Despite some pauses, tags set to resume climb

Supply and demand in balance for the most part

Gordon Graff -- Purchasing, 8/11/2005

Prices of most aliphatic chemicals such as ethylene, propylene, methanol and acetone have been generally up in the past year, but tags of some products, such as ethylene and methanol, have softened in the past few months. With crude oil still in the $60 range and demand for most petrochemicals likely to remain robust for the rest of the year, however, any price lulls for aliphatics are likely to be temporary, say industry analysts. Buyers of aliphatics are finding supplies and demand more or less in balance.

North America has the largest ethylene production capacity, but its position is being challenged by a rapid expansion of ethylene capacity in the Middle East and Asia. One factor that once favored North American ethylene makers—the region's cheap ethane feedstocks for ethylene—has disappeared in the past few years as domestic natural gas, the source of ethane, has skyrocketed in price. Meanwhile, rates for gas oil, another ethylene feedstock, have jumped dramatically this year along with the crude oil from which it is extracted. In fact, ethylene derived from gas oil is now "a net money loser" for producers, says Dan Lippe, president of Houston-based consultants Petral Worldwide.

Most propylene used commercially is a byproduct of ethylene produced by steam cracking units in refineries. But demand for propylene is outpacing the quantities that can be churned out by these ethylene crackers, notes Mark Eramo, vice president for olefins at Chemical Market Associates Inc. (CMAI) in Houston. To fill this gap, he says, more and more producers are making propylene "on purpose" (not as a byproduct of ethylene production), using such technologies as propane dehydrogenation and olefin metathesis.

As for methanol, supplies are "adequate" for now, says Dave McCaskill, another CMAI analyst. He notes that methanol consumers are counting on a huge (5,000 metric tons/day) methanol plant to come onstream in Trinidad by early August. But if that unit, owned by Methanol Holdings (Trinidad), fails to start up on schedule, he adds, "there could be a huge swing" to tightness in methanol supplies later this year.

Because most acetone used commercially is a byproduct of the production of phenol, demand for phenol largely determines capacity utilization of acetone. As a result, notes SRI Consulting, acetone supply and demand are frequently unbalanced, with supply usually exceeding demand. But an unusually strong demand for downstream acetone products that began in 2004 has recently made acetone tight, SRI reports.

Ethylene sales in the U.S. began slackening off in the first half of 2005, says Lippe, as producers of polyethylene, the largest downstream product of ethylene, began holding back some of their ethylene orders. Apparently, he concludes, they were expecting ethylene prices, which had dropped somewhat due to a temporary dip in crude oil tags, to go still lower. But crude oil rebounded, he notes, adding that "it would be hard to make the case that ethylene prices are going to fall anymore" this year. He believes ethylene consumers will soon get this message and resume their accustomed rates of buying. In any case, ethylene producers seem bullish on their product, Lippe surmises, because they haven't cut their operating rates, as they usually do when they expect business downturns.

Demand for propylene is growing faster than that for the ethylene that is produced along with it, Eramo says. The "large number of projects" to produce propylene that are expected to start up in the next three or four years, he adds, will barely keep pace with the accelerating propylene demand. As a result, Eramo anticipates that propylene will remain somewhat tight over the next five years.

The big story in methanol last year was the frenetic sales in China, which leaped by 12-13% over 2003, McCaskill reports. That activity has cooled off, he says, with sales growth in China this year likely to be up a still respectable 5-7% over 2004.

In the acetone sector, demand was sluggish in 2001 and 2002, but picked up significantly in 2003 and 2004. The turnaround, according to SRI Consulting, was influenced by a brisk market for acetone-derived polymer feedstocks such as methyl methacrylate and bisphenol A, as well as solvent applications of acetone.

After a run-up in early 2005, prices of ethylene, particularly spot prices, began to retreat somewhat in the three or four months leading up to July. Lippe believes that this was due to slower demand from the polyethylene producers who expected prices to fall further. But that softness has probably run its course, he asserts. "I don't think ethylene prices are likely to drop, at least for the next six months," says Lippe. "In fact," he adds, "I would think they will go up again" as the impact of recent rises in crude oil is felt and purchasers realize that tags will not edge lower.

Because propylene demand is outstripping that of its ethylene co-product, propylene prices have been rising faster than ethylene tags. Typically, says Eramo, propylene has sold at 75-80% of the price of ethylene. But today, propylene is trading at 90-95% of the value of ethylene, and in some markets propylene's price exceeds that of ethylene. Overall, propylene will continue to sell at an historically high ratio to ethylene for at least the next five years, Eramo predicts.

Methanol prices were "abnormally high" for about two years, before starting to fall back a few months ago, McCaskill observes. The decreases have been most apparent in China, he adds, where declines have averaged about $5/ton per week and are related to a slowdown of demand in that region. These declines in Asia, he notes, are now working their way back to Europe and North America. Methanol should "continue to soften somewhat" for the rest of the year, McCaskill forecasts. Supply and demand for methanol should be in balance throughout 2006, he continues, so that methanol tags are unlikely to change much in 2006 from their levels at the end of 2005

Meanwhile, the recovery of demand has driven acetone prices to record highs. But SRI analyst Elvira Greiner notes that as East Asia continues to bring on more acetone capacity to meet rising demand for the product in that sector, acetone prices will be "negatively impacted."