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U.S. Ethylene Prices in Q2 2019: Where Have All the Traders Gone?
01 July 2019
Hello! I'm Kathy Hall, the executive editor of OPIS PetroChem Wire. I've been writing about
U.S. petrochemical markets for more than 20 years and what a wild
ride it has been so far! I'll be giving quarterly market recaps for
one of my favorite markets, ethylene. So, watch this space for more
ethylene price insights. Please use the comments section to leave
feedback and any suggestions you have for trends you'd like to see
addressed in these pieces.
In 2012, I gave a presentation at a plastics industry
conference. The audience really wanted to know when the price of
ethylene was going to break. Ethylene was 50 cents per pound while
polyethylene was also 50 cents per pound. Making polyethylene was
not living the dream.
Plant after plant, I laid out a list of new ethylene facilities
that were under construction that year, the first of which was
scheduled to start up in 2017. Ethylene prices would have to fall.
And, as the market played catch-up getting its polyethylene and
other downstream plants started up, margins for those plastics
would expand.
"Your time will come," I said, in conclusion.
And that time is here. Ethylene has moved into the basement, while polyethylene has stayed in the
penthouse.
Take a look at then...
And now...
While it's nice for me to feel as if I was quite prescient, the
journey had some surprising plot twists over the past seven
years.
Unexpected events (ethylene plant outages), realized prophecies
(new plant start-ups) and drama that affects all markets (weather)
have made for some turbulent times for both ethylene and its child,
polyethylene.
A few factors have contributed to this slump in
liquidity and its effect on ethylene prices.
There are fewer people trading ethylene than a few
years ago. The 2016 spot ethylene market was a busy one,
and it was the most activity ethylene had ever seen. But ethylene
is not a market for the faint of heart, and several trading
companies closed up their books entirely in 2017. Few new people
have entered the ethylene trading arena, and a few more shops have
quietly shut their ethylene books in 2018 and 2019.
The new kids on the block don't need ethylene.
The latest entrants in the ethylene market are there because they
started up ethylene plants. Sometimes it feels as if everyone's in
disposition mode.
The old ethylene buyers aren't buying like they used
to. With new ethylene production coming from typical
consumers such as OxyChem, Dow, Indorama and Shintech, the
consumption base has changed.
As the number of participants has ebbed, the appetite for risk
has naturally waned. And this has created a rather timid
marketplace. Ethylene is in a "contango" shape, meaning that the
near-term months are priced lower than farther-out time frames. A
contango market usually follows the cost of storage and is
fundamentally viewed as a weak market.
An unusual nuance of the contango in the current ethylene
market, however, is how small it is. The premium of July over June,
for example, is a scant one-eighth of a cent. This is less than the
cost of storage. This adds to the reluctance of participants to get
too busy in the forward markets - the price is practically flat to
today's price. Low risk, low reward, no fun.
Forget about trading for a moment - ethylene producers are also
struggling in a low-price environment. While producers certainly do
not price all of their ethylene at the spot price, that low price
is a largely unprofitable one. Even with NGLs languishing at 2019 lows, costs to
produce ethylene with anything other than ethane is a losing
proposition for most.
Co-product prices are attractive - polymer grade propylene is
still above 30 cents - however, cracking propane or butane leaves the ethylene
portion of the process at a negative number. Even using ethane,
costs to produce ethylene are below 10 cents at this writing, and
spot ethylene is 12-14 cents in the NOVA well at Mont Belvieu. Not
much cause for celebration.
So, is there any good news? For petrochemical producers, yes.
Ethylene may be in the basement, but every producer of ethylene
uses most of it to produce other chemicals. So integrated supply
chain margins are robust.
As a commodity itself, however, ethylene is having a rough year,
being (rightfully) snubbed by those looking to build a book reliant
on risk and speculation.
What's ahead for ethylene? Will liquidity continue to dry up,
returning us to the days when one trade a week was big news?
That's doubtful. There are fewer people in the ethylene market
than in 2016, but a healthy number of companies continue to lease
storage space at the major hubs in Mont Belvieu, Texas, and
Choctaw, Louisiana.
And more hubs are on the way! One way to stimulate more
opportunities in any commodity is to create more options, such as
different locations.
Caliche Development Partners recently opened a storage hub at
Beaumont, Texas, which is a common stopover for piping ethylene
from South Texas or Mont Belvieu up to Port Arthur or over to
Louisiana.
Enterprise Product Partners is on track to open yet another hub
near the Houston Ship Channel and recently announced that the hub
is extending pipeline capabilities from Morgan's Point down to
South Texas. The Enterprise hub, in particular, is an interesting
one, as it will also serve a new ethylene export terminal.
So, the market may be down in the dumps at the moment, but 2019
could end up being remembered as "The Year of the Ethylene
Comeback." Watch this space to stay on top of what's next.