Commodities — Ethylene, Plastics, and Their Supply Chain

Spend Matters welcomes a guest post from Nick Peksa of Mintec Ltd.

A couple of weeks ago I attended the Commodity EDGE conference in Chicago. It was an interesting couple of days with a varied audience and a great set of speakers. The session I was invited to host was based around chemicals, ingredients and their outlook going forward. So this presents a perfect opportunity to share some of the content.

Ethylene production
Ethylene is one of the world's most important chemicals, with over 60% of the raw material produced being used in the plastics industry: HPDE, LDPE, PS and also PVC. Ethylene is also the key feedstock for the production of ethylene oxide, another major chemical feedstock. Ethylene can be manufactured two ways: from natural gas or from crude oil derivatives.

Source: Mintec Chemical Factsheet

On the basis of the chemical synthesis routes of manufacture there are four distinct trading regions: US, Europe, Asia, and the newcomer, the Middle East. Asian and Europe, due to limited natural gas reserves, rely of the Naphtha routes, while the US and Middle East (with cheap and plentiful natural gas sources) will opt for this route.

Outlook for ethylene production
The price of ethylene in world has risen by 19% since the start of 2012. Ethylene prices are tending to rise due to limited global supply and a rise in the cost of crude oil, natural gas and the key feedstock naphtha. Supply of ethylene, particularly in Asia, is also reported to be limited due to maintenance at a number of important ethylene producers' in South Korea and Japan.

  • US is expected to grow from 28mn tonnes in 2012 to 43-45mn tonnes over the next 10 years
  • In the next five years, the middle east is expected to add 6mn tonnes additional capacity (21mn tonnes)
  • Increases in China looking to be a minimum of 1mn tonnes additional capacity, as China is importing from the lower-cost Middle East
  • Supply and demand is dependent on China, only modest growth of 3-4% is expected

Plastic market movements
LDPE prices strengthened in recent weeks largely driven by high feedstock costs and a tight supply and demand balance. Many producers continued to limit their output, as they have done in the past few months in response to slowing demand, with many plants operating at below-average rates. Demand for film was robust, led by the food packaging and the booming automotive sectors in the US.

European HDPE prices also moved up amidst higher ethylene costs, lower import levels and reduced supply as a result of production cutbacks introduced by most European producers in recent months. In addition, severe cold weather experienced in Europe in late January-February led to problems with freezing polymerization lines at a number of production plants. Demand also improved slightly, particularly from food packaging. By mid-February, a number of producers were reported to have stopped accepting orders that exceeded their forecasts. With petrochemical costs rising, buyers throughout the plastics production chain have been cautious, closely tracking demand developments in China after the Lunar New Year.

- Nick Peksa, Mintec Ltd.

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