Dim long-term outlook

According to a new report from IHS, a market research firm based in Englewood, Colorado, USA, an extended recovery period for crude oil prices would have dramatic implications for the global petrochemical industry, creating a more competitive environment for naphtha producers and possibly less demand for recycled plastics.

The IHS “Chemical Crude Oil Turmoil and the Global Impact on Petrochemicals Special Report” assesses the potential market and economic implications of three possible, short-, medium- and long-term recovery trajectories for crude oil prices.

“Oil price volatility is creating a nightmare for companies planning investments,” says Don Bari, vice president, technology and analytics, IHS Chemical, and an author of the report. “The long-term recovery case, should it come to fruition, has the most significant implications for the market. Since oil dynamics drive marginal production cost and price-setting mechanisms for many chemicals, plastics and fibres, a prolonged oil-price recovery could shift the feedstock advantage from ethane and back to a more cost-competitive naphtha.” He adds that the scenario could resemble the industry experience of the late 1980s.

In the case of a long-term oil price recovery, IHS economists expect moderate economic growth to continue for several years, along with slower oil demand growth. At the same time, technology would continue to reduce oil production costs and increase supply, even at lower oil prices. Long-term, continued global oversupply of crude oil could keep prices from recovering to trend for more than 10 years, the IHS report says.

As for petrochemicals, the first major impact of a long-term oil price recovery, Bari says, would be on production of natural gas liquids (NGLs) and ethylene in the USA, where prolonged lower oil prices would slow NGLs production and ethane cracker capacity expansions, potentially creating a tight market.
 

“Ethylene cracker operating rates would be driven to near-record highs, since the second wave of ethylene capacity additions wouldn’t come online until 2025, and global ethylene demand growth will be strong,” Bari says. “According to our IHS analysis, in the long-term recovery case, ethylene demand is forecast to grow at an annual rate of 4.5% and nearly 4% during 2015-2020 and 2020-2025, respectively, while the nameplate capacity is forecast to grow at an annual rate of more than 3% and less than 1% respectively, during the corresponding time periods. In the long-term recovery case, ethylene demand grows at a higher pace than supply during the 2015 to 2020 time frame, which will lead to severe supply shortages similar to late 1980s.”

A second macro trend would be seen in Europe and Asia, where naphtha crackers would be running at high rates, IHS says.

Since more ethylene production from naphtha yields more co-production of propylene and butadiene, global on-purpose producers of propylene would see their profits erode quickly, the report states.

“One of the most intriguing revelations from our IHS long-term price recovery analysis was the impact on the plastics industry, particularly plastics demand and the implications for plastics recycling,” Bari says. “We found that low oil prices stimulate demand for virgin plastics by reducing economic incentives to recycle plastics. As less plastic is recycled, demand for ethylene further increases, which leads to more co-product production of propylene and butadiene.”

A long-term oil price recovery also would have a major impact on global polyethylene (PE) and polypropylene (PP) markets. In this case, IHS says, PE production would grow as global demand expands by more than 54 million tonnes during the study period 2014 to 2025 in light of a higher gross domestic product (GDP), better price competitiveness displacing conventional materials, such as metal, paper and glass, and the aforementioned replacement of recycled material by virgin material. Western Europe and Asia would benefit greatly from more competitive feedstock and higher demand, while North America would experience lower integrated margins, IHS says.