SIMON SAYS: Dr. Olefins provides his Economic Prognosis

Submitted by Simon Hill on Tue, 06/25/2019 - 16:36
US GDP vs Ethylene Production

Many years ago, when I was young and single, I would always come across this guy, I never knew his name, but every new hip bar I went to, he was stood there, glass of champagne in hand. I got to know him, especially as he was able to tell me which the next in-bar would be. I always called him “the Indicator”. It’s funny how we try to spot commodities that can likewise indicate the next big move in the global economy. Analysts have always said copper, but I think there is a lot of merit in olefins, why not  Dr. Olefins!

The commodity industry has used the catchphrase Dr. Copper as market lingo to predict turning points in the global economy. They say Dr. Copper has a Ph.D. in economics enabling him to make these calls, but it suggests to me that the metal traders spend too much time in their local pub! The more often reason given, is that copper has widespread applications in most sectors of the economy , from homes and factories to electronics, power generation and transmission. If the demand and price for copper increases then the economy is due to grow and vice versa.

I feel though we should be more trusting of Dr. Olefins, as the olefins production ultimately finds demand in a similar, if not even broader, range of business segments than copper, sectors such as automotive, household, airlines etc.

Olefins are unsaturated hydrocarbons, produced initially via thermal cracking but more recently via fluid catalytic cracking and hydrocracking, their applications can be found in the production of alcohols (Please, this isn’t the link to the LPG industry, if you’re thinking where’s all this going?), man-made fibres, industrial polymers and petrochemicals. It’s the petrochemicals that we are most interested in from an NGLs / LPG perspective, so if it determines how the world economy is going to behave I’m up for that!

In pretty simplified terms, the LPGs we love are transformed into mainly ethylene and propylene, which by the magic of chemistry end up in the broad term “plastics”. I’m writing this quietly as I don’t want my sons to think it’s me endangering the world’s eco-system, as well as all those other issues a 58-year-old father is supposedly responsible for! The plastics industry has certainly taken centre stage in the world’s petrochemical industry over the last couple of years. Growth is still blossoming and is still above GDP levels, China has seen near double digit growth despite a waste import ban, also profits have been strong, notwithstanding the crusade by consumers and governments to ban single-use plastics, and the US have brought on-stream new petrochemical and plastic investments aimed predominantly at the export market.

The world is certainly changing and the importance of olefins in investment, consumption and therefore world growth is amplifying. For example, it’s likely that the demand for crude oil derived transportation fuels will max out in less than ten years’ time. This is driving the refining and oil sectors to change course, linking oil to petrochemicals, whether it is building refinery and petrochemical facilities together in one complex (see my blog on global LPG production, 11Jun19) or developing oil-to-chemicals technology, such as by Sabic and ExxonMobil.

The continuation of shale development in the U.S. has pumped up the investment in the huge wave of ethane-based facilities producing ethylene, polyethylene (PE) and monoethylene glycol (MEG), for export. The cost advantage of the ethane feedstock is significant, and with the midstream investments helping unravel the ethane log jams between producer and consumer, it’s likely this investment will continue; by some counts there’s an additional 10 olefin steam crackers planned for 2022 and beyond. In the meantime, we are seeing the growth in propane exports ultimately finding their home in the growing Chinese Propane Dehydrogenation (PDH) facilities producing propylene, despite the U.S./China tariff war (see my blog, “Markets are as Unpredictable as ever.”, 19Jun19). In fact, whilst historically China was the largest importer of petrochemical and plastic raw materials, the drive is certainly on to become self sufficient in propylene and primary derivatives, as it has in polystyrene and polyvinyl chloride (PVC). Though it still imports nearly half of its ethylene, polyethylene, ethylene glycol and other ethylene derivatives, there are major investments going ahead to achieve self-sufficiency.

So, as we sit comfortably reading the blog in our molded plastic outdoor patio chairs, sipping our favourite drink in that orange plastic cup, we’re saying to ourselves, “what’s Dr Olefins or Dr Copper for that matter, got to do with all of this?”.

Well, it’s all been about growth and more growth, with a little tinkering as we go along. But we need to be aware that there are storm clouds on the horizon!

US Ethylene and Propylene Prices

Olefin prices have been down trending for the last year. So, has the industry overbuilt? Are economic forecasts missing underlying demand weakness? Figure 1 above shows U.S. propylene prices declining nearly 50% from 60 c/lb to approximately 30 c/lb, and ethylene similarly falling from around 20 c/lb to just above 10 c/lb. Not coincidentally, other macroeconomic based commodities have weakened as well, with crude oil falling from $66/Bbl for WTI to recent lows just over $50/Bbl. Naphtha, another petrochemical feedstock, that competes with NGLs, specifically propane and butane in Asia and European markets, has become glutted in Asia as demand appears to be waning.

Doom and gloom is not the forecast, at least not at this point in the business cycle, but central banks and governments around the world are taking notice of economic signals that indicate slowing; the US Federal Reserve’s comments over the last several weeks have become increasingly dovish, and the EU is currently in rate cutting mode. There are some economists, even some linked as likely appointees by Mr. Trump to the Federal Reserve (Fed), who have argued for more focus on commodity prices as a guide to monetary policy decision making. It’s likely Dr Olefins has the diagnosis the Fed and governments around the world are looking for, to cure the symptoms of a slowing, or overheating economy.