Spend Matters welcomes this guest post from Monika Sosnowska, of Mintec.
In the second half of 2015, we wrote about falling ethylene and propylene prices. Now, after being on a downward trend since the autumn of 2014, the major plastic feedstock prices have started to rebound and have climbed over the last couple of months.
These chemicals are very important in our day-to-day lives, as they are processed into two major and widely used plastics: polyethylene (PE) and polypropylene (PP). They are used in the production of a vast range of plastic products such as plastic bags, food containers, household products, car parts and building and construction materials, to name a few.
What caused the sudden change in price direction? There are two reasons. The main driver has been the recovery and upward movement of crude oil and natural gas prices. As a result, ethylene has increased by over 60% since the beginning of the year. The increase was accentuated by numerous unplanned production stoppages in the past few months.
Another factor is the planned seasonal maintenance operations. These scheduled operations generally peak twice a year around spring and autumn and can last for up to two months in a single plant. In 2015, low prices of crude oil heavily outweighed any price impact of these seasonal operations, but now that the crude prices are recovering, the effect can be seen.
The propylene price has also rebounded, although more modestly, up by nearly 5% since the start of the year. This was partly because the propylene price already had a significant premium over ethylene at the start of the year due to tight underlying supply.
As the shale gas revolution took off in the U.S., ethylene supply rose but U.S. and global propylene supply reduced markedly. This is because propylene has historically been produced as a by-product of ethylene production from crude oil. Higher availability of low-cost feedstock ethane, produced from shale gas, meant that more ethane or other lighter feedstocks were used, leading to a reduced capability to coproduce propylene.
Alternative propylene production technologies are now being explored to bridge this gap in the U.S., such as a propane dehydrogenation (PDH) process, with one plant already in operation and several more under construction or consideration. Significant investment has also been made in China in recent years to tackle the propylene deficit.
The changes in ethylene and propylene supply balance have also fed through to the plastic market, and the U.S. is now expected to be in surplus of polyethylene (PE). Since other regions, such as Europe and Asia Pacific, will suffer a growing PE deficit, PE exports from the U.S. are expected to increase.
So where next? Volatility in the crude oil markets always makes predicting the future for ethylene and propylene markets difficult. Despite the narrowing gap between the prices of ethylene and propylene, the situation might soon be reversed. The scale and timing of bringing new propylene capacity to the market will depend on crude oil prices, as low prices may make using crude oil-based feedstock more attractive and curb or delay these projects.