"Dramatic changes have occurred and will continue to occur in global ethylene markets during this decade, bursting long-held paradigms," says Vikki Medley, director of light Olefins for Chemical Market Associates Inc. (CMAI). She believes, "Companies must incorporate a return, once again, to oversupplied market conditions at some point this decade in their corporate planning."

But the geography of the ethylene supply base is shifting. Because of their proximity to cheap feedstocks, ethylene producers in the Middle East have a cost advantage over producers elsewhere in the world, particularly in Europe and North America. The high profit margins enjoyed by these producers are resulting in the construction of new plants.

According to Mark Eramo, CMAI's president of olefins and derivatives, at the end of 2006, U.S. ethylene production capacity was 28.5 million metric tons while global capacity was 121 million metric tons. At the end of 2011, he forecasts U.S. production capacity to slip slightly to 28.3 million metric tons while global production capacity will rise substantially to 156 million metric tons. This increase is due to large plants coming on stream in the Middle East and Asia.

By 2012 ethylene production capacity in the Middle East will equal that of North America. Substantial new ethylene capacity has recently come online or is under construction in China, Singapore, India and Taiwan.

The world's largest ethylene producers in descending order are Equistar Chemicals, ExxonMobil, ChevronPhillips, Shell and Innovene (formerly BP). Other major producers include BASF, Fina Petrochemicals, Formosa, Lyondell, Sabic, Sinopec, TotalFinaElf and Westlake Petrochemicals.

Ethylene is coming from  new regions, like Shell’s new ethylene plant in Nanhai, China.

In the U.S., 60% of total ethylene production capacity comes from liquefied natural gas (mostly ethane) and 38% from naphtha. The relatively high cost of U.S. natural gas is a major factor in the forecast for flat U.S. ethylene production in the next several years. Ethylene is cheaper to produce from naphtha than from liquefied natural gas. In the Middle East, most ethylene is produced from liquefied natural gas according to Eramo. However, he notes, "In the Middle East, producers are now introducing naphtha into their ethylene production strategies in order to build a more diversified downstream chemical industry.

Eramo says over-supply could hit the ethylene market by 2010. Another issue from a U.S. viewpoint is the forecast for a glut of LPG supply on a global basis in combination with increased availability of ethane from domestic production and liquefied natural gas imports.

Ethylene prices peaked and slid in 2006. Buyers indicate the price slide may be over, though.

So while global ethylene production will increase substantially, even with flat production, the U.S. ethylene industry will remain an important factor in the global chemical economy.

The biggest factor that may dictate where supply comes from may be feedstock costs. In the first seven weeks of 2007, crude oil prices (West Texas Intermediate) have varied from a high of $60.05 per barrel to a low of $49.90. Natural gas prices have varied from a high of $7.96/MM Btu) to a low of $6.03. Ethane prices have varied from 58.75¢/gallon down to 52¢.

Prem Cholia, group manager of petrochemicals for Jacobs Engineering Group in Pasadena, Calif. notes that the production growth in the Middle East is being driven by low feedstock costs while growth in China and other parts of Asia are being fueled by strong demand growth.

The percentage of buyers predicting ethylene prices to increase jumped from 19% in March to 35% in April.

Eramo reports that first quarter U.S. average capacity utilization is about 86% of nameplate capacity. Because plants are periodically shut down for maintenance, utilization of effective plant capacity is 94%. It is more difficult to estimate global capacity utilization observes Eramo. "We would guesstimate the world is about 90% nameplate utilization," he says.

Eramo estimates 2007 ethylene prices to average 41.5¢/lb. He forecasts 2007 ethylene margins to be around "9 ¢/lb based on CMAI's large buyer contract price and weighted average cash cost. While it's difficult to pinpoint the exact margin, the key point is that we expect profits in the ethylene sector to be lower in 2007 compared to 2006."

U.S. margins on the merchant spot market were 13¢/lb according to Eramo. He forecasts this to decline to 9¢/lb in 2007.