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October 07, 2022Petrochemicals and Polymers: Quarter three performance
Feedstock selection key to competitiveness in weakening markets through quarter three
Global petrochemical markets remain heavily exposed to the deteriorating economic climate into the second half of 2022, with consumption of commodity petrochemicals vulnerable to changes in consumer spending in a deepening cost of living crisis. Diminishing consumer interest is now emerging as a key constraint to volumes as bottlenecks in supply chains faced emerging form the COVID-19 pandemic abate. The hastening downturn in demand arrives at an inopportune time for an industry that has recently expanded supply immensely, plaguing global markets with risk of oversupply for some time. Greater focus on demand side risk led crude oil prices to fall steadily, offering some optimism against deepening market pressures as a leading indicator of production costs. Turbulence in global energy markets led prices of competing energy streams to diverge, leaving feedstock selection critical to competitiveness of petrochemical production.
Brent crude oil prices dropped more than 25 percent to settle below US$90 per barrel into September, with downside risk of slowing demand drawing attention of markets. Gas prices meanwhile escalated sharply as upside risk to supply was more prominent. Naphtha prices dropped ten percent relative to easing crude oil prices as robust gasoline demand lengthened supply ahead of subdued petrochemical demand. Cost competitiveness of lighter feedstocks deteriorated as critically tight gas markets in Europe spurred renewed escalation of gas prices. The cost advantage previously assumed in cracking ethane in the United States remained absent as ethane prices settled at a ten year high, lifting cash cost 40 percent from quarter one. Resilient co-product revenue fully covered the lower cost of naphtha feedstock in Western Europe and cash cost of the Standard naphtha cracker tumbled 60 percent from quarter one.
Ethylene Production Costs ($/ton)
The NexantECA Quarterly Business Analysis program has offered widely respected assessment of trends in production economics of leading petrochemical markets for over 50 years. The recently published report indicates recent trends in cost, price and margin in response to turbulent operating environment.
Asia
The petrochemical market in Asia remained soft in the third quarter of 2022, with demand across most value chains heavily capped by recession fears, the continued impact of sporadic COVID-19 restrictions, and currency weakness. Petrochemical prices and margins remained under considerable pressure in the third quarter, with olefins prices retreating to a two year low. Naphtha cracker margins languished near cash cost breakeven, with broadening weakness across co-product markets countering cost savings offered by record low naphtha crack spreads that remain deeply in negative territory. Naphtha cracker costs in Asia defined the ceiling to regional production costs, unable to capitalise on the lower feedstock cost burden. Softening East/West freight rates and a huge utility cost advantage over European producers revived export opportunities, although business remained very price sensitive to secure placement as weakness became more ingrained in global markets.
Western Europe
Weakness was increasingly apparent in commodity petrochemical markets across Western Europe as supply lengthened against the burden of faltering demand. The adverse economic climate hastened a downturn in demand that was already apparent as the cost of living crisis deepened. Swift pass through of lower crude oil prices into naphtha countered market weakness and escalation of cost components with greater exposure to natural gas. Competitiveness of the European industry was enhanced as the Euro weakened to parity against the Dollar and negative crack spreads on naphtha widened alongside slack petrochemical demand. The NexantECA petrochemical profitability index eased 22 percent from quarter two but remains at upper end of the range seen prior to the sharp upturn in tight markets emerging from the COVID-19 pandemic in 2021.
Volumes were much more exposed to deteriorating market conditions. Most commodity petrochemicals suffered slowing demand as seasonal pressures compounded the deteriorating economic climate. Eurozone GDP stagnated in the first half of the year and escalating energy costs led inflation in the Euro zone above 9 percent by August, prompting fears of a pending recession. Shutdowns of manufacturing lines scheduled through the peak of the holiday season in August were extended. Business was routinely confined to contractual base load, with offers of heavy discounts failing to stimulate consumer interest in incremental spot business. Lengthy Asian markets limited export opportunities. Surplus supply burdened commodity petrochemical markets as supply demonstrated greater inertia than faltering demand. Ample availability of olefins returned, clearing upstream bottlenecks faced through a busy period of scheduled maintenance that had halted crackers accounting for a quarter of regional ethylene capacity in quarter two.
United States
The petrochemical market in the United States was marked by weakening demand and sufficient supply in the third quarter. Increased inflation and recession concerns affected economic activity and weakened petrochemical demand. The majority of petrochemicals suffered decreased margins. The NexantECA petrochemical and polymer profitability index dropped almost 20 percent to settle at the lowest level since third quarter 2020 during the COVID-19 pandemic. Natural gas prices increased further in the third quarter as supply concerns persisted, affecting both raw material and utility costs.
Demand for most petrochemicals weakened as the third quarter progressed. While demand into packaging applications remained steady, demand into the automotive and appliance sectors continued to be hindered by the semiconductor shortage. Ongoing inflation, higher interest rates, and recession concerns affected consumer spending, weakening demand for many petrochemicals. Export opportunities were curtailed as the wider global economy suffered a similar downturn. Lengthy supply was mostly sufficient to cover subdued demand and cuts to operating rates indicated weakening markets.
Middle East
Profitability of export business from the Middle East suffered its greatest quarter on quarter losses since global oil prices collapsed in 2015, with average margins dropping 23 percent. The cost advantage offered by long term supply agreements for gas streams in the Middle East narrowed as Brent crude oil prices dropped more than 25 percent to settle below US$90 per barrel into September. Petrochemical prices accessed in export markets routinely fell ahead of the downturn in crude oil prices, reflecting weakness increasingly apparent in petrochemical markets as demand slowed ahead of supply.
Find out more...
Quarterly Business Analysis: Middle East - Q3
The Quarterly Business Analysis provides key insight into production economics for a broad range of commodity petrochemicals, polymers and C1 chemicals. The analysis presents a review of costs, prices and margins for typical production assets, providing a valuable view of regional and value chain competitiveness and is is available for each key price setting region - Asia Pacific, Middle East, Western Europe and the United States. A quarterly report provides insightful commentary to illustrate current trends, related to recent market developments. The accompanying database is updated monthly.
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The Author
Andrew Powell, Project Manager
About Us - NexantECA, the Energy and Chemicals Advisory company is the leading advisor to the energy, refining, and chemical industries. Our clientele ranges from major oil and chemical companies, governments, investors, and financial institutions to regulators, development agencies, and law firms. Using a combination of business and technical expertise, with deep and broad understanding of markets, technologies and economics, NexantECA provides solutions that our clients have relied upon for over 50 years.
