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Ethylene outlook muted by weak demand, supply surge

3:00 PM MDT | April 1, 2013 | —Robert Westervelt in Houston

Eramo: Ethylene profits vary widely by feedstock.

Weaker demand growth coupled with higher rates of capacity expansion has dampened the profit outlook for ethylene, particularly for high-cost producers that use heavier feedstocks, said Mark Eramo, v.p./chemical market insights for IHS Chemical. Eramo was speaking at the IHS Chemical World Petrochemical Conference (WPC), at Houston late last month.

Global ethylene consumption reached 129 million m.t. in 2012 and is forecast to grow at 4%/year for the next 5 years, Eramo said. “This represents nearly 6 million m.t./year of demand growth, which would result in total consumption near 158 million m.t. by 2017,” Eramo said. That represents about 29 million m.t./year of new demand by 2017, compared to 34 million m.t./year of expected capacity growth over the same period. IHS estimates the industry will add 57 million m.t./year of new ethylene capacity between 2011 and 2020 with 40.5 million m.t., 70% of the total, added in the Mideast and Asia, and 12 million m.t., 22% of the total, added in North America.

“Under this scenario, the global operating rate never reaches 90% during the 5-year forecast,” Eramo said. “This would suggest limited improvement in ethylene cash margins due to oversupply.” Profits will vary widely by feedstock used, however, with gas-based producers maintaining strong margins.

“In North America, competitive ethane prices are supporting high ethylene margins and are creating a very profitable environment, which cannot be said for naphtha-based producers located in all parts of the world,” Eramo said.

The rate of ethylene demand growth relative to global GDP growth is declining, another factor that will keep supply long, Eramo added. Ethylene demand growth was disappointing in 2012 at 1.5%, less than 2 million m.t., or roughly 0.6 times (x) GDP, Eramo said. IHS now forecasts ethylene demand growth to advance at 1.1–1.2x GDP through 2017, below previous forecasts. “This is below historical norms, including the 1990s, when ethylene demand grew at a multiple of 2x global GDP due to heavy substitution of ethylene-based plastics into many nondurable applications,” Eramo said.

Polyethylene (PE) remains the primary driver of ethylene demand, representing more than 60% of total consumption, Eramo said. PE growth forecasts remain strong at 5%/year through 2017. The ethylene oxide forecast is also solid at 4.5%/year. “Styrenics and vinyls are showing more moderate growth rates, near 3%/year, more in line with global GDP growth,” Eramo said.

IHS estimates developing counties will account for 70% of incremental ethylene demand growth by 2020, up from current levels of 60%. That level was 18% in 1995. “Rapid demand growth in these regions is impacting global trade flows for derivatives as well as investment decisions with respect to locations for new ethylene capacity and related investments,” Eramo added.

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