Volatility to rule olefins, styrene markets to 2001

March 17, 1997
World Ethylene Outlook [72133 bytes] World Butadiene Outlook [103294 bytes] Markets for light olefins and styrene will remain very unstable to 2001, continuing the cyclical patterns of the past. However, the currently strong world market for butadiene will continue to improve by 2001. Of the three petrochemical subsectors, only butadiene should enjoy rapid and steadily rising demand, which will push plants to run close to full capacity and keep prices high, according to recent studies by
Markets for light olefins and styrene will remain very unstable to 2001, continuing the cyclical patterns of the past.

However, the currently strong world market for butadiene will continue to improve by 2001.

Of the three petrochemical subsectors, only butadiene should enjoy rapid and steadily rising demand, which will push plants to run close to full capacity and keep prices high, according to recent studies by Chemical Market Associates Inc. (CMAI), Tarrytown, N.Y.

But, manufacturers of light olefins, notably ethylene and propylene, will see continued rapid cycling between strong and weak market cycles, CMAI predicts: "Simply stated, the number of world scale (600,000+) metric tons/year olefins units being constructed appears to be somewhat ahead of demand late this decade, setting the stage for low operating rates and poor returns."

Meanwhile, the styrene market has enjoyed relative stability, and demand will continue to grow to 2001. However, during this forecast period, "The world styrene industry will be unable to absorb all the new capacity, and operating rates will fall," CMAI said, warning that early signs of a "major restructuring" are already under way.

Olefins rollercoaster

The market for light olefins seems locked in a rollercoaster pattern familiar in recent years.

Cash margins for ethylene frequently vary from year to year, depending on feedstock prices, market conditions and co-product values.

CMAI said, "Periods of very good profits are followed by periods of poor profits as new capacity is added at a faster rate than the market can absorb."

In recent years, U.S. cash margins peaked in 1988-89, then fell in 1990-92 as demand slowed. In 1994-95, prices increased while costs fell-"the best combination of any producer, raising 1995 margins against benchmark prices to an average of $389/ton in western Europe and $414/ton in the U.S." But margins again fell in 1996, as feedstock prices rose, yet due to insufficient capacity additions, margins should recover to $240-340/ton in both regions this year.

Still, the apparently smooth ride won't last, CMAI predicts.

After 1997, "New capacity being engineered or under construction for commissioning in the 1998-2001 timeframe will push benchmark price-based ethylene margins down to a low of $120/ton in western Europe and $175/ton in the U.S.," CMAI said. "In turn, this will set the stage for a margin peak again as the rate of new capacity additions will slow dramatically."

Forecast details

In other details of CMAI's light olefins forecast:

  • Confirmed capacity additions worldwide will grow by 29.5 million tons/year, or 37%, to more than 109 million tons/year from 79.6 million tons/year in 1995.

  • Almost half of the increase, more than 13 million tons/year, is due in the Asia-Pacific region, while North America has the potential to add 7.5 million tons/year of new capacity during 1996-2001;

  • By comparison, western Europe "has become more judicious in adding capacity," due to more mature markets and increasing threats of Asian imports, with only 2 million tons/ year of capacity additions planned for 1996-2001.

  • Asia and the Middle East, meanwhile, are adding many new olefins plants, including planned units in Kuwait, Egypt, and the Philippines.

Second or third olefins plants will be added in Indonesia, Bulgaria, Algeria, and Singapore.

CMAI noted, "The accelerated addition of new light olefins capacity in Southeast Asia will make this large importing region 100% self-sufficient by 2001, meaning that the region does not need imports of ethylene or ethylene derivatives to satisfy a rapidly expanding demand."

"This will severely affect international prices for these products as low-cost ethylene producers in the Middle East and Canada vie for declining export business. At the same time, more 'export oriented' capacity added in the Middle East and western Canada will increase the pressure in these markets to stimulated international demand."

The bottom line

Looking at light olefins market balances to 2001, CMAI concludes:

  • Exports of light olefin derivatives from western Europe and the U.S. will decline through the end of this decade, with the exception of ethylene dichloride/vinyl chloride monomer from the U.S. due to chlorine cost advantages.

  • Western Europe's net imports of light olefins and their derivatives will be substantially higher during 1998-2001 than today.

  • Competitive world ethylene operating rates, after averaging 93% in 1994, will drop to 89-90% in 1999-2001.

CMAI contends this scenario will create the following longer term conditions:

  • International prices for ethylene and its derivative products will "suffer as too much capacity is being added in most exporting markets."

  • Following a tight market again in 1997, the nameplate capacity of olefins plants will decline to 87% of capacity in 2000, as 4.3 million tons/year of capacity is added during 1998-2001.

  • Prices and margins will revert to the poor returns of the early 1990s under the weight of these capacity additions. In short, international prices for ethylene and its derivative products will "suffer as too much capacity is being added in most exporting markets," CMAI said.

However, propylene markets will see the opposite situation, namely:

  • World propylene trade will remain "severely depressed" in 1997, equaling slightly more than 200,000 tons/year, but rebound to 400,000 tons/year in 1997 and 1998.

  • Propylene markets will benefit from increased demand from consumers in western Europe and Asia, which will "facilitate a return to the 1990 propylene trade peak of 700,000 tons by 2000."

Trade volumes of ethylene will follow a similar pattern, but due to excessive capacity additions, prices will not follow suit, CMAI indicates.

Among other major conclusions of the CMAI report on light olefins:

  • World markets for polyolefins will weaken under the pressure of too much capacity, with the peak of the next cycle not expected until after 2001.

  • Western Europe will become an increasingly large net importer of light olefins and derivatives, with net ethylene trade moving from a net export position of 193,000 tons to a deficit of 1.3 million tons in 2001, as this region becomes a net importer.

  • Western Europe also will require an extra 1 million tons/year of propylene from local refineries or imports and, as time passes, about half of the new requirements will be imported.

In conclusion, CMAI said: "The tight supply and higher prices of light olefins only lasted until early in 1995 and repaired capacity was commissioned. The global olefins price and margin weakness, which began in the second half of 1995, will carry over into much of 1997, with the exception of the U.S. and Southeast Asian import market."

However, by 1998, the large number of expansions and new additions justified by the 1994-95 profits "will cause operating rates to plummet. As a result, prices for olefins and key olefins derivatives (such as polyethylene) will fall to levels experienced in 1992 and 1993."

But, CMAI added: "Low prices, however, will stimulate demand for these products, setting the stage for market strength returning by 2002."

Styrene's changing identity

Styrene faces changing market conditions that effectively will create a whole new "identity" for this key petrochemical.

Styrene markets have enjoyed rare stability that "have not enticed monomer consumers to either build or deplete inventories," CMAI observed. "Therefore, the lack of incentive to 'play' with inventories along the entire styrene chain has resulted in steady demand."

Still, a fresh round of market volatility looms.

During 1985-95, CMAI noted, styrene demand grew at roughly twice the rate of gross domestic product (GDP). This was partially the result of two styrene boom cycles in 1988-89 and 1994-95. A downturn in the styrene market is just now getting under way.

Demand for styrene-which grew at about twice the rate of average world GDP for the last decade-will now deflate to about 1.5% GDP during 1996-2001.

And while not all of the news facing the styrene industry is bad news, the apparent good news may have some bad tidings if manufacturers don't watch trends carefully, CMAI cautions.

Upsides/downsides

On the upside, the Asia/Pacific region has become the largest styrene consumer in the world.

In 1996, latest figures show that this region consumed nearly 40% of the estimated 16.4 million tons/year of world styrene demand, and that's expected to reach 42% of the market by 2001.

Meanwhile, the world styrene market will grow to 21.5 million tons/ year-an annual growth rate of 4.5%-during 1995-2001, CMAI projects.

"This translates to an additional 5.1 million tons of styrene with over 50% of the additional consumption attributed to the Asia-Pacific region," CMAI said.

Making matters even brighter-at least on the surface-total world styrene demand in 2001 is estimated to reach 21.5 million tons, with most of the volume growth in the polystyrene sector, with ABS resins enjoying the largest proportionate increase of 5%.

What's wrong with this picture? A budding oversupply situation is just ahead, CMAI projects.

"More than ample supply will be added worldwide throughout the forecast period," CMAI said. "In fact, over 7 million tons of additional styrene capacity is scheduled to come on line during the 1995-2001 period. This means that about 2 million tons of excess styrene will be brought on over and above the forecast increase in styrene consumption of 5.1 million tons."

The Asia-Pacific region will account for more than half of styrene additions, followed by western Europe, it added.

Conditions to watch for, CMAI notes, include:

  • Asia-Pacific styrene capacity additions will outpace demand but not at the levels seen in western Europe.

  • However, as the Asia-Pacific region becomes more self-sufficient, it could be in an export position by 1998.

  • The competitive positions of monomer producers in North America and the Middle East will make exporting difficult for Asia/Pacific producers.

This translates to a situation where "the world styrene industry will be unable to absorb all the new capacity about to be added" and "operating rates will fall" predicted CMAI.

Styrene restructuring

As a result, "major restructuring will occur in the styrene industry," and some "older, inefficient units may be shut down and projects planned for the latter part of the decade will be delayed or canceled," CMAI said.

Among CMAI's forecasts for styrene:

  • 1996 will prove to be the last year of profit, on average, for styrene producers, with estimated yearend demand of 4.9% and operating rates around 93%.

  • Economic growth will continue to stabilize in the U.S., while global economies realize growth rates of 2-4%/year, but eastern Europe is expected to "recover robustly" from longstanding economic weakness.

  • The resulting increase in styrene demand will "help western Europe sustain a healthy economy."

However, CMAI cautions, unless "major restructuring develops, margins will not reach reinvestment econ- omies until after the forecast period."

Among the signs of restructuring to watch for:

  • As the Asia-Pacific region becomes more self-sufficient after 1997, "trade patterns will change and Latin America will be a new focal point for North American producers."

  • "Extensive capacity additions in West Europe (will) place this region in a net export position."

  • "Additional styrene capacity... (will come) on stream in the Far East starting in 1997, decreasing demand for U.S. styrene exports dramatically."

The result will be that the ratio of U.S. styrene exports meeting total world demand will decline, with total U.S. styrene demand (including exports) experiencing only modest growth during the forecast period of 1995-2001.

This will lead to the creation of new players in the world styrene market, as existing players reshuffle existing positions.

Among major changes to watch for, CMAI says:

  • South America is on its way to becoming a more industrialized and free market-based economy, where privatization of the petrochemical industry will "encourage further foreign investments" that will improve market conditions and lead to higher growth than forecast.

  • Mexico will become a "major styrene importer," as planned new plants come on stream and capacity is boosted, while North America tries to place a portion of lost exports into Mexico, as well.

  • Meanwhile, the outlook for benzene suggests "a lower level of floor prices," as lower benzene values have allowed styrene and its derivatives to become more competitive against other plastics and still remain at or above production costs.

To stay competitive, holding down production costs "will become critical for survival," and older, less-efficient plants will probably be shut down the next 5 years.

The forecast weakness in the styrene market will "more than likely cause cancellation or delay of some of the announced new monomer capacity."

This will result in a "shorter period of overcapacity and squeezed margins for styrene producers."

The power of perception

In words directed to styrene manufacturers, but frequently heard throughout other sectors of the petrochemical and petroleum industries as well, CMAI observed: "Perception is very important in setting prices."

For instance, as styrene demand rose at a greater rate than capacity additions in 1996 but operating rates remained near 1995 levels, "the outlook for increased capacity created a perception of upcoming weakness ...and prices reacted accordingly by falling."

Styrene enjoyed a long period of being buffered from volatility in feedstock, energy, and petrochemical markets, but those days appear to be passing fast, CMAI said.

Butadiene growth

Global demand for butadiene will increase by 50% during 1996-2001, compared with demand growth during 1991-95, CMAI forecast.

Most of this growth will occur in eastern Europe, Africa, Middle East, and Asia/Pacific. In 1997, the Asia/Pacific region will become the largest consuming region for butadiene, surpassing North America.

Overall world demand is expected to grow at an annual average rate of 4.1% during the forecast period.

Among other trends noted in the report:

  • Strong demand growth will push butadiene plant operating rates to more than 88% of design capacity by 2001.

  • New capacity is due on stream in the Asia-Pacific region (especially China, India, South Korea, Taiwan, and Thailand).

  • Plant operating rates in this region are expected to be pushed to their maximum capacity.

  • Butadiene demand will continue to remain concentrated in production of synthetic rubber, which currently accounts for more than 63% of consumption, the report said.

Because synthetic rubber is expected to improve its market share in the continuing competition with natural rubber, synthetic rubber plants will have higher production rates during the forecast period despite the expectation that about 90,000 tons/year of new capacity will be added.

However, demand for butadiene in the production of acrylonitrile butadiene styrene (ABS) resins will see the highest volume growth among all butadiene derivatives during 1996-2001, averaging 5.3%/year.

"However, since ABS only uses a small percentage of butadiene in its manufacture, polybutadiene will lead all derivatives in the increase in total tons of butadiene consumed during the period," CMAI said.

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