SPECIAL REPORT: PETROCHEMICALS - for its on-purpose propylene plants. ... It is unclear so far what...

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  • www.platts.com/petrochemicals

    SPECIAL REPORT: PETROCHEMICALS

    Production restarts threaten to spoil bumper year for Europes crackers

    August 2014

    by Daved Chohan

  • plAtts speCiAl RepoRt: petRoCHeMiCAls | 2

    Production restarts threatens to spoil bumper year for Europes crackers

    PROduCTIOn RESTARTS THREATEnS TO SPOIL buMPER yEAR fOR EuROPES CRACkERSAfter years of bad news and rationalization, olefin and polyolefin producers have enjoyed six months of improved margins and increased run rates so far this year. This was largely driven by cracking liquefied petroleum gas (LPG), which is trading at record discounts below naphtha Europes traditional feedstock.

    The onslaught of LPG cracking has given Europe a peek into the future of a world where gas becomes more dominant as a feedstock. Lower ethylene prices, higher propylene prices, unexpected exports to Asia and a converter-driven shift away from polypropylene-based products to polyethylene has been the impact.

    The short term boost in operating rates has been welcomed by Europes battered crackers, but it has not changed the overall picture, which is one where Europes chemical companies will have to specialize or import gas in order to survive in a world of cheap U.S. gas and Middle Eastern petrochemical expansions.

    The shale expansion has provided European cracker operators food for thought, with some refitting plants to maximize use of gas, while others invest tens of millions of dollars in building infrastructure to bring in ethane from the U.S.

    For coastal crackers, having the flexibility to crack gas or liquids is vital as they need to compete with cheap polyolefin imports from the Middle East.

    But for inland plants the economics are different and transporting ethane provides enormous challenges. Leaving those inland to hope that the benefits of having a captive market outweigh what will likely be more expensive liquid feedstock.

    A good startAs the first quarter of 2014 came to a close, European cracker operators toasted what was a remarkable three months. Operating rates hit a two-year high of 83% pushing quarterly production of the two main olefins to a two-and-a-half year high. According to data released by Petrochemicals Europe, European crackers produced 4.9 million mt of ethylene and 3.7 million mt of propylene, more than any quarter since Q3 2011.

    The reason for the improved production margins was due to a global transition to cracking cheaper, lighter feedstocks, which boosted production margins and operating rates.

    A rule of thumb for crackers is that once butane and propane falls 10% below naphtha, the production economics favor cracking gas over liquids, a price phenomenon that has been evident all of 2014.

    Indeed the economic condition was particularly favorable for butane, which collapsed to a record 23% discount to the price of naphtha. Propane also remained at a reasonable discount to naphtha, widening to a 16 month high of $187.75/mt on July 21.

    LPG on the riseSo what caused the LPG price fall and will it last? At 3C over historical averages, the European winter in 2013-2014 was exceptionally mild which reduced demand for LPG, as propane is used as a heating fuel. This came on the back of a record year of LPG exports to Europe from the U.S.

    0

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    800

    1000

    Q1 14Q4 13Q3 13Q2 13Q1 13Q4 12Q3 12Q2 12Q1 1260

    68

    76

    84

    92

    100

    Source: Petrochemicals Europe, Platts

    ($/mt) (%)

    Variable Margins/ Cracker Operating Rates

    Naphtha Propane Butane Operating rates

    70

    75

    80

    85

    90

    Q1 14Q4 13Q3 13Q2 13Q1 13Q4 12Q3 12Q2 12Q1 12

    Source: Platts

    ($/mt)

    Cracker operating rates

    Ethylene Propylene Butadiene

    800

    1000

    1200

    1400

    1600

    1800

    May-14May-13May-12May-11

    Source: Platts

    ($/mt)

    Global ethylene prices

    CIF NWE FD USG CFR NE Asia

  • plAtts speCiAl RepoRt: petRoCHeMiCAls | 3

    Production restarts threatens to spoil bumper year for Europes crackers

    According to the EIA, LPG exports from the US surged to 281,000 b/d in 2013, an annual rise of 44%. Of that, 44,000 b/d came to Europe in 2013, up 63% on a year earlier and hammering down the relative price to naphtha. But while the winter may be a temporary phenomenon, increased supply of LPG may not be.

    According to the EIA, US exports of LPG reached an all-time high in April, as the U.S. transported across the Atlantic 15.2 million barrels of LPG, 50% up on 2013s monthly average.

    Over at least the short term, it is hard to see where LPG will find a home and some analysts even talk of the U.S. exporting propane to China for its on-purpose propylene plants.

    Over the longer term some cracker operators see the same picture, with Repsol last year retrofitting its Tarragona plant to maximize flexibility and take in more gas, a huge outlay that would unlikely be made without confidence that LPG would remain at a discount to naphtha for some time.

    And the transition towards lighter feedstocks will not end at LPG. Major European crackers are looking west to buy U.S. ethane, which will make the European feedstock slate even lighter.

    Ineos will import the first molecules into Europe next year for its Rafnes and Grangemouth facilities and Sabic has applied to convert storage terminals at its Wilton plant in the UK from liquids to gas.

    Adding to that, in February this year, Borealis renewed its long term agreement to source ethane from Norwegian state-controlled Statoils gas plant at Karsto, Norway for its steam cracker in Stenungsund Sweden for seven years starting October 2015.

    DivergedThe impact of a shift to light feeds has been stark. Ethylene collapsed to an 11-month low of Eur855/mt on April 25, and propylene in May touched a high of Eur1,173/mt FD NWE - levels not seen for more than 2 years.

    That price divergence has pushed European ethylene into Asia and sucked in propylene from the Middle East. Ethylene exports to Asia in

    the first 4 months of the year hit 85,148 mt, treble the levels seen in the same corresponding period a year earlier, according to Eurostat.

    But the rise in exports to Asia was not solely due to a switch in feed, meaning rising exports east are unlikely to be a permanent feature. The cracking of gas coincided with a heavy turnaround season in Asia and congestion in the port of Ruwais, which saw Asia prices spike at the same time that Europes slumped.

    The divergence in ethylene and propylene prices diminished towards the end of the first half of the year as a number of production issues downstream led to propylene prices falling and these are key issues to watch out for.

    Another outcome is the growing trend towards substitution. There is a growing body of anecdotal evidence that many converters are now seeking to replace polypropylene products with cheaper polyethylene alternatives. Several of Europes largest converters have told Platts they are looking into reducing purchases of polypropylene due to the growing belief of lower ethylene prices over the long-term.

    Three main factorsLooking ahead there are three main factors to watch out for, which together could mean depressed ethylene prices for the remainder of the year. For propylene the picture is more mixed.

    The first key issue is when the POSM plant at Shell and BASFs Moerdijk facility will return. On June 4, an explosion at the plant, which consumes propylene to make propylene oxide, took it offline and raised the availability of propylene in the market. Any return, now expected in the next 2-3 months, could take propylene tons out of the European market, with the unit having a propylene oxide capacity of 250,000 mt/year. It would have no impact on ethylene.

    Key events to watch out for

    Ellba POSM unit to restart Bullish propylene, neutral ethylene

    Versalis Porto Marghera (Q3) to restart Bearish propylene

    Borouge (Q2) due to restart Bearish ethylene

    Ethylene variable cost curve and cumulative capacity additions

    Source: Platts

    *No capacity additions; **All additional Chinese capacity projects Cumulative ethylene capacity additions (000 mt)

    ($/mt)

    0

    100

    200

    300

    400

    500

    600

    700

    0 10000 20000 30000 40000 50000

    Middle East ethaneUS E/PUS ethaneCTO (max ethylene)WE naphtha*SE Asia naphthaNE Asia naphtha**US full range naphtha*

  • plAtts speCiAl RepoRt: petRoCHeMiCAls | 4

    Production restarts threatens to spoil bumper year for Europes crackers

    The second issue concerns Versalis Porto Marghera cracker. In February, Versalis announced that it was to pause its cracker and aromatics units for six months in Porto Marghera, Italy to absorb the prevailing downturn in the market and prepare the site for investment. When the cracker does return, it is clearly bearish for both ethylene and propylene.

    The final issue concerns the UAEs Borouge. Borouge 3s 1.5m mt/year ethane cracker started last month in Ruwais, UAE. Whilst it has had a limited impact on the ethylene market thus far, this has been primarily due to the congestion in Ruwais, rather than any longer lasting trends. The belief remains that it will become an important exporter of ethylene and when that takes place it is expected to have a globally bearish effect on ethylene prices.

    Rising poolOver the longer term, and in spite of the improvement in margins and the rise in operating rates, it is clear that Europe is still suffering. The economic benefits gained from cracking lighter feeds have proved instrumental in steam cracker margins reaching a 16 week high in July.

    However the seasonality of LPG