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Will Europe's bumper steam cracker margins be sustained?



Global Ethylene Outlook

By Nandita Lal and James McKenna


Last year was a bumper year for European operators of steam crackers and that dynamic is expected to continue into the first half of 2017, as a heavy cracker turnaround season is expected to prop up cracker margins.


However, a reversal of fortune is set to occur in Q3 as long-awaited material from the US is expected to come to market and a slowdown in Chinese growth threatens once again to depress margins for European integrated petrochemical producers.


Last year was a remarkable year for petrochemical producers in Europe, continuing the trend started in 2015, after crude oil prices started plummeting in late 2014.


Spot cracker margins in Europe hit a record high of $911/mt in June 2015.


They narrowed in 2016, to a year high of $758/mt (in August), though remained vastly ahead of the five-year average of $255/mt.


Crackers produce ethylene, the main building block of chemicals. Ethylene is used to make polyethylene, the most widely produced plastic resin in the world. As Europe is 67.5% dependent on naphtha as cracker input, the slide in crude prices leveled the ethylene playing field relative to advantaged US and Middle Eastern producers.


The solid margins, described as the "golden age for naphtha crackers," withstood the sharp increase in polyethylene imports into the region. High density, low density and linear low density PE imports were at 1.25 million mt, 556,548 mt and 898,392 mt respectively in the first 10 months of the year, all up about 25% versus the same period of 2015.


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However, globally, PE production is forecast to grow from 84.7 million mt in 2015 to 121 million mt by 2026, according to Platts Analytics, with the majority of this expansion announced in North America, the Middle East and Asia. This means that Europe's import dependency is set to keep increasing, with no further builds in Europe, implying that the bumper margins will face weakening. And this price dynamic could start to emerge next year.


H1 2017 will be characterized by a heavy maintenance season in Europe, expected to support margins in the continent. Eight cracker units are expected to undergo maintenance in 2017 and a further two have been heard to be scheduled. Europe has 44 crackers complexes with a combined ethylene capacity of 23 million mt/year.


Expected European cracker maintenances 2017


Company Location Capacity ('000 mt/year) Timing
ExxonMobil Gravenchon, France 425 H1
Total NC3, Antwerp, Belgium 575 H1
Sabic Geleen 3, The Netherlands 590 H1
Dow Terneuzen 2, The Netherlands 575 H1
OMG Schwechat, Austria 500 H1
Ineos Cologne, Germany 530 H2
Borealis Porvoo, Finland 400 H2
Versalis Porto Marghera, Italy 490 H2


US SUPPLIES TO LENGTHEN

Globally, ethylene cracker capacity from all forms of production is estimated to increase by 5.14% in 2017 to some 181.4 million mt according to Platts Analytics with the majority of these expansions announced in North America.


Four crackers are expected to start in Texas, USA this year.


Occidental/Mexichem's cracker in Ingleside with a capacity of 550,000 mt/year is expected to start up in H1, while ExxonMobil's cracker in Baytown with a capacity of 1.5 million mt/year is expected to start up in H2, as are Chevron Phillips Chemical's cracker in Baytown with a capacity of 1.5 million mt/year and Dow Chemical's cracker in Freeport, also with a capacity of 1.5 million mt/year. All the crackers have corresponding PE capacities.


Some delays are expected. "To date no one has started their new cracker on time. Cost overruns are endemic in the industry," Robert Bauman of US-based Polymer Consulting International told Platts at the K Fair in Dusseldorf in October.


The ethylene and PE capacities impact on Europe will be limited by export infrastructure. Ethylene exports are especially limited, as US so far only has one ethylene export terminal. Most of the exports are in the form of PE.


Platts Analytics managing analyst Hetain Mistry said in December that it was unlikely that major increases in US product would hit European shores initially, due to export infrastructure restrictions and lead times. "Also, it will take a while for new capacities to ramp up production which may limit product availability in the short term for long-haul transportation," Mistry added.


European producers share this view. "The US still has to establish a supply chain, but probably in 2017, we won't see a major invasion of material. [The] second quarter of 2017 is a high turnaround season [in Europe] which may see an import spike due to constrained material availability. In the first half of 2017, I don't see a structural change in the flow of material," one European producer said in December.



ASIA'S AMBITIONS FOR SELF-RELIANCE

While the US ramps up production, Asia looks to become more self-sufficient in terms of ethylene and PE.


Asian ethylene capacity is estimated to reach 52.67 million mt/year in 2017, 2.15% up on 2016, according to Platts Analytics.


The variable to watch for will be Chinese growth. If China's growth is robust, the excess global capacity will be easily absorbed, if not, Europe's PE production rates might be hit by increased imports. Middle Eastern material traditionally sent to China could now find its way to Europe, putting further pressure on European based producers.


Chinese per capita polymer consumption is relatively low when compared to developed western markets, hence the Chinese market growth potential is extensive.


"China isn't near where the rest of the world is in terms of kilos per capita of PE consumption. The US is around 30 kg per capita -- China is still in the single digits but growing. Instead of importing 90% of [their] PE they may only import 50%," Joe Pilaro, president of BRAE Partners Inc, said in December.



CURRENCY VOLATILITY AND TRADE FLOWS

The other variable to variable that could impact global fundamentals will be currency fluctuations. With the US dollar and euro nearing parity, US export opportunities to Europe may begin to look less attractive to US-based producers who historically have struggled to compete with Middle Eastern producers for market share.


The euro has declined some 3.11% against the dollar since January 2016 according to Platts data. However, so far this has not dampened US exports of PE to Europe. The EU imported 2.92 million mt of PE in the first 10 months of the 2016 from the US, compared with 2.798 mil mt for the same period in 2015.


"[It is] difficult for US polyethylene [producers] to compete with Saudi Arabian [producers] as they have the cheapest costs by far. North America plans to export to Latin America and Southeast Asia. [They've] been valuable markets for them. Europe is a tough market for the US to compete in," Pilaro added.


While it is not entirely clear how the European market will be affected by global capacity expansions many European market participants remain upbeat.


"I still believe European producers will drive the market and imports will be limited because of the lead times," one trader said. This sentiment may well be correct, as exporting nations face both logistical and infrastructure challenges.


Next article: US propylene market eyes more length in 2017







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