Petrochemicals - Ethylene

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Transcript of Petrochemicals - Ethylene

SECTOR UPDATE

OIL AND GASEthylene Global Demand-Supply ScenarioIndia Equity Research | Oil, Gas and Services

Global demand for ethylene to grow at a healthy rate of 4.8% CAGR over 2010-15, compared to a growth rate of 1.5% over the last 5 years. In spite of healthy demand, there is likely to be an oversupply situation during 2010-11 due largely to huge capacity addition in the Middle East and China leading to decreased ethylene prices and margins. The situation is expected to improve after 2011 due to limited capacity addition. Global capacity utilization decreased to around 80% during 2010, but is expected to increase substantially till 2015 to reach a high of 95%.

Global ethylene oversupply scenario not as badThough there is concern that the new capacities coming up in the Middle East and China are going to flood the world market, depressing ethylene prices and margins, we believe that most of the scheduled projects, amounting to 10 mtpa (million tonnes per annum), have already come online by 2010. Only marginal new capacity of 9 mtpa is expected to come online till 2015. Large projects totaling 12 mtpa, which are delayed because of a number of reasons, such as, feedstock availability, impact of financial crisis, regulatory approval and environmental impact, are not expected to come online anytime soon.

Healthy demand growth led by polymer demand in China and IndiaDemand for ethylene is expected to grow at a healthy rate of 4.8% CAGR between 2011-15 driven by strong polyethylene (PE) demand from developing economies in Asia. PE demand per capita in India is very low at 2kg against a world average of 10.3 kg. We expect the PE demand per capita in developing countries like China and India to grow in line with their high GDP growth rate, consuming the added capacity.

Asian crackers have bi-product netback; Middle East (ME) crackers short of feedstockMost of the crackers that are coming up in China are Naphtha based. Though Naphtha costs more than Ethane, it gives 17x more bi-product netback than ethane based crackers. On the other hand, large projects planned in the Middle East are delayed or cancelled because of concerns of natural gas availability thus tightening ethylene supply situation. The two factors together are expected to contribute positively to cracker operators bottom lines.

Ethylene margins to grow in line with higher capacity utilizationWe expect that the utilization rates of the crackers will reach a trough in 2010-11, and then the demand scenario will tighten till 2015 primarily driven by healthy demand growth in line with rebound in global economy and less capacity addition. This will drive better margin for the cracker operators.

Alin Dev+1-617-504-3157 alin.dev@edelcap.com

August 29, 2011Edelweiss Research is also available on www.edelresearch.com, 1 Bloomberg EDEL , Thomson First Call, Reuters and Factset.

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Sector UpdateContents

Ethylene Supply.................................................................................................................................................................. 5 Middle East: ................................................................................................................................................................... 6 Asia: ............................................................................................................................................................................... 7 US and Europe: .............................................................................................................................................................. 7 Ethylene Demand ............................................................................................................................................................... 8 Ethylene Economics ........................................................................................................................................................... 9 Feedstock Slate: ........................................................................................................................................................... 10 Ethylene Margin & Utilization Rate .................................................................................................................................. 12 APPENDIX I .................................................................................................................................................................... 14 What is Ethylene? ........................................................................................................................................................ 14 Ethylene Value Chain ................................................................................................................................................... 14 Feedstocks ............................................................................................................................................................... 15 Intermediates .......................................................................................................................................................... 15 Derivatives ............................................................................................................................................................... 16 APPENDIX II ................................................................................................................................................................... 19 How is Ethylene Produced? ......................................................................................................................................... 19 APPENDIX III .................................................................................................................................................................. 21 Middle East Feedstock concerns: ................................................................................................................................. 21 Saudi Arabia: ........................................................................................................................................................... 22 Iran: ......................................................................................................................................................................... 23 Qatar: ...................................................................................................................................................................... 23 APPENDIX IV .................................................................................................................................................................. 24 Existing and expected cracker capacities all over the world ........................................................................................ 24 APPENDIX V ................................................................................................................................................................... 40 Sensitivity Analysis ....................................................................................................................................................... 40

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Sector Update

Ethylene SupplyGlobal ethylene capacity has dramatically increased between 2005 and 2010 from 115.2 million tonnes per annum to 144 mtpa, growing at a CAGR 4.6%. During the same period China has added 14.2 mtpa of ethylene cracker capacity, while Middle Eastern Chart 1: World ethylene capacity has grown at CAGR 3% from 2004-15 countries have nearly doubled their capacity to 23.6 mtpa. At the same time, during 2006-10 the cumulative capacity share of Western Europe and North America dropped from 53% to 42.5%. Total ethylene capacity is expected to continue increasing, though at a subdued rate, till 2015 when the capacity will reach 152.7 mtpa representing a CAGR of 1.2% from 2010-15 with Asia, mainly China, and Middle East, mainly Saudi Arabia adding major portion of the new capacity.Source: Oil & Gas Journal, Edelweiss research

We believe that most of the scheduled projects, amounting to 10 mtpa, have already come online by 2010. Only marginal new capacity of 9 mtpa is expected to come online till 2015. Large projects totaling 12 mtpa, which are delayed because of a number of reasons, such as, feedstock availability, impact of financial crisis, regulatory approval and environmental impact, are not expected to come online anytime soon.

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Oil and GasChart 2: Most of the incremental capacity has already been added by 2010

Source: Oil & Gas Journal, Edelweiss research

Middle East:Availability of cheap crude oil and high dependence of the kingdoms on oil revenue have driven the kingdoms and governments to diversify into manufacturing commodity chemicals and capture more value from the commodity nature of crude oil. Middle Eastern countries are also better positioned to transport petrochemicals at a lower cost to developed markets in Europe, as well as high growth markets in Asia. This being a labor intensive industry, the governments are also able to generate meaningful employment for its people by developing the petrochemical industry. To bring about rapid growth in the petrochemicals industry, Middle Eastern countries provide different incentives to investors. Some of the incentives typically provided in Saudi Arabia include: Subsidized natural gas at $ 0.75 per Mmbtu. A complex discount system for domestic users with NGLs garnering a 30 percent discount on the exp