Ethylene producers build Middle East capacity but rethink US plans

Recent ethylene capacity additions in the Middle East have Asian and European producers worried, consulting company DeWitt & Co. Inc., Houston, said at its World Petrochemical Review this week. It said in North America, the strength of natural gas prices has cut into margins, making producers rethink their decisions and strategies for expanding cracker capacity.


Thi Chang
Refining/Petrochemical Editor
Oil & Gas Journal


HOUSTON, Mar. 30�Recent ethylene capacity additions in the Middle East have Asian and European producers worried, consulting company DeWitt & Co. Inc., Houston, said at its World Petrochemical Review in Houston this week.

It said in North America, the strength of natural gas prices has cut into margins, making producers rethink their decisions and strategies for expanding cracker capacity.

Peter Jordan, DeWitt senior vice-president, said no one is pretending that the buildup in Middle East ethylene capacity is for anything but the Asian export market, mainly China.

Under current economic conditions, while China polymer demand will have a hard time absorbing Middle East supply in the short term, the pain will diminish by 2003-04, predicted Rick Coles, vice-president of DeWitt.

Saudi Arabia started three crackers with a total nameplate capacity of 2.3 million tonnes/year (t/y) in the past few months and has announced two more world-scale capacity plants for 2004 and 2005. Although the schedules are likely to slip, Iran promises to add more than 4.5 million t/y of capacity by 2005.

Kuwait, Qatar, and Abu Dhabi will also get in the picture, bringing Middle East ethylene capacity from 8 million t/y today to 19 million t/y in 2008. The local derivative markets will take no more than 15% of this capacity, said Jordan. The rest is aimed at Asia�s polyethylene and ethylene glycol markets.

Although Asian cracker capacity grew 8.1% between 1991 and 2000, it will slow to 3.9% between 2001 and 2005. Excluding China, there will likely be no new crackers in Asia after 2005, which leaves room for some Middle East capacity.

In a low-growth scenario of 5% for ethylene derivatives demand, China will absorb only 19% of Middle East ethylene capacity. A more likely growth of 10-12% will witness an absorption of 60-70% of Middle East supply. Although some of the remaining capacity will go to other Asian markets, most will find a home in Europe, said Coles.

Jordan expects West Europe�s ethylene outlook to be balanced after 2001. New production will sustain an average demand increase of 2.8%/year.

The huge Middle Eastern expansions by 2005, however, combined with planned increases in China cracker capacities, will be a threat to the European balance after 2005, particularly if the Middle East has a cost advantage should crude oil prices be high.

US margins
US ethylene is now noncompetitive in the world market, said Earl Armstrong, managing director of DeWitt.

He said the past few months witnessed an unprecedented change to natural gas pricing relative to crude oil. Historically, the discount of gas prices relative to crude gave US petrochemical producers a significant advantage over world markets. Recently, however, the price of gas has exceeded twice the crude oil equivalency.

Since roughly 60% of ethylene is produced from light feedstocks recovered from gas (ethane, propane, and some butane), ethylene producers suffered negative margins in January and small positive margins in February.

In January, ethylene costs from ethane and propane were about 35�/lb. Ethylene costs from light naphtha were lower, about 26�/lb. Spot and contract prices, however, were 30-33�/lb.

Although still high, ethylene production costs in February lowered to 25�/lb.

As a result of these margins, US cracker operating rates are 80-85%. Should gas prices stay at $4-5/MMbtu for 2-3 years, heavy crackers will maximize production for domestic end uses, light crackers will run to meet captive demand, and ethylene for export products will decline significantly or cease altogether, said Armstrong.

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