While economic activity in North America remained weak during first and second-quarters of 2009, petrochemical industry developments call into question the most bearish views of a protracted global economic recession for 2009-10.
Specifically, ethylene production began to rebound during first-quarter 2009, and the rebound was stronger than forecast in fourth-quarter 2008. Exports of all major ethylene derivatives rebounded in first-quarter 2009.
These trends indicate that worst-case scenarios need to be replaced with moderately optimistic and more realistic forecasts for third and fourth-quarters 2009.
Feed slate trends
Ethylene industry’s demand for fresh feed averaged 1.31 million b/d in first-quarter 2009. In January the industry began to recover from the devastating impact of the financial crisis and global economic recession. Demand for fresh feed increased steadily and averaged 1.56 million b/d in April 2009 vs. 1.03 million b/d in December 2008.
Demand for LPG feedstocks (ethane, propane, and normal butane) averaged 0.85 million b/d in fourth-quarter 2008 and increased to 0.93 million b/d in first-quarter 2009 and 1.12 million b/d in March-April 2009.
The industry feed slate was heavier during fourth-quarter 2008 than in any-quarter since fourth-quarter 2005; LPG feeds accounted for only 67% of total fresh feed in fourth-quarter 2008.
Ethylene producers began to swing back to lighter feeds in January 2009 and continued to increase LPG feeds through April. LPG feeds accounted for 71% of total fresh feed in first-quarter 2009 and 75% in April.
Economics for ethane were very favorable during first-quarter 2008 and ethane’s share of fresh feed averaged 54% in first-quarter 2009 vs. 49% in fourth-quarter 2008. Total demand for ethane increased to 860,000-870,000 b/d in April 2009 and accounted for 55% of total fresh feed.
Based on projected ethylene industry operating rates of 78-82% for second and third-quarters 2009, total demand for fresh feedstocks will average 1.45-1.50 million b/d. Total demand for LPG feedstocks will average 1.05-1.10 million b/d during second and third-quarters 2009.
Fig. 1 illustrates historic trends in ethylene feed slates.
Ethylene production
Ethylene production from fresh feed totaled only 10.3 billion lb in fourth-quarter 2008 but increased to 10.5 billion lb in first-quarter 2009. Ethylene production from steam crackers during fourth-quarter 2008 was 1.18 billion lb lower than in third-quarter 2008 (almost 10 days’ output based on average daily production during third-quarter 2008).
Production in first-quarter 2009 was 225 million lb higher than in fourth-quarter 2009 (about 2 days’ production). Production remained at the depressed levels of November-December 2008 during January and February 2009 but increased to 136 million lb/day during March and April 2009 (an equivalent of 49-50 billion lb/year). Production in March-April 2009 was only 6.7% below the prerecession daily average for first-half 2008.
Production from LPG plants totaled only 3.69 billion lb in fourth-quarter 2008, or 671 million lb (about 14 days of production) less than in third-quarter 2008. Production from LPG crackers increased to 4.11 billion lb in first-quarter 2008, or 418 million lb (about 10 days of production) more than in fourth-quarter 2008.
Production increased to an equivalent of 4.8-4.9 billion lb/quarter in March and April 2009. Production from LPG plants in March and April 2009 was 0.5 million lb/day higher than the average for first-half 2008.
Production from multifeed crackers totaled 6.63 billion lb in fourth-quarter 2008, or 511 million lb (about 7 days’ production) less than in third-quarter 2008. Production from multifeed crackers declined again in first-quarter 2009 and totaled only 6.44 billion lb, or 193 million lb (about 3 days’ production) less than in fourth-quarter 2008.
LPG plants operated at 68% of capacity in fourth-quarter 2008. During first-quarter 2009, however, ethylene producers responded to the significant cost advantages provided by light feeds and operated LPG crackers at 90% of capacity in March 2009 and 96% in April 2009. Multifeed crackers operated at 66% of nameplate capacity (based on capacity of 39.2 billion lb/year) during fourth-quarter 2008 and only 67% during first-quarter 2009.
Overall operating rates for the industry declined in fourth-quarter 2008 and averaged 67.0%. Operating rates increased to 72% during first-quarter 2009 and averaged 86% in April.
Fig. 2 illustrates trends in ethylene production.
US propylene production
Coproduct propylene supply from steam crackers totaled only 2.38 billion lb in fourth-quarter 2008, or 227 million lb less than in third-quarter 2008 (about 8 days’ production). Furthermore, coproduct propylene production during fourth-quarter 2008 was 712 million lb less than year-earlier volumes (about 21 days of production). Coproduct propylene supply during fourth-quarter 2008 was significantly lower than year-earlier volumes due to reduced operating rates for all olefin plants.
Although industry’s average operating rate rebounded during first quarter, the rebound in rates for LPG plants was significantly stronger than for multifeed crackers. Furthermore, ethane’s share of total fresh feed to multifeed crackers averaged 38% in first-quarter 2009 vs. 34% during fourth-quarter 2008.
As a result, coproduct propylene supply declined again in first-quarter 2009 and totaled only 2.16 billion lb, or 222 million lb less than during fourth-quarter 2008 (almost 9 days’ production). The combined volume of coproduct propylene supply during fourth-quarter 2008 and first-quarter 2009 was 1.09 billion lb (19.3%) less than total production during first and second quarters 2008.
Propylene production from LPG feeds totaled 0.79 billion lb in fourth-quarter 2008 and was 532 million lb less than production in third-quarter 2008. Coproduct propylene supply from LPG feeds was also 733 million lb less than year-earlier volumes. Propylene production from LPG feeds declined slightly in first-quarter 2009 and totaled 0.74 billion lb, or 42 million lb less than in fourth-quarter 2008.
Propylene production from naphthas, condensates, and gas oils totaled 1.59 billion lb in fourth-quarter 2008 and was 305 million lb more than during third-quarter 2008. Coproduct propylene supply from heavy feeds declined by 181 million lb during first-quarter 2009 and totaled 1.41 billion lb.
Refinery supply
Refinery propylene sales into the merchant market are a function of fluid catalytic cracker feed rates, FCC operating severity, and economic incentives to sell propylene rather than use it as alkylate feed or burn it. Normally, FCC unit feed rates and operating severity are at their seasonal peaks during second and third quarters and decline to minimum seasonal levels during fourth and first quarters.
According to the US Energy Information Administration statistics, however, FCCU feed in the Gulf Coast increased by 7.7% during fourth-quarter 2008 from third-quarter 2008. The increase in sales during fourth-quarter 2008 was consistent with the recovery to normal operations after substantial downtime in September and October due to Hurricanes Gustav and Ike. FCCU feed rates, however, were 9.3% lower than year-earlier levels during fourth-quarter 2008.
EIA reported that refinery-grade propylene sales during fourth-quarter 2008 averaged 36.0 million lb/day and were 43 million lb more than in third-quarter 2008 (about 1.2 days’ production). Refinery-grade propylene sales averaged 34.7 million lb/day during first-quarter 2009 and were 186 million lb less than in fourth-quarter 2008 (about 5.2 days’ production).
Domestic propylene supply from both sources totaled 5.66 billion lb in fourth-quarter 2008 and was 182.5 million lb less than in third-quarter 2008. Domestic production declined again in first-quarter 2009 and totaled only 5.22 billion lb, or 0.44 billion lb less than in fourth-quarter 2008 and 1.38 billion lb less than year-earlier volumes.
Fig. 3 illustrates trends in coproduct and refinery merchant propylene sales.
Ethylene production costs
Consistent with the accelerating decline in crude oil prices during fourth-quarter 2008, production costs for ethylene in the Houston Ship Channel (based on full spot prices for all coproducts) declined by 55-65% during fourth-quarter 2008. Production costs for ethane averaged 15-16¢/lb during fourth-quarter 2008 vs. 41-42¢/lb in third-quarter 2008. Production costs for propane declined to 18-19¢/lb in fourth-quarter 2008 vs. 42-43¢/lb in third-quarter 2008. Production costs for natural gasoline posted the largest decline during fourth-quarter 2008 and averaged 17-18¢/lb vs. 49-51¢/lb in third-quarter 2008.
Feedstock prices, coproduct values, and ethylene plant yields determine ethylene production costs. Petral maintains direct contact with the olefin industry and tracks historic trends in spot prices for ethylene and propylene. We use a variety of sources to track trends in feedstock prices. Some ethylene plants have the necessary process units to convert all coproducts to purity streams. Some ethylene plants, however, do not have the capability to upgrade mixed or crude streams of various coproducts and sell some or all their coproducts at discounted prices. We evaluate ethylene production costs in this article based on all coproducts valued at spot prices. |
Feedstock prices continued to decline during first-quarter 2009 but the rate of decline was measurably slower than during fourth-quarter 2008. Production costs averaged 13.5-14.5¢/lb for ethane, 19-20¢/lb for propane and 22.5-23.5¢/lb for natural gasoline.
Average production costs for natural gasoline during fourth-quarter 2008 were only 1.5¢/lb higher than ethane and were 1¢/lb lower than for propane. However, prices for natural gasoline were depressed because prices for unleaded regular were unusually weak throughout the fourth-quarter. Prices for unleaded regular gasoline rebounded during first-quarter 2009 but coproduct prices remained relatively weak. Average production costs for natural gasoline during first-quarter 2009 were 9¢/lb higher than for ethane and 3¢/lb higher than for propane.
Crude oil production cuts by OPEC began to have their full impact during second-quarter 2009. Prices for crude oil and unleaded regular gasoline increased by 30-35% Prices for all ethylene feedstocks were also higher in second-quarter 2009. Ethylene production costs increased to 15-17¢/lb based on ethane and 16-18¢/lb based on propane. Variable production costs based on light naphthas and natural gasoline increased to 23-26¢/lb.
Ethane again benefited from strong economic support in both LPG plants and multifeed crackers during first and second-quarter 2009. Ethane’s share of fresh feed to LPG plants increased to 84% in March and averaged 82% during first-quarter 2009 vs. the historic norm of 74-78%. Ethane’s share of fresh feed to multifeed crackers increased to 38% in first-quarter 2009 vs. 34% during fourth-quarter 2008.
Ethylene pricing, margins
Contract prices for ethylene averaged 38.9¢/lb in fourth-quarter 2008, or 28.9¢/lb (42.6%) lower than in third-quarter 2008. During fourth-quarter 2008, contract prices fell to 28.25¢/lb in December from 50.75¢/lb in October.
After the extraordinary volatility of 2008, contract prices varied by fewer than 2¢/lb during first-quarter 2009 and averaged 31.3¢/lb. The industry most often negotiates contract prices for ethylene retroactively, usually 30 to 60 days after the end of the contract month. Contract prices for April and May settled at 30.25¢/lb for May.
Spot prices for ethylene averaged 23.3¢/lb for fourth-quarter 2008 and were 32.2¢/lb, or 58.2% lower than third-quarter average. During fourth-quarter 2008, spot prices averaged 33.5¢/lb in October but fell to 17.2¢/lb in December.
Spot prices began to rebound from the December low and averaged 25.0¢/lb in January 2009 and 28.4¢/lb in February 2009. Spot prices slipped in March and averaged 25.7¢/lb. For the full quarter, spot ethylene prices averaged 26.4¢/lb, or 9.2¢/lb higher than in December 2008.
The increase in ethylene production in April and May ended the rally in spot prices. These averaged 21-22¢/lb in May, but rising feedstock prices pushed them to 26-27¢/lb in June. We estimate that spot prices averaged 24.0-24.5¢/lb for second-quarter 2009.
Margins based on spot ethylene prices and LPG feedstocks began to erode in third-quarter 2008 and continued to weaken during fourth-quarter 2008. Margins based on purity ethane production costs averaged only 2.7¢/lb in fourth-quarter 2008 and were 6.4¢/lb lower than average for third-quarter 2008. Margins in the fourth quarter averaged 0.3¢/lb negative for propane and 0.8¢/lb negative for natural gasoline.
Margins in first-quarter 2009 improved to 7.3¢/lb for purity ethane and 1.3¢/lb for propane. Margins in first-quarter 2009, however, eroded to 3.8¢/lb negative for natural gasoline. Margins in second-quarter 2009 weakened to 2.8¢/lb for purity ethane, 0.7¢/lb for purity propane, and were 8.2¢/lb negative for natural gasoline.
Fig. 4 illustrates historic trends in ethylene prices (spot prices and net transaction prices). Fig. 5 illustrates profit margins based on contract ethylene prices and composite production costs.
Octane values; propylene prices
Octane values weakened during fourth-quarter 2008 and fell to 1.59¢/octane-gal in December from 2.59¢/octane-gal in October. Octane values for fourth-quarter 2008, however, averaged 2.06¢/octane-gal and were almost unchanged from average of 2.07¢/octane-gal for third-quarter 2008.
| We determine the incremental value of octane by tracking the differential between unleaded premium unleaded regular gasoline prices divided by the difference in octane (87 octane for unleaded regular gasoline and 93 octane for unleaded premium gasoline). Octane values are a primary economic influence on spot prices for refinery-grade propylene and toluene. Trends in spot prices for these two coproducts tend to drive prices for other coproducts. |
During first-quarter 2009, octane values varied from 2.0¢/octane-gal in February to 1.5¢/octane-gal in March and averaged 1.7¢/octane-gal for the quarter. Octane values rebounded to 2.03¢/octane-gal in April and 2.33¢/octane-gal in May.
Fig. 6 illustrates trends in octane values
Refinery, polymer-grade C3=
Spot prices for refinery-grade propylene averaged 22.2¢/lb during fourth-quarter 2008 and were 42.1¢/lb (65.6%) lower than the average for third-quarter 2008. Spot prices fell to a low of 12.8¢/lb in December 2008 from 36.9¢/lb in October 2008. Refinery-grade propylene prices averaged only 0.75¢/lb higher than unleaded regular gasoline prices for fourth-quarter 2008 and averaged 2.6¢/lb less than unleaded regular gasoline prices in November/December 2008.
| Prices for all grades of propylene move in tandem with each other, and differentials between grades are generally constant within a narrow range. We highlight trends in refinery-grade prices and discuss differentials between polymer and refinery-grade propylene. The premium for polymer-grade propylene covers operating costs and profit margins for the various merchant propane-polypropylene splitters in Texas and Louisiana. |
Spot prices for refinery-grade propylene increased to 19.3¢/lb in January and 24.6¢/lb in February. For full first-quarter 2009, spot RGP prices averaged 21.5¢/lb and were 1.7¢/lb higher than unleaded regular gasoline. Spot prices remained within the first-quarter range in April but jumped to 33-35¢/lb in May. Spot prices for the second quarter were an estimated 30¢/lb.
From the October settlement of 60¢/lb, contract prices for polymer-grade propylene collapsed during fourth-quarter 2008 and settled at 20¢/lb in December. For the fourth quarter, contract prices for polymer-grade propylene averaged 36.7¢/lb, or 14.5¢/lb higher than spot refinery-grade propylene prices.
Contract prices increased to 22¢/lb in January and 29¢/lb for March and April. Contract prices increased again in May and settled at 31.5¢/lb.
Summer-fall 2009 outlook
Spot prices for West Texas Intermediate crude oil fell to a monthly average of $39.15 in February 2009 but rallied to $49.82/bbl in April and $59.00/bbl in May. Following the historic collapse in prices during third and fourth-quarter 2008, the rebound in crude oil prices during March was not surprising. The shift to sharply higher prices during April/May, however, was unexpected.
We reviewed trends in pricing for other benchmarks such as dated Brent and Dubai/Oman and trends in differentials between WTI and other benchmarks. This review suggested that production cuts by the Organization of Petroleum Exporting Countries and slower but continued growth in demand in Asia and other economies of countries outside the Organization for Economic Cooperation and Development (non-OECD) were sufficient to reverse the collapse in prices during third and fourth quarters 2008. We also note, however, that demand in OECD countries remains weak. OPEC has achieved better compliance with its series of production quota agreements than expected early in fourth-quarter 2008.
We revised our price forecast to $50/bbl in late April. Escalation of tensions in Nigeria, however, increased the supply risk to Nigeria’s crude oil production of 2 million b/d. Threats to Nigerian crude oil production will reinforce bullish influences of OPEC production curtailments and demand growth in non-OECD economies. Forecasts are now based on WTI prices of $55-65/bbl for third and fourth quarters 2009.
Ethylene production costs (full cash costs) are likely to be in the range of 18-24¢/lb for third and fourth quarters for ethane and propane and 30-33¢/lb for natural gasoline. Spot ethylene prices are to average 22-24¢/lb. Profit margins are to average 2-4¢/lb for purity ethane and break even for purity propane. Profit margins for natural gasoline are to average 7-10¢/lb below break-even.
The author
