Volatile markets are the norm
Unexpected plant shutdowns have been tighening key supplies, and boosting prices.
By Tom Stundza -- Purchasing, 11/2/2006 2:00:00 AM
The nine-month chemicals marketplace has been marked by volatility in supply and purchasing that has been slightly lower than expected. While nine-month sales data isn’t readily available, it can be reported that chemical railcar shipments through September were running 1.8% behind year-ago levels. Pricing was relatively stable for some time but then came several unexpected late-summer plant shutdowns that have tightened supply and boosted pricing of ethylene and methanol—just as energy costs began to tumble.
Analyst Frantz Price at Global Insight’s offices in Eddystone, Pa., projects that domestic petrochemical production for the year will be barely 1% better than the 2005 output. “Domestic petrochemical production has improved lately after having plunged 10% in 2005,” he writes. “However, it remains lackluster, the consequence of an inventory draw-down earlier in 2006 and a slowdown in the key housing construction and consumer durable markets in recent months.” Now, with manufacturing activity cooling, economists are reluctant to forecast definite petrochemical supply, demand and pricing outlooks for 2007.
A surge in petrochemical prices occurred after the 2005 hurricanes that ran from September 2005 through April 2006. Subsequently, tags began a slow and steady decline before an unexpected spike in September. The Purchasing Chemical Price Index reading of 196.0 through September (100=1992) is close to even with the 196.9 reading for full-year 2005—and not only because of a jump in September but because of unplanned and temporary supply issues. The Plastics Price Index reading of 197.7 in September compares with 192.6 for 2005; but, again, that’s because of the recent spikes that are expected to fall back to earth soon.
Also note that foreign supply has expended this year because of the weak U.S. dollar and the return of U.S. prices to global parity. Looking ahead, analyst Price sees “petrochemical prices moving sideways to slightly upward in the next two years (until) several new petrochemical plants currently under construction in the Middle East and Asia come on-stream in 2009–2010, taking world prices down.”
A key factor in production of ethylene and numerous other chemicals and resins is the supply and cost of oil-based energy products and natural gas. Only 22% of the buyers polled by Purchasingdata.com in September see price inflation ahead. A market analysis by the Barclays Capital suggests an oversupply of energy products in North America and Europe will keep prices down this autumn. This view has been supported by other analyses, which see further price slippage in the fourth quarter from a seasonal slowdown in demand during milder-than-average winter weather.
Ethylene complex is weak
Ethylene’s spot prices have been volatile all year, starting at 56¢/lb, sliding to 46¢, rebounding to 54¢ and now, looking at September buys for October deliveries, down again to 49¢. Reason: The market shock of recent unplanned outages at Chevron Phillips and Westlake crackers have subsided. Also note that spot ethylene is well below the August ethylene contract price of 51.5¢/lb. Given the disparity between spot and contract and a lower feedstock cost structure in September, ethylene contract prices also might be ready to decline.
Traders suggest that October spot material will be around 47¢ or so and November-December prices could go as low as 42¢. That’s because crackers are coming back on stream. The production outages are expected to decline from 13% of capacity to less than 5% by November as planned maintenance turnarounds come back online. Also, Westlake planned to restart its cracker at Lake Charles, La., in early October, and Lyondell’s La Porte, Texas facility, is back up after a month of downtime for unplanned maintenance. Also, Shell has lifted a month-long force majeure on ethylene now that two crackers in Norco, La., are back online, providing sufficient supply to meet demand while the company’s Deer Park, Texas, olefins and aromatics units undergo scheduled maintenance.
Also contributing to the softer prices ahead is softening demand from the polyethylene sector. Ethylene is a key olefin feedstock with more than 59% going into PE production for use in a wide variety of products—including plastic containers like buckets, luggage, storage tanks and furniture, as well as film and plastic bags. PE market prices jumped by 6¢-9¢, depending on the grade, in September because of the ethylene supply and cost issues. However, sales prices were expected to fall back to July-August levels by October because of the decreased costs of natural gas and crude oil.
Any upward pressure on polymer prices is being degraded by the projected slippage in ethylene monomer prices, says analyst Steve Byrne at Merrill Lynch in New York. “Given the continued sluggishness in polyethylene demand and a significantly lower cost structure (in October), it does not appear likely that PE producers have enough pricing power to push through any sustained increases,” he writes.
Also, “both suppliers and consumers have noted increasing offers of lower-priced prime PE in secondary markets, which has placed further downward pressure on the contract sector,” reports Ron Coifman at the ICIS online news service. “Additionally, consumers say purchases were slowing, noting adequate inventories on pre-buying ahead of the recent price hikes and of further increase announcements. Players anticipate the U.S. PE market will weaken in the fourth quarter with the approach of the year-end draw-down on inventories.”
Outside the U.S., ethylene supply is tight, particularly in Asia and Europe, due to production glitches and plant maintenance shutdowns. In Europe, PE prices moved up in August and September and word on the street says producers will be trying to increase PE prices again in the fourth quarter. Asian olefin spot markets have climbed over 30% in the past six months—flirting with 13-year highs this year due to very tight supply. Accordingly, PE prices have been soaring by up to 18% in China due to tight ethylene supply and plant-maintenance turnarounds in the region.
Not everyone agrees that high prices are sustainable, though. Ethylene prices may fall 16% in the next three months because regional production capacity is expected to expand when plant maintenance ends, forecasts Singapore-based industry consultant Garrie Li of Chemical Market Associates.
Asia’s ethylene capacity is set to climb 11% to 28 million tons next year, according to Li. South Korea’s SK Corp. and Japan’s Idemitsu Kosan are among chemical makers re-opening plants after maintenance and Taiwan’s Formosa Petrochemical soon will open Asia’s largest plant, a 1.2 million-ton a year cracker. In fact, new ethylene plants are opening worldwide.
The U.S.-British BP energy giant and Germany’s BASF, the world’s largest chemical maker, have built chemical plants in China. Exxon Mobil, the world’s biggest investor-owned oil company, is building a second cracker in Singapore. China Petroleum & Chemical Corp. and PetroChina Co., the country’s biggest oil companies, have announced plans to commission as many as 12 crackers, each with capacity of about 1 million tons a year, between 2007 and 2011. And, Saudi Aramco, the world’s largest privately held oil company, plans to build a $3.5 billion refining and chemicals venture with Exxon Mobil and China Petroleum & Chemical in China’s Fujian province.
Upshot: “Asian (home and export) ethylene prices in 2007 probably will stay below this year’s record highs because of this rise in supply,’’ Li says. In agreement is Yoshinori Hasegawa, senior broker at Singapore-based Ginga Petroleum (Singapore). “All indications point to a sharp price downturn before the year’s out,’’ he says, “since the current market is largely driven by a short-term supply tightness.’’
Methanol mart is a mess
Methanol is a key ingredient in the markets for aliphatic and solvent chemicals and an important raw material in the production of acetic acid, formaldehyde and formaldehyde-derived products used in a wide range of engineered wood resins, specialty wood adhesives and other applications. Several methanol outages and subsequent force majeure non-delivery announcements from producers in Trinidad and Equatorial Guinea have caused tightness in the world methanol market, driving up methanol prices and disrupting the acetic acid and formaldehyde markets as well.
Celanese Chemicals, which uses methanol as a raw material for its acetic acid, says methanol “currently is trading at an all-time high and in extreme short supply.” That’s why Deutsche Bank analyst David Begleiter estimates that methanol prices have increased from 30% to 65% globally. Gulf Coast spot methanol transactions averaged $2.03/gallon in September as compared with an average $1.05 in August and 92¢ in July. And formaldehyde averaged 36¢/lb in September (because of methanol supply allocations) after averaging 21¢ for the previous 11 months.
Acetic acid costs an average 53¢/lb these days, the highest spot price since Purchasingdata.com started tracking the product in 1984. Fourth-quarter acetic acid contract price discussions are underway, and producers are talking increases in the range of 6¢-10¢/lb. That’s because of the high value of methanol feedstock, as well as lingering supply shortages. Most insiders believe the tightness in the methanol market will continue to impact downstream sectors for a while. There’s a 90% sales control (meaning, allocation) being maintained by Celanese, the largest domestic acetic acid supplier. However, market sources say 6¢ would be the absolute upper limit on what producers might achieve.
Yet, there are reports of trader-based sales of methanol for October deliveries at $2.35-$2.50/gallon. Revised thought by the analysts suggests that methanol supplies won’t really loosen sufficiently to depress pricing until November even though producer Methanol Holdings (Trinidad) has resumed production at its 5,400 metric ton/day plant. “So, the U.S. Gulf Coast market won’t see fresh supplies from the plant for several weeks yet,” says Leslie Contreras at the ICIS news service.
Looking ahead, a new market analysis by Chemical Market Associates of Houston sees world methanol demand will be increasing through 2011. But, the growth will be uneven, centered in the Middle East and Northeast Asia, most notably China. North America and Europe will continues to see a significant decline in methanol demand. The phase-out of methyl tertiary butyl ether, or MTBE, as a gasoline additive has the potential to eliminate the production of approximately 9 million metric tons of MTBE by 2008 from the peak in 2000, which is the equivalent of 3 million metric tons of methanol. Similarly, Europe is on an aggressive program to replace MTBE with biofuels. The loss of MTBE production in this region of the world will be approximately 2.6 million metric tons from the 2000 peak consumption timeframe to 2008. This is equal to nearly 900,000 metric tons of methanol.
Material from personal interviews, newswire services, other reporters, buyer surveys and industry sources was used in this report.
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