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Introduction
The uncontrolled and rapid spread of COVID-19 has caused demand
destruction across various industries, with some sectors such as
tourism, aviation, automotive, and construction more heavily
impacted than others. The crude oil market has been extremely
volatile in 2020. This has been due to both a demand shock from the
pandemic with demand for transport fuel, especially jet fuel,
collapsing amid severely restricted air travel and a supply shock
in March and April this year as Saudi Arabia increased its
production and slashed its prices amid disagreements among OPEC+
members regarding production cuts. As of May, OPEC+ members agreed
upon and largely adhered to production cuts, and oil prices started
to recover from the previous lows. However, a bleak outlook
continues to weigh on crude oil market sentiment with a resurgence
of COVID-19 cases globally, uncertainty ahead of the US elections
in November, and ongoing political tensions between the United
States and mainland China. In addition, supply recovery is likely
to outpace demand, especially with the gradual return of Libyan oil
production following an eight-month blockage.
The relationship between propylene demand growth and economic
growth is becoming more ambiguous due to the increasing influence
of the technology and services sector on GDP growth and the
correspondingly lower impact of manufacturing. Also, many products
produced by propylene end users are increasingly being used for
less cyclical, non-durable applications. This is resulting in a
trend of lower multiples to GDP growth. In 2020, the GDP elasticity
of propylene has been only 0.10 as global GDP has contracted by
more than 5% amid the pandemic whereas propylene demand has been
more inelastic, decreasing by only 0.6% year on year. The 2021-25
forecast period projects propylene demand growth at an average rate
of 1.17 times GDP, which is lower than the 1-3 times GDP multiples
in the last decade.
Global
In 2020, a projected 46% of global propylene supply will be
produced as a coproduct from steam crackers while 30% will be
produced by FCC splitters/HS FCC. Propylene production from steam
crackers is influenced by the operating rates of crackers and the
type of feedstock utilized. Regions that utilize mainly naphtha
feedstocks for steam crackers, such as West Europe and Northeast
Asia, generate the greatest amounts of steam cracker propylene
coproduct owing to the high propylene yield of naphtha. In the past
few years, naphtha feedstock has faced economic pressure from
lighter feedstocks—especially ethane and propane due to
increasing availability from the United States. However, this trend
reversed in the second quarter of 2020 when naphtha prices
collapsed along with crude oil prices while ethane and propane
prices did not collapse by the same magnitude. In fact, some
naphtha-based crackers in Northeast Asia and West Europe enjoyed a
negative cost of production in the second quarter of 2020 when
credits generated from coproducts from naphtha cracking could cover
the feedstock and production costs.
As for propylene demand in 2020, polypropylene (PP) is the
largest market and accounts for 68% of total propylene demand
globally. Other key propylene derivatives include propylene oxide
(7%), acrylic acid (4%), oxo-alcohols (7%), cumene (4%), and
acrylonitrile (6%).
Northeast Asia
In Northeast Asia, PP is the largest derivative of propylene,
accounting for approximately 66% of total propylene demand in 2020.
Investments in other derivative products, including acrylic acid
and propylene oxide, are expected to accelerate propylene
consumption as well. Mainland China will still be the largest
contributor of demand growth in the region, but the country's
propylene demand growth from PP has slowed from close to 10% five
years ago to a projected 6.1% AAGR over the next five years.
In 2020, declines in propylene demand going into key propylene
derivatives such as acrylonitrile, cumene, oxoalcohols, acrylic
acids, and propylene oxide due to sluggish automotive,
plasticizers, coatings, and durable goods demand are being largely
offset by increased demand from PP this year. PP demand has been
boosted during the COVID-19 pandemic by surging demand for
packaging, medical, and hygiene applications, which partially
offset the reduced demand from the automotive sector. Also,
propylene demand from PP has increased further as the low crude oil
price environment has incentivized more virgin PP rather than
recycled PP and boosted stocking activity in mainland China.
Regarding supply, some new crackers and PDH projects have been
slightly delayed for a couple of months due to the pandemic.
Previously, it was anticipated that should all these supplies come
onstream, the Asian propylene market would come under pressure.
However, supply length has been reduced due to some new startup
delays, prolonged unplanned outages, and a series of accidents at
some crackers and refineries in the region, as well as lower
propylene supply from refinery sources amid slow gasoline
demand.
Looking at the last decade, several coal-based and
methanol-based technologies to produce light olefins emerged as
crude oil and naphtha prices were close to peak levels. As a
result, in the years that followed, new Asian capacities—mainly
in mainland China—were dominated by coal-based and
methanol-based technologies while interest in traditional steam
cracker projects diminished due to weaker project economics.
However, this has changed following the dramatic crash in global
crude oil markets at the end of 2014. The industry now recognizes
that both coal-based and methanol-based technologies have their own
sets of challenges. Several new coal-to-olefins (CTO) and
methanol-to-olefins (MTO) projects in mainland China were either
delayed or cancelled in recent years due to unattractive economics.
Over the next five years, steam cracker and PDH projects will
dominate new capacity additions given the current favorable
economics. In Asia, the new investments are mostly in mainland
China and South Korea, but most of these new crackers allow for the
use of both naphtha and LPG as feedstocks. In mainland China, there
are also EPB and pure ethane crackers in construction or planning
stages. IHS Markit expects that the use of naphtha as a cracker
feedslate will decline throughout the forecast period, and as such,
on-purpose plant investments—especially PDH units—are
required and increasingly important to meet growing demand in the
region.
Propane Dehydrogenation
The shale gas revolution spurred a sharp increase in propane supply
out of North America. Subsequent strong investment in propane
transportation infrastructure to meet growing LPG demand for
residential and commercial heating attracted investments in PDH
plants. The first in mainland China was Bohai Chemical's 600,000
metric ton (mt) per year unit, which started in October 2013. As of
2020, there are a total of 18 PDH projects representing
approximately 7.9 million mt per year of capacity operating in
mainland China. The two newest PDH plants, which started up in the
third quarter of 2020, are Huahong New Material's 450,000 mt per
year unit and Zhejiang PC's 600,000 mt per year unit. Several units
totaling more than 6 million mt are likely to start up over the
next five years (2020-25). Meanwhile, in August 2018, mainland
China imposed an additional 25% tariff on US-origin propane,
bringing the overall tariff rate to 26%. Following the
implementation of the tariffs, the Middle East has been the main
supplier of propane to the mainland Chinese market, resulting in
higher propane prices in East China compared with Japan due to
higher premiums. Propane imports from the United States resumed in
the second quarter of this year as exemption from the additional
tariffs on US products, including propane, were allowed in mainland
China and the propane price differential between East China and
Japan decreased. Nonetheless, uncertainty remains regarding future
trade talks between the United States and mainland China.
In addition to the above overview of the latest propylene
industry developments in Northeast Asia, global trade flows, price
trends, supply and demand fundamentals in each region, and other
key strategic issues that in the opinion of IHS Markit will have a
significant impact on global propylene markets over the next 10
years are discussed widely and in greater depth in the
2021 World Analysis - Propylene.
The process for developing an updated forecast involves the
analysis of all derivative sectors. With a country-by-country
analysis of demand trends - given the economic, political and
legislative environment - a rigorous approach is taken to develop
demand and growth prospects. From a supply perspective, the
developments in all major regions are analyzed with prospective
projects included, based on IHS Markit's estimates for start-up
timing, given feedstock, engineering and construction availability
as well as the current progress of investments.
Clients have access the following:
The online capacity database, which is updated frequently
throughout the year
A 10-year supply and demand forecast for producing and
consuming countries and regions, which is updated twice during the
12-month service period
A 10-year price forecast for key benchmark prices, which is
updated every quarter
Detailed trade analysis
Access to IHS Markit ethylene experts globally is also included
in this 12-month service period
Posted 20 October 2020 by William Chen, Ph.D, Executive Director, Asia Olefins, IHS Markit