Strong global petrochemical margins in early 2011 defy rapidly rising crude prices - study
The petrochemical industry enjoyed a strong start to 2011, defying the sharp rise in crude oil prices, according to a study from global consulting firm Nexant.
Profitability of the industry improved greatly in the first quarter of the year, with average margins in most regions rebounding to their highest since the global economic crash in the second half of 2008, the report said.
This was achieved despite intense pressure from rising feedstock costs, as crude oil prices accelerated upwards and approached $120/bbl in March. Base petrochemicals faired particularly well, with olefins and aromatics achieving some of the strongest gains in margins, Nexant reported.
The cost of procuring feedstock once again became a critical concern of most petrochemical producers at the end of 2010, as crude oil prices resumed their upward trajectory.
Margins were under intense pressure as Brent FOB crude oil prices strengthened to close the year near $100/bbl. Crude oil prices climbed sharply through the first quarter of 2011 as the political crisis in Libya deteriorated, approaching $120/bbl in March. Naphtha prices followed crude oil markets, with average prices rising almost 10 percent over the last quarter. Asian naphtha prices climbed above $1000/ton in March for the first time in 30 months.
Despite ongoing intense pressure on feedstock and energy costs in the first quarter, the petrochemical industry actually achieved much stronger profitability at the start of the year, the study found. With markets mostly tightening, producers achieved large price increases to cover the higher feedstock costs, allowing them to restore margins that had been severely eroded at the end of 2010.
Average margins of the west European industry climbed 60 percent, ahead of the average of the past decade. Producers in the U.S. remained highly competitive, as average ethane prices remained largely detached form firming oil prices. Average margins across the U.S. industry improved 10 percent. Meanwhile, average profitability of petrochemicals production in the Middle East approached a record high, climbing 23 percent on strong netbacks and steady feedstock costs.
European petrochemical markets were viewed as relatively tight at the start of the year, the report said. However, demand remained moderate as the growth rate of the European economy slowed in the closing quarter of 2010, increasing just 0.2 percent. The mounting cost burden to downstream consumers compounded fears of demand destruction, yet volumes held steady.
Tightness was principally due to a short supply side. Frequent technical failures at crackers restricted supplies of olefins through January and February and the onset of the spring maintenance schedule compounded shortness in the supply side. Average operating rates across the industry remained well below the long term average, languishing at 82 percent.
Demand for petrochemicals in the U.S. improved steadily through the first quarter. Domestic consumption improved modestly, with further positive economic data reported. However, most of the demand growth was attributed to rising exports as US producers were increasingly competitive in global markets.
Meanwhile, the supply side shortened through the quarter, squeezing markets. Inventories were relatively low to start the year, following a five percent reduction in ethylene production in the 2010 fourth quarter. A spell of harsh winter weather and several extended technical failures at crackers further restricted production of olefins and derivatives in the first quarter.
Demand in Asia was interrupted by the lengthy Lunar New Year holiday, observed in many countries. The devastation caused by the earthquake and tsunami in Japan in March added uncertainty to the market towards the end of the quarter. The announcement of a further rise in Chinese interest rates compounded pressure on already sluggish demand in China. Some traders were seen to be exporting material previously imported into China.
Production outages from scheduled turnarounds and technical issues continued to restrict supply, maintaining a balance with the slow demand side of the market. With almost 23 percent of Japan’s ethylene capacity and 37 percent of propylene capacity halted after the earthquake, Asian markets tightened towards the end of the quarter.
Those producers in the Middle East with access to low-cost ethane were largely protected from the cost pressure as crude oil prices escalated further, the report said. Netbacks from primary export markets increased on renewed strength of crude oil. Tight polyester markets across the globe supported a sharp rise in MEG profitability, lifting export margins to their highest ever, except for a brief period at the end of 2007 when production in Saudi Arabia was severely disrupted.
Meanwhile, polypropylene achieved its highest-ever export margins for producers back integrated to propane dehydrogenation units. Average profitability of the industry as a whole approached the peak achieved in 2008, even though average crude oil prices remained almost 20 percent below the peak set in the middle of 2008.
The strong industry-wide performance masks some very different trends across sectors of the industry, the study said. While the olefins and base petrochemicals sector captured very strong profitability, the intermediates and polymers sectors struggled to add much further value. Margins were increasingly taken upstream, with any producers not integrated to a cracker suffering frail profitability.
The key exception was the polyester value chain, where tight global markets supported margins from polyester back up to paraxylene and MEG.
Steam crackers producing ethylene achieved strong profitability in the first quarter, despite being directly exposed to the surging price of feedstock petroleum products. European ethylene contract prices increased sharply, supported by escalating crude oil prices and tight supplies, with March settlements up almost €200/ ton from December.
Meanwhile, a sharp increase in the value of propylene and aromatics co-products more than offset the rise in raw material costs, and net feedstock costs for European naphtha crackers actually fell sharply. With production costs falling against rising prices, average margins strengthened more than $150/ ton, reversing losses made at the end of 2010.
European propylene markets remained tight at the start of 2011, with firm demand as downstream consumers restocked after extensive supply restrictions as a consequence of strike action at refineries towards the end of 2010. A busy schedule of maintenance at refineries and propane dehydrogenation units kept supplies short.
Contract prices leapt to record highs, with the February settlement at €1185/ ton standing 25 percent above December’s contract price, narrowing the discount on ethylene to just €10/ton to ethylene.
The report was part of Nexant’s quarterly business analysis program.
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