Oversupply in the US ethylene market is expected to persist in 2017, with upcoming capacity expansions contributing to a bearish pricing outlook and calls for more exports.
Length was palpable on the pricing side throughout 2016, with spot and contract pricing posting their lowest yearly averages in more than a decade, according to S&P Global Platts data.
"We do not think the US can consume all the ethylene coming online," Kim Davies, head of corporate development with shipping major Navigator Gas, said at the recently held S&P Global Platts Petrochemicals Seminar in Houston. "Supply is outstripping demand."
Four steam crackers totaling more than 5 million mt/year of ethylene capacity are scheduled to commence operations in 2017 along the Texas Gulf Coast, which houses the bulk of North America's petrochemical industry.
These are the first in a wave of US projects -- resulting from aggressive shale-driven investments -- that stand to total 10 million-12 million mt/year of additional capacity by 2020.
And that's just the new builds.
Over the past four years, more than 2 million mt/year of capacity has been added through brownfield expansions, with another 620,000 mt/year scheduled for 2017. North America's ethylene production during the next decade is expected to climb from approximately 32.2 million mt in 2016 to nearly 44.6 million mt in 2026.
Analysis continues below...
Enterprise Products Partners, a Houston-based midstream major, estimates the nearly 40% expansion in ethylene production will result in an oversupplied US market and that producers will need to reach global markets or dial back operating capacities.
"We believe ethylene exports are important to satisfy global demand and growing US supply," Brian Sinn, Enterprise's petrochemicals marketing and supply manager, said at the S&P Global Platts Petrochemicals Seminar.
To that end, Enterprise, which in September inaugurated the world's largest ethane export terminal along the Houston Ship Channel, is considering adding a similar setup for ethylene at its Morgan's Point site as the "next logical step."
Exports played an important role in 2016, as the market attempted to balance supply with the help of attractive arbitrage opportunities to Asia and Europe.
But the strategy faced logistical constraints, given the US currently has only one export terminal, which is operated by Targa Resources along the Houston Ship Channel and contracted to Mitsubishi Chemical.
US ethylene exports stood at just over 125,000 mt through September, according to data from the US International Trade Commission. Most of the exportable volume headed to Asia, where ethylene pricing on a CFR Northeast Asia basis averaged $1,095/mt through December 23, more than $500/mt above the US average, according to Platts data.
2016 STARTS ON LOW NOTE
Growing length and a stubbornly weak energy complex pressured US pricing from the start in 2016.
Spot posted its lowest assessment to open a year (19 cents/lb, or $418.87/mt) since Platts began tracking daily pricing in 2004 and soon fell to a seven-year low of 15.75 cents/lb (January 20) just as oil prices slid toward 13-year lows.
Pricing rallied in February and March ahead of turnaround season and marched mostly stable around the 25 cents/lb mark from April to mid-July.
It surged nearly 40% from August through mid-September -- hitting a 21-month high of 41 cents/lb on September 15 -- on outages and weather-related issues in Texas and Louisiana that affected olefins pricing in general.
Pricing slid in the fourth quarter as production restarted and players destocked. Spot prompt-month pricing closed December 23 at 25 cents/lb and was poised to close the year averaging just under 27 cents/lb, down some 3 cents/lb from 2015 and the lowest average since Platts began assessing daily markets in 2004.
Contract pricing through November's settlement of 30.25 cents/lb averaged 30.63 cents/lb, down 1.17 cents/lb from 2015 and the lowest yearly average since 2003, according to Platts data.
Weaker ethylene pricing came despite higher feedstock costs. Purity ethane, the feedstock of choice in North America, averaged 19.6 cents/gal ($2.95/MMBtu) through December 23, up nearly 7% from 2015.
The dynamics impacted North American cracker margins. Cracker margins using ethane as feedstock averaged 21.88 cents/lb ($482.37) through the period, down nearly 18% from 2015, and the lowest since Platts began tracking them in 2011.
PROJECTS NEAR COMPLETION
Fresh off having LyondellBasell restart its steam cracker in Corpus Christi, Texas, in December with an additional 363,000 mt/year of capacity, the US market expects to see a 544,000 mt/year joint venture between Occidental Chemical and Mexican PVC maker Mexichem online during Q1.
Ethylene sourced at the Ingleside, Texas, site will be used in the production of ethylene dichloride, a feedstock in the making of vinyl chloride monomer, the major precursor for PVC production.
Dow Chemical, Chevron Phillips Chemical and ExxonMobil Chemical all have 1.5 million mt/year units due online in Texas, with Dow planning to start its unit in Freeport by midyear and the other two, to be located in Baytown, expected during H2 2017.
All three companies have polyethylene projects tied to their greenfield projects totaling 3.35 million mt/year of resin capacity, some of which could be completed ahead of the crackers. Dow also has a 250,000 mt/year ethylene expansion at its Louisiana Operations complex in Plaquemine set for completion by end-2017, the company said.
Also in Louisiana, Indorama Ventures Olefins, a subsidiary of Thailand-based Indorama Ventures, is targeting Q4 2017 for the startup of its 370,000 mt/year ethylene-capacity cracker, which was previously owned by Equistar Chemicals and idled in 2001. Indorama's US portfolio already includes ethylene oxide, monoethylene glycol, purified terephthalic acid and polyethylene terephthalate.
The additional capacities in the US Gulf Coast region, coupled with limitations on the export side, point to another year of oversupply for the US ethylene market, sources said.
Next article: US propylene market eyes more length in 2017