means that recycled plastic is likely to become the growth feedstock for the future.
In addition, of course, today’s high oil price is almost certainly now causing demand destruction down the value chains – just as it has always done before at current price levels. People only have so much money to spend. If gasoline and heating costs rise, they have less to spend on the more discretionary items that drive polymer demand.
COMPANIES HAVE TO REPOSITION FAST TO BECOME WINNERS IN THIS NEW LANDSCAPE As I suggested with the above slide at last month’s ICIS World Polymers Conference, today’s growing over-capacity and political uncertainty will create Winners and Losers:
- Ethylene consumers are already gaining from today’s lower prices
- Middle East producers will gain at the US’s expense due to their close links with China
- Chinese producers will also do well due to the Belt & Road Initiative (BRI)
As John Richardson has discussed, China is in the middle of major new investment which will likely make it a net exporter of many polymers within a few years. And it has a ready market for these exports via the BRI, which has the potential to become the largest free trade area in the world. As a senior Chinese official confirmed to me recently:
“China’s aim in the C2/C3 value chains is to run a balanced to long position. And where China has a long position, the aim will be to export from the West along the Belt & Road links to converters / intermediate processors.”
The Losers will likely be the non-integrated producers who cannot roll-through margins from the well-head or refinery. They need to quickly find a new basis for competition.
Luckily for them, one does exist – namely the opportunity to develop a more service-led business model and work with the brand owners by switching to use recycled plastics as a feedstock. As I noted in March:
“Producers and consumers who want to embrace a more service-based business model therefore have a great opportunity to take a lead in creating the necessary infrastructure, in conjunction with regulators and the brand owners who actually sell the product to the end-consumer.”
Time, however, is not on their side. As US ethylene prices confirm, the market is already reacting to the reality of over-capacity. H2 will likely be difficult under almost any circumstances.
The industry made excellent profits in recent years. It is now time for forward thinking producers – integrated and non-integrated – to reinvest these, and quickly reinvent the business to build new revenue and profit streams for the future.
The post US ethylene prices near all-time lows as over-capacity arrives appeared first on Chemicals & The Economy.
“By Monday, the third straight day of flooding, the aftermath of Hurricane Harvey had left much of the region underwater, and the city of Houston looked like a sea dotted by small islands. ’This event is unprecedented,’ the National Weather Service tweeted. ‘All impacts are unknown and beyond anything experienced.’”
This summary from the New York Times gives some idea of the immensity of the storm that struck large parts of Texas/Louisiana last week, including the 4th largest city in the US. And this was before the second stage of the storm.
I worked in Houston for 2 years, living alongside the Buffalo Bayou which flooded so spectacularly last week. The photo above from the Houston Chronicle shows the area around our former home on Saturday, still surrounded by water. Today, as the rest of America celebrates the Labor Day holiday, the devastated areas in Texas and Louisiana will be starting to count the cost of rebuilding their lives and starting out anew:
Some parts of the Houston economy will recover remarkably quickly. It is a place where people aim to get things done, and don’t just sit around waiting for others to do the heavy lifting
But as Texas Governor Abbott has warned, Harvey is “one of the largest disasters America has ever faced. We need to recognize it will be a new normal, a new and different normal for this entire region.”
The key issue is that the Houston metro area alone is larger in size than the economies of Sweden or Poland. And as Harris County Flood Control District meteorologist Jeff Lindner tweeted:
“An estimated 70% of the 1,800-square-mile county (2700 sq km), which includes Houston, was covered with 1½ feet (46cm) of water”
Already the costs are mounting. Abbott’s current estimate is that Federal funding needs alone will be “far in excess of $125bn“, easily topping the costs of 2005′s Hurricane Katrina in New Orleans. And, of course, that does not include the cost, and pain, suffered by the majority of homeowners – who have no flood insurance – or the one-third of auto owners who don’t have comprehensive insurance. They will likely receive nothing towards the costs of cleaning up.
SOME PARTS OF THE ECONOMY HAVE THE POTENTIAL FOR A QUICK RECOVERY
Companies owning the large refineries and petrochemical plants in the affected region have all invested in the maximum amount of flood protection following Katrina, when some were offline for 18 months
Oil platforms in the Gulf of Mexico are used to hurricanes and are already coming back – Reuters reports that only around 6% of production is still offline, down from a peak of 25% at the height of the storm
It is hard currently to estimate the impact on shale oil/gas output in the Eagle Ford basin, but the Oil & Gas Journal reports that 300 – 500 kb/d of oil production is shut-in, and 3bcf/d of gas production
ExxonMobil is now restarting the country’s second-biggest refinery at Baytown, and Phillips 66 and Valero are also restarting some operations, whilst ICIS reports that a number of major petrochemical plants are now being inspected in the expectation that they can soon be restarted
Encouragingly also, it seems that insurance companies are planning to speed up inspections of flooded properties by using drone technology, which should help to process claims more quickly. Loss adjusters using drones can inspect 3 homes an hour, compared to the hour taken to inspect on roof manually. But even Farmers Insurance, one of the top Texas insurers, only has 7 drones available – and has already received over 14000 claims.
RECOVERY FOR MOST PEOPLE AND BUSINESSES WILL TAKE MUCH LONGER
For the 45 or more people who have died in the floods, there will be no recovery.
Among the living, 1 million people have been displaced and up to 500k cars destroyed. 481k people have so far requested housing assistance and 25% of Houston’s schools have suffered severe or extensive flood damage.
These alarming statistics highlight why clean-up after Harvey will take a long time. Basic services such as water and sewage are massively contaminated, with residents being told to boil water in many areas. The “hundreds of thousands of people across the 38 Texas counties affected by Harvey” using their own wells are particularly at risk.
And as the New York Times adds:
“Flooded sewers are stoking fears of cholera, typhoid and other infectious diseases. Runoff from the city’s sprawling petroleum and chemicals complex contains any number of hazardous compounds. Lead, arsenic and other toxic and carcinogenic elements may be leaching from some two dozen Superfund sites in the Houston area”
FEW IN HOUSTON HAVE FLOOD INSURANCE
Then there is the issue that, as the chart from the New York Times shows, most of those affected by Harvey don’t have home insurance policies that cover flood damage. Similarly, a survey in April by insurer Aon found that:
“Less than one-sixth of homes in Harris County, Texas, whose county seat is Houston, currently have active National Flood Insurance Program policies. The county has about 1.8 million housing units.”
As the Associated Press adds:
“Experts say another reason for lack of coverage in the Houston area was that the last big storm, Tropical Storm Allison, was 16 years ago. As a result, people had stopped worrying and decided to use money they would have spent for insurance premiums on other items.”
Even those with insurance will get hit by the low levels of coverage – just $250k for a house and $100k for contents. Businesses carrying insurance also face problems, according to the Wall Street Journal, as they depend on the same Federal insurance scheme, which:
“Was primarily designed for homeowners and has had few updates since the 1970s. Standard protections for small businesses, including costs of business interruption and significant disaster preparation, aren’t covered, and maximum payouts for damages haven’t risen since 1994.
The maximum coverage for business property is $500k, and the same cap applies to equipment and other contents, far below many businesses’ needs. And even those with insurance find it difficult to claim, according to a study by the University of Pennsylvania and the Federal Reserve Bank of New York after Hurricane Sandy in 2012:
“More than half of small businesses in New York, New Jersey and Connecticut that had flood insurance and suffered damages received no insurance payout. Another 31% recouped only some of their losses.”
Auto insurance is a similar story. Only those with comprehensive auto insurance are likely to be covered for their loss – and even then, people will still suffer deductions for depreciation. According to the Insurance Council of Texas:
“15% of motorists have no car insurance, and of those who do, (only) 75% have comprehensive insurance. That leaves a lot of car owners without any protection.”
In other words, around 1/3rd of car owners probably have no insurance cover against which to claim for flood damage.
HARVEY’S IMPACT WILL BE LONG-TERM
It is clearly too early, with flood waters still rising in some areas, to be definitive about the implications of Hurricane Harvey for Houston and the affected areas in Texas and Louisiana.
Of course there are supply shortages today, and the task of replacement will created new demand for housing and autos. But over the medium to longer term, 3 key impacts seem likely to occur:
It will take time for the supply of oil, gas, gasoline and other refinery products, petrochemicals and polymers to fully recover. There will inevitably also be some short-term shortages in some value chains. But within 1 – 3 months, most if not all of the major plants will probably be back online
It will take a lot longer for most people affected by Harvey to recover their losses. Some may never be able to do this, especially if they have no insurance to cover their flooded house or car. And those working in the gig economy have little fall-back when their employers have no need for their services
The US economy will also be impacted, as Slate magazine warned a week ago, even before the full magnitude of the catastrophe became apparent:
“For the U.S. economy to lose Houston for a couple of weeks is a human disaster—and an economic disaster, too….Given that supply chains rely on a huge number of shipments making their connections with precision, the disruption to the region’s shipping, trucking, and rail infrastructure will have far-reaching effects.”
Imagine your government decided to shutdown most of the industry in two major cities for 2 weeks or more? Say Detroit and Chicago in the US, or Milan and Turin in Italy, or Leeds and Manchester in the UK. Now you will have some idea of the scale of the shutdowns being mandated in China for Shanghai and Ningbo ahead of the G20 Summit in Hangzhou on September 4-5.
The reason is the need to improve air quality during the summit, as I noted last month.
Hangzhou itself is China’s 4th largest city, with a population of 21m. And as the map shows, it is bordered by Shanghai (with 24m people), and Ningbo (8m people). Together, they are one of the biggest industrial conurbations in the world.
Now, as ICIS news reports, more details are starting to emerge of the scale of the likely disruption:
“Hangzhou is home to major polyester producers, which are expected to implement the prescribed temporary measures to curb pollution until after the summit, market sources said.
“For Shanghai, the production cuts and shutdowns will take effect from 24 August to 6 September, according to a document published on the Shanghai Environment Protection Bureau website. Other industries such as steel, coking and cement sectors in Shanghai are also being required to restrict production for a prescribed period, based on the document.
“In Ningbo City, a number of industries were likewise given orders to help out in the efforts to reduce pollution in preparation for the G20 summit. Cement, non-ferrous metal, chemical fibre companies are due to shut down their plants during the summit, while refining and chemical companies must reduce operation more than 50%, according an official statement obtained by ICIS.”
More information will obviously follow in the next few weeks. But already details have begun to emerge on the scale of the planned shutdowns in Ningbo:
- In the polyester sector, Yisheng Petrochemical will shut 5 million tonnes of PTA capacity
- In polyurethanes, Wanhua Chemical will shut 1.2 million tonnes of MDI capacity
- There will also be 1.2 million tonnes of propylene capacity shutdown
- In addition, production of at least 16 major petrochemicals will be disrupted including PVC, ethylene, styrene. ethylene glycol, acrylic acid and polypropylene
- CNOOC’s Ningbo Daxie refinery complex will also be operating at reduced rates
These closures/cutbacks will obviously have a very disruptive impact on a whole range of supply chains. Some companies will lose their raw material supplies – others will lose their customers for finished product. So there will be no easy answers for managements – and even if their immediate suppliers or customers are still operating, there may well be closures or disruption in another part of the value chain.
Companies outside China, whether suppliers or customers, will clearly also be impacted, given the importance of this region in global markets. My suggestion would be that you need to check as soon as possible with your business partners to gain their insights into the likely outcome, now that details of the plans are becoming clear. Then you will have time to work out alternative options.
One other important conclusion is clear. No government would lightly create this level of disruption, particularly at a time when the domestic economy is already under pressure. The fact that President Xi Jinping is taking these major steps, is a sign of the severity of China’s pollution problems. The country simply cannot go back to the Old Normal way of doing things – the New Normal policies are here to stay.
I was kindly invited last week to give a keynote address at the annual ME-TECH conference in Dubai. Naturally, there was intense interest in my argument that oil prices were most unlikely to recover to the $100/bbl level.
Instead, I suggested they would likely return to their long-term historical average of $33/bbl (in $2014). And I argued that this would be good news for the global and Middle Eastern economies.
The chart above highlights a key issue in my analysis. Based on official OPEC data, it shows how:
- OPEC’s own refining output grew 245% between 1980-2013, from 3.3 mbd to 8.1 mbd (blue area)
- OPEC’s share of world refinery output grew as a result from 5.6% to 9.5% (red line)
This development highlights the change of direction underway in oil policy in key nations such as Saudi Arabia. They now have a much greater stake in promoting downstream demand, in order to create local jobs in the region.
One key issue is that exports from this new refining capacity effectively increase OPEC’s total oil exports. Commentators usually only focus on OPEC’s actual oil production. Yet its exports of refined products are equally important to global oil supply and demand balances.
Even more important is the opportunity that new refining capacity provides to create jobs in downstream industries such as plastics and other value chains. This is critical for social stability, as the Middle East is one of the few world regions with relatively young populations of median age 25 – 30 years.
Governments who wish to remain in power, know they have to provide jobs for these young people, or risk mounting social unrest. And so whilst it may be more profitable to ship high-priced oil to markets in the US, Asia and Europe, job creation is becoming a more important priority.
Thus Saudi Arabia is in the middle of a major refinery expansion, as the picture on the right shows of the new Jubail refineries. These add 0.8 mbd to Saudi capacity, with a further 0.4 mbd capacity planned at Jazan for 2017. As Oil Minister Ali al-Naimi told the Wall Street Journal yesterday:
“We are no longer limited to exporting crude oil. This will make the kingdom one of the five largest countries in the world in terms of refined crude capacity and the second largest exporter of refined products after the US”.
In turn, this highlights a key rationale for Saudi’s market-driven pricing policy. Not only does it have the lowest production costs in the world, and the largest oil reserves. But it needs to maximise its refinery and downstream volumes to create jobs.
High oil prices do the opposite – they destroy demand. Thus it should be no real surprise that, as I noted back in December’s pH Report, Naimi has made it very clear that in future, “the market sets the price”.
In my view, the various conspiracy theories that have been put forward to explain why Saudi encouraged oil prices to fall are wide of the mark. Logic suggests that Saudi has little interest in trying to bankrupt Russia, or to close down US shale production.
Instead, it simply needs to maximise demand for its products in order to create as many jobs as possible, as fast as possible.
There are 2 ways to improve operating rates in an industry. One is to increase volumes, the other is to reduce capacity. The latest APPE data covering H1 2014 for European olefin capacity highlights how the European petrochemical industry has successfully used both mechanisms over the past year to improve its position:
- Ethylene volume increased to 9.8MT, versus 9.3MT in 2013
- Ethylene capacity reduced by 490KT, following Versalis’ decision to close at Porto Marghera
- As a result, operating rates increased to 84% versus 78% last year
However, this success cannot hide the fact that an 84% operating rate is still too low to be sustained forever.
Equally, as the second chart shows, it seems that the industry’s efforts to increase the ratio of propylene production to ethylene output may have peaked at around 75%.
The increase from the 60% level seen 20 years ago has added valuable income to the bottom line, as propylene demand has grown. It has also enabled the industry to benefit from the global propylene shortages created in recent years by the increased use of ethane feedstock in the US (which reduced the region’s propylene output).
But the data confirms there has been no real improvement in the ratio since 2008.
EUROPE NEEDS TO LOOK FORWARD, NOT BACK
These two developments would be challenging enough in themselves. But as ICIS’ Nigel Davis noted in an Insight analysis this week, the external environment is set to become much more difficult:
“Ultra-low growth prospects in the EU give its producers no cause for comfort. The weakened chemicals demand growth prospects for China are the cause of further concern.”
Yet as Shell Chemicals CEO Graham van’t Hoff highlighted at the European Petrochemical Association’s meeting earlier this month in Vienna, the industry is enormously important to the European economy:
“European chemicals are a $558bn industry providing over 1 million direct and nearly 5 million indirect jobs,… based on a vast, differentiated product portfolio”.
Encouragingly, van’t Hoff clearly shares the blog’s view (as highlighted in its recent article ‘Time to look forwards, not back’), that Europe now needs to become much more pro-active if it wants to survive and prosper in the future. He argued that it particularly needed to focus on the potential for its clusters:
“First, we should continue to leverage our clusters, which we have quite a few here in the region, such as the Antwerp-Rotterdam and Rhine-Ruhr clusters down to Ludwigshafen and Marl. We all know that competitive clusters are more robust, as they are well-integrated in terms of logistics, ownership and derivative units; and they have low cost to serve”
And he then went on to highlight other key areas for focus:
- Integration. van’t Hoff argued there were opportunities to build on the existing integration between refineries and chemicals – perhaps even utilising surplus gasoline streams to produce added value aromatics output
- Feedstock flexibility. There was clear potential to use more natural gas liquids, particularly ethane and propane, in coastal sites
- Government partnerships. These need to be formed on a national and regional basis to promote ‘joined-up policies’ and competitiveness versus other regions
TIME FOR ACTION
The conclusion is clear. There is growing agreement that Europe needs to take radical action to secure its position for the future. There can be no ‘business as usual’ strategy, given the range and scale of the challenges that it faces.
The need now is to establish national and European initiatives within the appropriate legal boundaries. The blog has obtained expert legal advice to confirm that there are no regulatory “no-no’s” to stop the industry from developing the creative collective solutions that are required.
If we work together, we can create win-win solutions for the European economy, companies themselves and their major stakeholders. This will enable us to build a sustainable future for our industry, and a better result for all of us individually.
When the world changes, companies either change with it or go out of business. The market for stagecoaches was never the same once cars came along. And not many students use slide rules today, now calculators are available.
Usually, of course, these market changes are slow-moving. So companies often fail to respond in the hope the old world will somehow return.
That is what had been happening with European petrochemicals. It has been clear for some time that the ageing population means there can be no recovery back to SuperCycle levels of demand. But nothing happened in response until INEOS and Solvin announced their JV in PVC, and effectively fired the starting gun on restructuring across the industry.
The depth of the crisis is shown by the fact that the two companies are No 1 and 2 in the PVC business. Normally market-leading companies do not need to merge. Nor will the European Commission normally allow them to merge .
Yet as the blog argued in its advice to the Commission, the alternative would have been to risk the closure of major parts of the industry – with an inevitable loss of jobs all along the value chain as a result.
Now another, equally significant move has been made in the refining business, this time by ExxonMobil (EM). In its typically far-sighted way, it has decided to spend $1bn on reconfiguring its Antwerp refinery in Belgium. As EM’s European refining head, Steve Hart, told the New York Times:
“From its network of refineries in northwest Europe, Mr. Hart said, Exxon Mobil will collect heavy fuels for which there is no longer much demand – like the so-called bunker used by older ships – and carry it by boat to Antwerp. There, a new refinery unit will distill the gooey substances into diesel and a similar lighter-weight fuel used by more modern ships.”
The reason for the new investment is the major shift from gasoline to diesel that has taken place on cost grounds in Europe’s auto fleet since 1990. Then, only around 1 in 10 cars used diesel. But today, more than half of new cars sold are diesel – and more than twice as much diesel is used than gasoline across the entire market.
Of course, the easy answer would be to close down Antwerp. Most of the analysts would like that ‘solution’, as it would boost earnings short-term. But how then would Europe obtain the fuel it needs over the coming decades? Would it really want to become even more dependent on imports from Russia, the US and Middle East?
Equally, what would EM do in the future, if it chose to abandon a market where it is currently has a leading position?
The grass may always look greener on the other side. But readers with long memories will remember Exxon’s efforts to become a major player in the office equipment market in the 1970s, when oil markets were similarly difficult.
This proved once again that ‘diversification is usually diworsification” as Fidelity’s Peter Lynch used to remark, as:
“A business that diversifies too widely, risks destroying their original business, because management time, energy and resources are diverted from the original investment”
Europe’s economy is not going to move into recovery mode, no matter what policymakers may wish to believe. But nor is it going to stop being one of the world’s biggest markets. As the blog told the NYT in the same article:
“European refineries have to invest in a difficult environment if they want to be around for the long term,” said Paul Hodges, chairman of International eChem, a consulting firm in London. “It would be far more expensive to pretend that somehow the world will return to the market conditions of 25 years ago.”
The message, and the challenge, for European petchem producers is the same.
WEEKLY MARKET ROUND-UP
The blog’s weekly round-up of Benchmark price movements since January 2014 is below, with ICIS pricing comments:
US$: yen, down 3%
Brent crude oil, down 1%
PTA China, flat 0%. ”Limited availability in Asia because of production cutbacks and shutdowns because of weak margins”
Naphtha Europe, up 3%. “Market is long, and increased output of naphtha-rich light, sweet Libyan crude oil could lead to a further rise in supply”
Benzene, Europe, up 7%. “4 new benzene units with 2MT capacity expected to come online in Asia by the end of July could help ease global availability and pricing”
S&P 500 stock market index, up 7%
HDPE US export, up 7%. “International buyers are only willing to buy replacement cargos at the moment, and are not interested in building inventory at high prices”