The Petrochemical Industry Returns to Profitability!!!

Implications: Ethylene producers have returned to profitability.  While ethylene prices are dropping quickly, feedstock prices are dropping faster.  While heavy feedstock cracking may still be negative, the overall industry (median margins) are back in positive territory.  Derivative margins are quite strong.

Analysis: Ethylene producers, as a whole, have returned to profitable territory.  There have been lots of questions over the past few months about the continued health of petrochemical producers, and speculation about weak plants shutting down.  In general, this just isn’t the way the industry reacts.  Producers know that, eventually, costs, prices, and demand will realign and capacity for ethylene production will be needed.

While spot ethylene prices have dropped from a high of 65¢/lb in mid-July to the current level of 50¢/lb for August, feedstocks have fallen faster.  Ethane traded at $1.44/gal in mid-July, now it is $1.02.  Natural gasoline, representative of heavier feedstock has fallen in price from $3.11/gal to $2.52.  To further benefit heavy feedstock crackers, important coproducts like benzene have risen in price from about $3.80 per gallon to $4.40.  The fall in feedstocks can be attributed directly to dips in oil and natural gas prices over the same timeframe.

The median cash margin for U.S. producers is now 1.2¢/lb, by my calculation.  While cash margins at the ethylene level may still be negative for heavy feedstocks, producers really don’t sell ethylene (in general), they sell the derivatives like polyethylene.  Polyethylene producers announced a 5¢/lb increase in June, 7¢/lb in July, and are aiming for another 8¢/lb in August.  The industry believes they got the June and July increase, August is yet to be seen.  Spot prices for polyethylene, depending on grade, run from 82-90¢/lb.  The bottom line is that even naphtha-based ethylene derivatives are profitable, so producers will continue to run.

With costs now realigning with the market, concerns shift back to demand.  Domestic demand, generally a function of GDP, is softening.  Exports have been good, but are likely to dwindle in the short term, as Asian producers crank naphtha crackers back up, due to lower costs.  In the long term exports are vulnerable because of low cost Middle Eastern capacity coming on line.

While the U.S. petrochemical industry still faces many challenges that will require creative solutions, a eulogy is certainly not in order.