IHS Chemical Week


Lower crude prices won't cut off ethylene margins at the peak, Dow says

6:33 PM MDT | October 22, 2014 | By ROB WESTERVELT

The sharp drop in crude oil prices has increased near-term volatility, but will not stop ethylene margins from marching toward a peak over the next two years, Dow Chemical officials said on a third-quarter earnings conference call with analysts today. Crude oil prices have dropped 30% since June, with West Texas Intermediate crude for November delivery trading at $82.81/bbl on 21 October.

“Over the long term, our view on oil remains constructive,” says Howard Ungerleider, Dow CFO. “In the near term, however, the situation is volatile and we are well prepared to adapt as needed." While lower crude prices may compress margins for ethane-based crackers globally, even with crude oil at $80/bbl ethane-based crackers in the Americas maintain first- and second-quartile cost positions, Dow says. “Lower oil is also a positive for our highly flexible crackers and integrated complexes in Europe,” Ungerleider adds.

Lower oil prices boost the overall global economy, particularly large energy importers such as the United States and China, Dow says. “We would expect this positive impact to become more apparent as we move through 2015,” Ungerleider says.

Stronger economic growth will continue to push industry operating rates higher, increasing price leverage for producers, Ungerleider says. “Global GDP is forecast to be 3.4% or perhaps higher in 2015, up from 2.8% this year,” Ungerleider says. “Based on this, ethylene operating rates reach pricing power levels in the 2015 and 2016 time frame.” Ethylene operating rates have been improving by about 1%/year, Ungerleider adds. “Barring a global slowdown, and with industry balances where they are, we would expect this trend to continue taking operating rates above 91% as we move into 2016, continuing the march toward increasing pricing power for producers.”

Any impact from crude-related inventory destocking on demand and margins will be fleeting and correct itself by early 2015, Dow says. “People do in fact clear the books in December, factories do come down, inventory clearing does happen,” says Dow Chemical chairman and CEO Andrew Liveris. “But, inventory is very low across the value chains right now. That’s so at the polymer end, and at the monomer end.” Liveris is confident that “sustained margin expansion” will continue. “I think there may be slight depression or compression based on the fact that there may be slower demand and the oil price effect,” Liveris says. “But it will rewrite itself next year.”

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