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Falling naphtha prices return profitability to heavy-feed crackers globally


By Nandita Lal, Clement Choo, Pavel Pavlov, Zameer Yusof, Ramthan Hussain


May 3, 2013 - A 25% drop in global naphtha prices during the past two months has returned healthy margins to naphtha-fed crackers globally, and could signal a structural downward shift in economics for ethane-based crackers.


During the past two months the Platts Global Naphtha Index has fallen from $707/mt on February 18, to as low as $536/mt the week ended April 24.


The falling naphtha index has outpaced the Dated Brent price, which has fallen 17% during the same period, from $118/barrel on February 18 to $97 on April 17. (See related chart: Dated Brent & Naphtha Price Trends).


“Considering where the economy is and the lack of demand (for crude oil), this could be a sustainable trend,” a US-based petrochemical producer said April 23.


Analysis continues below...


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If the trend is sustainable, it could mean shrinking margins for US ethylene producers using ethane as a feedstock. Because of inexpensive ethane from US shale gas plays, ethane has become the feedstock of choice – and most profitable option – for producing ethylene.


And while ethane is the most widely-used feedstock in the United States, the marginsl demand in the market is met by the naphtha cracker.


This enables ethylene sellers to set their prices based on naphtha-based production.


If the recent drop in naphtha prices is sustained, the marginsl price of ethylene, then, will also fall.


Since mid-February, the delta between the profitability of an ethane-fed cracker and a naphtha-fed cracker has fallen from $1,400/mt to $690, a more than 50% drop in ethane’s feedstock advantage.


The margins for ethane, while still far more profitable than naphtha, are diminished by the falling naphtha price. (See related chart: US Ethane and Lt. Naphtha Cracker Margins).


Global ethylene prices are reflecting this trend. Since mid-February, European ethylene prices have fallen nearly 14%, while Asian ethylene prices are down 16%.


US ethylene prices are down 3% during the same period, which includes a recent jump in prices because of production outages.


Four ethylene producers have reported unplanned outages recently, starting with ChevronPhillips Chemical shutting the No. 22 ethylene unit at its Sweeny, Texas, facility in the beginning of the week ended April 24, followed by the April 23 shutdown of Williams Olefins' cracker, located in Geismar, Louisiana.


Lastly, Flint Hills Resources and Huntsman reported production issues April 21, after brief power outage in Jefferson County, Texas.


Before prices were pushed higher by the outages, US prices had fallen 11% since mid-February. (See related chart: Global Ethylene Price Comparisons).


The 11% drop in US prices between mid-February to the first week of April occurred despite a more than 20% increase in ethane prices in the US during the same period. Ethane prices have effectively found a floor relative to natural gas because of ethane rejection.


With ethane prices effectively equal to its British Thermal Unit value, ethane spot values are expected to mimic changes in the natural gas price.


The US natural gas prices has climbed 33% since mid-February. The climbing natural gas price has been attributed to a late-spring cold snap in the United States. (See related chart: US Natural Gas and Ethane Spot Prices).


Given the seasonal nature of natural gas prices, a correction in the market later in the spring or in early summer could return some of the margins to the ethane-based cracker.


As the natural gas price falls, the ethane fuel value – which effectively sets the price floor for ethane – also would trend lower. (See related chart: US Ethane Rejection Calculation).


Next page: Drop in feedstock naphtha prices set to continue: sources





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