Ethylene Market: Impact of COVID-19 and Short-Term Outlook
The global outbreak of COVID-19 in 2020 has hit the chemical industry hard and brought operations and trade activities to a standstill. The adverse impact of the pandemic shook the core of an already weakening industry that earlier recorded a decline in overall demand in 2019 compared to the previous year. The trade value of organic chemicals slumped by 10% in 2019 vis-à-vis 2018. Weakening global demand in industrial as well as consumer markets (barring a few consumer goods sectors); compliance to safety and hygiene measures in production activities; and supply chain disruptions due to lockdown measures in all major economies had a significant impact on production and trading activities in the chemical industry.
The turbulent market conditions were further intensified with the uncertainties in the oil & gas industry. Prices started sliding downward in mid-January this year due to the dual effects of overproduction and price slash by Saudi Arabia amid disagreements among OPEC+ countries and gradual drop in demand as a result of restricted industrial, traveling, and transportation activities. These factors substantially impacted the pricing dynamics in the chemical industry. Typically, a drop in crude oil and natural gas prices reduces the cost of raw materials for chemical producers, though the range of percentage reduction depends on its place in the chemical value chain. Major chemical building blocks, such as olefins – ethylene and propylene, and aromatics, are direct products of oil or its derivatives. Hence, the raw material pie in the cost structure showed signs of volatility with the decline in prices of crude oil and natural gas as well as their gradual recovery as a result of the historic deal pulled off by OPEC+ members to slash oil output. Chemical companies with backward integrated operations benefited the most by securing better margins when crude prices were low.
Performance of ethylene during and post-lockdown phase
The demand and pricing of ethylene, the largest-volume organic compound and the most widely used petrochemical globally, often sets the outlook for the petrochemical industry. The demand for ethylene primarily depends on the growth of its polymeric downstream products including polyethylene (PE), polyethylene terephthalate (PET), and polyvinyl chloride (PVC). More than 50% of the global supply of ethylene is consumed in the production of polyethylene. These polymers are widely used in industries such as packaging, construction, and automotive. The non-polymeric applications of ethylene downstream products include surfactants, detergents, synthetic lubricants, automotive antifreeze, agrochemicals intermediates etc.
The demand for ethylene remained steady during the pandemic, driven by high volume consumption of downstream PE and PET in the packaging industry. However, the demand for other ethylene-based polymer grades was largely muted due to the total shutdown of construction and infrastructural activities. The demand for PVC and high-density polyethylene (HDPE) pipe grades has started rising with the resumption of construction activities and the lifting of lockdown measures globally. The outlook is brighter in this segment due to demand from deferred construction activities.
The production of ethylene has not been substantially impacted through the pandemic. The facility run rates gradually increased to pre-crisis levels by the end of July 2020. In the US, ethylene is largely produced through natural gas liquids (NGL), such as ethane, propane, and butane as feedstocks, to yield higher proportion of ethylene and less co-products. Whereas, the European and Asian origin ethylene volumes are largely naphtha-based. Naphtha values declined lower than NGLs in March and April. This ensured higher nominal margins for naphtha-based producers and weakened the cost advantage enjoyed by the US ethane-based ethylene. Record high ethane rejection rates in July 2020 by producers in the US indicated higher availability of ethane to produce ethylene. By the end of July, price margins for ethane-based ethylene edged upwards as the value of naphtha rose in tandem with crude prices, thus creating better economics for ethane-based production. This reinstated the cost advantage of the US origin volumes.
The arbitrage window opportunity from the US to Asia dropped dramatically through 2019 and during the initial months of 2020, due to intense political tensions between the US and China, coupled with the economic slowdown in China. Since imports to China typically contribute a significant portion of the total US exports, the impact of trade war left the US suppliers with a considerable supply of ethylene. This may prompt US suppliers to divert the excess material to alternative markets, such as European countries.
In terms of investments in capacity additions, Asia, particularly China, is expected to lead the global initiative to boost self-sufficiency, while the country will also remain the largest importer of ethylene derivatives, globally. According to IHS Markit, the global demand is forecasted to grow by ~4 million tons in 2021 and ~6 million tons Y-o-Y between 2022 and 2025. The global operating rate is projected to fall from approximately 89% in 2019 to 85% in 2020 and range between 80-89% until 2025 with capacity additions outpacing demand growth in the short term.
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Santosh has over 12 years of experience managing large-scale procurement transformation engagements for leading Fortune 500 companies.
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