Pace's U.S. Ethylene Supply Scenarios (16584 bytes)
Pace's Adjusted U.S. Ethylene Demand (15869 bytes)
Balance will return to U.S. ethylene markets as early as the second quarter of this year if demand growth slows substantially.
But if U.S. ethylene demand growth remains strong, supply tightness could extend through second quarter 1995 and well into the third quarter, Pace Consultants Inc., Houston, predicts.
Pace said strong demand, low stocks, and operating problems since spring 1994 increased upward pressure on U.S. ethylene and ethylene derivative prices. Through the fall, ethylene supplies tightened significantly at about 2 week intervals, leaving only enough ethylene in inventory at the end of third quarter 1994 to supply the market for a little more than 1 week.
Pace expected supply increases to begin by this month as ethylene units brought down unexpectedly last year continued going back on line and ethylene capacity additions occurred as scheduled.
But opinions differed as to how the ethylene market might react. A few in the market expected an imminent price collapse. More expected prices to remain high through most-if not all-of 1995.
Pace's short term supply/demand analyses showed that expectations of an imminent price collapse were premature. But through most of the first quarter, there is little room to accommodate many outages.
A reasonable goal of U.S. ethylene suppliers would be to rebuild combined stocks to slightly more than 2 weeks of supply, a volume Pace said has been adequate but not excessive for the past 10 years.
"More than one unanticipated plant outage would reverse modest inventory improvement from minimum levels," Pace said.
Aside from a lot of unexpected outages, the major factor affecting market balance likely will be demand.
NEAR TERM PRICE
Not surprisingly, Pace said the outlook for a near term retreat of ethylene and derivatives prices depends on the pace of inventory rebuilding as well as sustainable operating rates after adequate stocks are in place. Operating rates of about 90% are likely through 1995, a level that allows industry to manage moderate price retreats and avoid price collapses.
Depending upon the strength of demand in 1995, Pace said, an ethylene price retreat is not likely until late second quarter at the earliest and during third and fourth quarters at the latest.
"Thereafter, judging from recent experience at similar operating rates, prices are likely to retreat 1-1.5lb/month," Pace said.
Based in part on predictions by national economic forecasting services of real U.S. gross domestic product (GDP) growth amounting to 3.9% in 1994 and 2.9% in 1995, Pace predicted the rate of ethylene demand growth will slow in 1995 to 1.7-3.9%. In absolute terms, the difference between high and low growth estimates amounts to about 1 billion lb of ethylene in a 45 billion lb/year market.
Since the beginning of 1991, U.S. ethylene demand has grown at a compound rate of 4.7%/year. At yearend 1994, U.S. ethylene nameplate production capacity stood at a bit more than 48.5 billion lb.
Although Pace forecasts over time have correlated well with certain GDP components, ethylene demand in summer 1994 exceeded the company's expectations. As a result, Pace based its projections for conservative demand growth in 1995 on a U.S. economic slowdown and some compensation for overshooting demand in 1994. The company considered its optimistic demand case a likely scenario, consistent with ethylene demand growth trends during the past few years, aside from economic forces.
SENSITIVITY TO CHANGE
Pace tested the sensitivity of U.S. ethylene supply/demand with these scenarios:
- In the conservative supply/demand case, Pace assumed plant turnarounds would occur as scheduled, a new 1.5 billion lb/year cracker would ramp up to full production rates by the beginning of March, and ethylene demand would grow 1.7% this year.
- In the optimistic supply/conservative demand case, three turnarounds scheduled for first quarter 1995 were postponed and the 1.5 billion lb/year cracker ramped up to full rates by early February, while ethylene demand grew 1.7%.
- In the pessimistic supply/conservative demand case, a 1.2 billion lb/year cracker was assumed to go down unexpectedly for 1 month in February 1995, prompting some ethylene producers to postpone turnarounds, and ethylene demand growth was set at 1.7%. Pace assumed three turnarounds were postponed in this case.
- In the optimistic supply/demand case, three first quarter turnarounds were assumed postponed, the new 1. 5 billion lb/year cracker was to ramp up to full rates by early February, and 1995 ethylene demand was to grow by 3.9%.
Under each scenario, Pace concluded that ethylene producers would be able to rebuild stocks to accommodate 14 days or more of market demand by at least the third quarter. Differences among supply assumptions affected only the timing of a return to more normal inventory levels and operating rates by plus or minus 1 month.
The balance of U.S. ethylene supply/demand was much more sensitive to Pace's demand assumptions. The company found that if U.S. ethylene demand growth in 1995 stayed on the trend established in first quarter 1991, the timing for a return to normal supplies relative to demand could be delayed until the third quarter.
"With the entire supply chain now fairly lean, everything depends on pull-through demand from end users," Pace said.
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