Low prices will go LOWER
By Christopher Reilly -- Purchasing, 3/11/1999
On the surface, 1999 is shaping up to be another good year for petrochemical buyers. Prices have been in decline for the majority of 1998, and most indicators point to a continuation of lower prices in this year.Market growth of petrochemicals is not what it once was. For the most part, demand has been down domestically and exports have fallen off severely due to the economic collapse of the Asian economies. Though many Far East currencies have begun to stabilize and the economies are beginning to recover, demand for petrochemical imports from the U.S. has remained very weak and will not likely improve for quite some time.
"The coming year will not be a brilliant environment [for petrochemical producers]," says Francz Price, senior vice president at wefa, a firm in Philadelphia that tracks petrochemical and olefin market performance. "There will be no major turnarounds and slow growth," Price says.
Another factor in the price decline has been a state of long-term oversupply in the industry. This oversupply, along with some other factors including lower feedstock prices, has been a leading cause of downward pressure on price indices measuring the petrochemical industry.
Also, some major transactions have taken place in the past few months which may have at least an indirect effect on the petrochemical markets. The mergers of chemical giants Exxon with Mobil and BP with Amoco have created two 800-lb gorillas. The restructuring that must follow mergers of this magnitude is sure to have some effect on the petrochemical industry.
In general, petrochemicals are divided into two major categories: aliphatics, such as ethylene and propylene; and aromatics, including benzene, toluene, styrene, and mixed xylenes.
According to buyer responses to Purchasing's monthly chemical transaction price survey, the aromatics index, which averaged 77.58 for the first quarter of 1998, has fallen dramatically in the past year. It dropped more than four points in the second quarter to 73.33. By the end of 1998, the index dropped a further 10 points to its current level of 63.25.
Data indicate that future declines are imminent. The aliphatics index is forecast to drop to 61 points in the first quarter of 1999, and hover below 59 for the rest of this year.
The same declining pattern is true for the aliphatics index. In the first quarter of last year, the aliphatics index was at 88.26%. That number fell to about 80.55% in the second quarter and continued its dramatic decline another 12.64 points to 67.91 in the fourth quarter of 1998.
Purchasing's data suggest that the aliphatics index will continue to drop to about 65 in the first quarter of 1999, then stabilize at about 63 until a slight recovery in first quarter of next year.
Detailed pricing and market forecasts for six major petrochemicals follow:
Ethylene
Ethylene prices have been in decline due mainly to long-term oversupply. But other factors also have had an effect on price slippage.
Recent demand for the polymers of ethylene and propylene has been fairly strong, but the monomers have depended much on export sales, says Tom Wizner, senior analyst for olefins at The pace Consultants, a petrochemical analysis firm based in Houston, Texas. "Acrylonitrile, vinyl chloride monomer, and ethylene glycol demand and profit margins are weak," Wizner says. "Polymers depend on export sales too, but last year when the Asian economy collapsed, much of polymer exports were diverted to Latin America and Europe. That demand is now drying up," he says.
Both contract and spot market prices for ethylene were at 20¢/lb for fourth-quarter 1998, and are forecast to fall by 2¢/lb to 18¢/lb by second-quarter 1999.
pace analysts describe ethylene prices as being "nebulous." Proposed price increases in the fourth quarter of 1998 have been rescinded, and it is unlikely that increases will stick in the near future. Most analysts forecast that price increases of a penny or two/lb won't be actualized until the first quarter of next year.
Planned and unexpected outages have limited ethylene production since the third quarter of 1998. According to pace, steam-cracker operating rates were at about 87% of nameplate capacity for the month of November 1998. In December, operation problems at the facilities of Westlake and Formosa Plastics prevented operating rates from breaking 90%.
Ethylene inventories are currently at low levels--approximately 8.5 days of demand. Wizner says that this rate is a little out of the comfort range of 12 to 14 days of demand. Ethylene supplies are tight, and prices have gone up a little due to the supply shortages, according to pace, but ethylene derivatives are suffering and profit margins at the derivative level are poor, so it's been very difficult for ethylene producers to achieve any price increases, Wizner says. However, he adds that new capacity and increased production will begin to quell this supply problem by the start of the second quarter.
Consumption is good, but not great, largely because of the loss of export sales, and weak sales of the chloride chain, vinyl chloride monomer, and PVC.
But despite the current situation, ethylene producers have been pushing for price increases for the past five months, according to Wizner, and each time they have failed.
There are an estimated 24 domestic producers of ethylene, accounting for approximately 57 billion lb/yr of nameplate capacity.
The major markets for ethylene are ethylene oxide, ethylene glycol, polyethylenes, styrene, vinyl chloride monomer, and polyvinyl chloride production.
Analysts at pace are predicting about 2% ethylene growth in 1999. Ethylene stocks should be back to normal by the second quarter of the year and will reach surplus status during the second half of 1999.
There was about a billion lb of capacity added to the industry (steam crackers) last year, mostly by Union Carbide and Mobil. However, no U.S. expansions have been planned for 1999, according to pace.
Benzene
Benzene prices, like the other aromatics, also have been down. The average contract and spot market price for benzene during the fourth quarter of 1998 was 83¢/gal, according to our survey data. This is a drop of nearly 10¢/gal when compared to the price of benzene during the first quarter of last year. Look for prices to bottom out at an average of 72¢/gal in the second quarter of 1999 before leveling off at approximately 75¢/gal on average through the year 2000.
Increases in benzene production on the order of about 5% during the third quarter of 1998 were enough to offset declines in cumene and cyclohexane, which, according to pace, kept consumption of benzene flat for the remainder of 1998.
Benzene production in the third quarter of 1998 was down about 10% from the second quarter. According to a pace estimate of annual production, 1998 was down slightly from 1997 totals.
Benzene producers' operating rates were down to approximately 68% for third-quarter 1998, compared to about 75% for the second quarter of last year. The National Petroleum Refiners Association (npra) reports that this is the lowest operating rate for benzene since 1992.
With regard to operating rates, 1998 was down from the previous year. pace data has the operating rate for 1997 at 77%, in 1998 that number was down to 74%. Expect the operating rates to climb slightly in 1999 back to the 1997 level.
Annual production capacity for 1998 was just slightly more than 3.2 billion gal. This was an increase of about 1 million gal of product from the previous year. pace predicts that the annual production for benzene in 1999 will be the same as last year: 3.2 billion gal/yr.
In 1997, Chevron and Saudi Industrial Venture Capital group formed a 50:50 joint venture to build a 482,000 ton/yr benzene plant in Al-Jubail, Saudi Arabia. Completion of the plant is expected this year.
Styrene
Styrene prices have been declining for more than two years due to oversupply and are predicted to track benzene prices in the coming year. For the first quarter of 1998, average U.S. bulk prices for 99.6% material were 30¢/lb for contracts and about a penny less per lb for spot tags, according to buyers' responses to Purchasing's monthly chemical transaction survey. Prices saw downward pressure in the second and third quarters of 1998. By the end of 1998, bulk contracts were 29¢/lb on average. Spot tags averaged about 26¢/lb.
In November and December of 1998, some styrene monomer producers attempted to raise prices by as much as 5¢/lb. But the fourth quarter of 1998 saw prices slip further, limiting the likelihood of price increases in the near future.
Buyers expect further declines in both contract and spot tags this year. Respondents forecast average prices of 26¢/lb for contracts and 22¢/lb for spot tags during the first quarter of 1999. Look for contracts to average about 23¢/lb in the second quarter. Spot tags at that time will bottom out at about 20¢/lb, according to respondents' data.
One reason for this is that major end uses for styrene are mature and there has been little change in the consumption outlook for 1999 compared to last year. Styrene consumption was about 10.3 billion lb in 1998. Analysts at pace predict consumption in 1999 will fall off about two percentage points from last year's level.
Most analysts agree that prices will remain flat for the remainder of the year, with no price increases until at least the first or second quarters of 2000. Profit margins in 1999 will remain under pressure.
Similarly, pace predicts production will be down approximately 2% from last year's level. Production is not likely to improve until demand for styrene and its derivatives improves with the recovery of the economies in the Far East.
Nova Chemicals Ltd. recently completed a process-technology upgrade at its Sarnia, Ontario, Canada plant which will reduce costs and improve styrene production by 60% to 90 million lb/yr, according to the company. The process, instituted to address environmental issues, has been under way for the past year and a half and cost approximately $83 million.
Also, Lyondell reports resumed styrene production at its Channelview, Texas, facility following operating difficulties.
Toluene
Domestic prices for bulk toluene contracts have fallen almost 11¢/gal on average in the past year. In the first quarter of 1998, contracts were 1.02¢/gal. In the fourth quarter, contracts averaged 94¢/gal, and are forecast to average 91¢/gal in the first quarter of 1999.
Weak demand and lower blending rates for toluene are expected to push contract prices down as low as 88¢ to 90¢/gal for the rest of 1999.
The spot market for toluene will see a similar decline, from an average of 95¢/lb in the first quarter of last year to 89¢/lb at the end of 1998. According to Purchasing's price survey data, spot tags will continue to fall as low as 82¢/gal on average by the end of the second quarter. Spot prices will remain flat at this rate until late-year increases of 2¢ to 3¢/gal bring fourth-quarter 1999 averages to about 85¢/gal.
There are about 23 domestic producers of toluene. U.S. total annual capacity is about 1.7 billion gal, according to pace estimates. Toluene is primarily produced from the gasoline blending pools at refineries, but it is also a by-product of styrene production.
Toluene has a wide range of end uses. The most common is its use as a hydrocarbon solvent. Another application is in gasoline blending. Toluene also is used as a feedstock for a number of derivatives, including benzene and xylenes.
Propylene
Average contract and spot market prices for chemical-grade propylene in the fourth quarter of 1998 were about 14.4¢/lb. This is down about 3¢/lb from the average price of 16.3¢/lb in the first quarter of 1998. According to Purchasing's price survey data, prices are forecast to dip another penny/lb in the first half of 1999 and then remain flat at 14¢/lb on average into the first quarter of next year.
pace data predict that chemical-grade propylene contracts will be flat at 11¢/lb for the first several months of 1999, but these data reflect Gulf Coast prices; Purchasing's survey encompasses national prices, which are a few cents/lb higher on average.
"It's a mixed bag for propylene as far as 1999 is concerned," says Tom Wizner, pace's Senior Consultant, Olefins. "Though chemical-grade propylene supplies will be in surplus all year, pace's growth forecast for 1999, based solely on the performance of polypropylene, is a conservative 1.7%," he says.
Expansions of polypropylene production in the past few months weakened profit margins domestically. As was the case with ethylene, no price increases are forecast until at least the first quarter of next year.
There are approximately 33 producers of propylene in the U.S. with a total capacity of about 31 billion lb/yr. About half of that production will come from olefin plants, yielding about one-third lb of propylene for every lb of ethylene produced, but this approximation depends on feedstock prices and operating rates.
Propylene demand remains fairly good, according to pace, due to steady consumption of polypropylene and cumene. Also, surpluses of polymer-grade propylene are causing stocks to build.
Exxon has begun plans to build a new polypropylene plant at its Alsten, La., location. The proposed plant, which will add 605 lb/yr of polypropylene capacity, is scheduled for completion by the second quarter of next year.
In other capacity news, Montell plans to close its Berr, France, polypropylene plant, citing high fixed and variable unit costs as the reason. The plant currently produces about 170 kilotons/yr of polypropylene.
The primary application for propylene is polypropylene production, which accounts for about half of domestic demand. Other applications include propylene oxide, propylene glycol, and acrylonitrile.
Mixed xylenes
Average prices for mixed xylene contracts are forecast to slip from their fourth-quarter 1998 average of 91¢/lb. Contracts at the beginning of '98 averaged $1.02/lb, but dropped dramatically in the second quarter to 93¢/lb. In the second half of last year, prices for contracts stabilized somewhat at about 91¢/lb.
Likewise, spot tags have slipped from 97¢/lb on average in the first quarter of 1998, to 91¢/lb by the end of the year. Weak energy prices, low octane values, and diminished chemical demand during the months of November and December have applied additional downward pressure to mixed xylene prices, according to pace.
Buyers can expect further slippage of contracts and spot tags in 1999, with no recovery until mid-2000. According to Purchasing's price survey, contract averages will be at about 87¢/lb for the first half of 1999, then drop to 85¢/lb in the third quarter, and 84¢/lb in the fourth quarter, barring any unforeseen changes in domestic or export demand. Look for spot prices to fall to about 85¢/lb in the first quarter of this year, then dip somewhere near 82¢/lb by the close of 1999.
Production outages for mixed xylenes have also had a hand in the declining prices. An outage at Chevron's Pascagoula, Miss., plant reduced mixed xylene demand in the fourth quarter of 1998. This outage was offset to a degree by a recent expansion of Amoco's Decatur, Ala., plant, but analysts are skeptical that the plant will continue to run at the same high operating rates since startup.
U.S. mixed xylene capacity is more than 13 billion lb/yr from about 21 domestic producers. It is typically extracted from refineries' gasoline blending pools, but can also be produced from toluene disproportionation.
Mixed xylenes have three major derivatives: orthoxylene, used mainly in the production of phthalic anhydride; metaxylene, a component of isophthalic acid in the gasoline pool; and paraxylene, used primarily in the production of polyethylene terephthalate (PET).
Ethylene market at a glance
Current average price: 20¢/lb for contracts and spot tags
Supply: Approximately 57 billion lb/yr
Demand growth: About 2%/yr
Operating rates: Approximately 87%Benzene market at a glance
Current average price: 83¢/gal for contracts and spot tags
Supply: Approximately 3.2 billion gal/yr
Demand growth: Flat
Operating rates: About 77%Styrene market at a glance
Current average price: About 29¢/lb for contracts; about 26¢/lb for spot tags
Supply: About 10.3 million lb/yr
Demand growth: Declining 2%/yrToluene market at a glance
Current average price: 94¢/gal for contracts; 89¢/gal for spot tags
Supply: 1.7 billion gal/yr
Demand growth: about 2%/yrPropylene market at a glance
Current average price: 14.4¢/lb for contracts and spot tags
Supply: About 31 billion lb/yr
Demand growth: about 1.7%/yrMixed xylenes market at a glance
Current average price: 91¢/lb for contracts and spot tags
Supply: slightly more than 13 billion lb/yr
Demand growth: about 2%
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