Market focus
Oil prices cause ripples
in chemicals market
The chemicals market has been hit by the effects of high oil prices. Higher feedstock
prices have brought higher end-product prices. Fame Information Services looks at
styrene prices and the soaring costs of feedstocks, particularly in the ethylene market
s the summer heat wave spreads across
the globe, sunbathers and sports enthusiasts are making for the water and
readying their water sports equipment.
Styrene is the basic chemical building block used to
produce the derivatives that our ocean-goers enjoy,
from the boats they drive to the styrofoam cups they
drink from. But the high prices of oil and oil products – used to produce such chemicals – is putting
upwards pressure on the cost of feedstocks.
Ethylbenzene, the precursor to styrene, is built
on the marriage of the olefin and aromatics families.
Most ethylbenzene is made by alkylating benzene
with ethylene. Neither benzene nor ethylene have
been immune to the price shocks seen in the oil
complex over the past six months. A higher oil
complex has considerably affected feedstock prices
across the board. While ethylene is the chemical
compound used to make vinyl chloride, ethylene
oxide, acetaldehyde, ethyl alcohol, alpha olefins and
polyethylene, the demand for ethylene is still underpinned mostly by the chemical’s use in styrene.
Ethylene and benzene production costs moved
higher as rising oil and natural gas prices pushed
all feedstocks higher. Earlier this year – with natural gas prices pushing above $5 per million British
thermal units (mmBtu), crude prices exceeding $30 a barrel (bbl) and
gasoline coming close to $40/bbl – producers had incentives to raise both
ethylene and benzene prices. The trend towards higher market prices in
general was due not only to the onset of war, but also to severely depleted
inventories in the US and the lack of Venezuelan crude and gasoline flowing to the southern US due to political upheaval in the South American
country. (See figure 1 and table.)
Benzene is the by-product of both the catalytic reforming process of
naphtha and the cracking of naphtha and gas oil in an olefins plant. The
latter process aims to produce ethylene and propylene, but a good 20%
of benzene production comes from the olefin cracking process. Free
benzene (the 0.5–1.0% content) from crude itself is captured alongside
the benzene produced from catalytic reforming, which accounts for as
much as half of US production.
The main purpose of reforming naphtha is to produce high-quality gasoline components from low-octane naphtha by reforming the molecules using
a catalyst. As a result, the dynamics the market should investigate are the
relationships between naphtha and the finished gasoline pool and naphtha
cracked for the production of olefins with the by-product of benzene.
Olefins plants are not limited to naphtha as a feedstock – depending on
their configuration, they can process ethane, propane, butane, naphtha and
gas oil. The highest yields for ethylene come from cracking ethane, propane
and butane. While the yield of ethylene from naphtha is only 23%, other
commodities are produced as a by-product as well. For example, gasoline
constitutes 18% of the substances produced from naphtha. (See figure 2.)
Hence, the market should analyse the entire picture of feedstocks,
A
Figure 1: Oil and chemical market trends
Figure 2: Differential and ratio of unleaded to naphtha
$/bbl
1.2
1.0
6
0.8
4
0.6
2
0.4
0
Crude oil prices climb from below $25 dollars a barrel to close to
$40/bbl in early 2003. Unleaded mirrored this movement. Ethylene
also followed the upward movement, but its reaction is delayed
compared to commodities more closely linked to the crude complex.
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Source: Platt’s, CMAI
I July 2003
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Unleaded v. naphtha differential (left axis)
Ratio of unleaded to naphtha (right axis)
14
Percentage (%)
WTI Cushing front-month price
Unleaded US Gulf market (USG) waterborne price
Ethylene USG spot price
Benzene USG market free-on-board spot price
Ethylene USG spot price trend line
Benzene USG free-on-board spot (current) trend line
Source: Platt’s, CMAI
Unleaded versus naphtha differential prices climbed as high as $14 a
barrel in March and April 2003, with unleaded prices representing as
much as 150% of feedstock (naphtha) prices at its peak.
high-volume end-products and by-products to evaluate which feedstock yields the highest-value products based on market demand.
Benzene represents more than 85% of styrene production costs
– hence the need to closely monitor feedstock production costs for
benzene, as they directly effect styrene costs. That said, analysts
expected ethylene capacity usage in the first quarter of 2003 to
increase dramatically on the news of planned outages. Styrene
prices rose in accordance with higher feedstock prices. The market
was tight, as active plants stretched to meet the continual high
demand. While this situation was true for the US markets, the home
front in Asia played to a different tune. In Asia, planned outages,
higher feedstock prices and strong ethylene prices prompted olefin
plant operators to switch to heavier feedstocks (naphtha and gas
oil versus liquefied petroleum gases) (see figure 3).
Figure 4: Arbitrage possibilities
150
$/tonne
100
50
0
–50
Styrene Korea spot
Styrene Taiwan cost
& freight
Styrene China spot
–100
–150
–200
–250
O
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02
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Source: CMAI
Spot prices
Higher styrene end prices encourage US producers to move product
to the Asia-Pacific region, particularly China. The arbitrage window
was brief, but seems to be opening again now in mid-summer.
If styrene feedstock prices are up, have styrene spot prices risen
in response? According to industry analysts, a $40–45/tonne
spread between US and Asian product prices is required to move
products from the US market to Asian destinations such as Taiwan,
Korea and China. Figure 4 highlights global styrene prices in
dollars/tonne from January 2002 to now. There has been a healthy
spread between Asian markets and the US beyond the $45/tonne
required cushion for several periods since January 2003.
In the second quarter of 2003, US market prices picked up
with stronger styrene prices, and the once-open arbitrage has
closed. One industry analyst says Asian firms spent close to their
annual budget early in the year on contract-based styrene
purchases. As demand picked up, spot purchases were required,
and the arbitrage window widened through to March.
On an interesting note, Asia is long benzene where the US
is tight, so benzene travels to the US only to be processed and
returned to Asia as styrene. The market is one vicious cycle.
The final question is: where are prices going, as crude oil and
gasoline prices taper off? At present, there is no truly liquid
published forward market for the chemicals business. One of the
easiest and most efficient ways to monitor how the price curve
will change is to analyse the forward curves for New York Mercantile Exchange (Nymex) West Texas Intermediate and Nymex
propane in the US, to see where feedstock prices are going.
Crude, oil product and chemical price movement statistics
Series
WTI Cushing Platt’s
Unleaded US Gulf
Ethylene US spot
Benzene US Gulf
Low ($) Mean ($) Standard dev.
17.925 27.800
4.163
21.000 32.603
5.101
18.654 25.589
5.000
33.810 57.750
13.421
Last ($)
31.290
35.899
27.553
53.865
The spread between the high and the mean of the series plotted above
reached close to $30/barrel for benzene and at least $10/bbl in other
cases. This occurred within a year and represents a highly volatile market.
After reviewing the average spreads between ethane and naphtha and
the forward curves in figure 5, users can create a more realistic view of
forward prices. EPRM
Mary Ashley Hall is an energy market specialist manager at Fame
Information Services in Houston, Texas.
e-mail: mhall@fame.com
Figure 5: Forward curves for propane and WTI crude
50
40
40
35
$/barrel
30
20
WTI Cushing front-month
mid from Jan 1, 2003
Nymex WTI forward curve
close on May 27, 2003
Propane Mont Belvieu TET
mid from Jan 1, 2003
30
Nymex propane forward curve
close on May 27, 2003
25
Naphtha US Gulf market waterborne
10
High ($)
37.780
46.305
39.035
82.950
Source: CMAI, Platt’s
Figure 3: Is naptha cracking for olefins profitable?
$/barrel
03
20
Ethylene US spot price
20
20
20
03
03
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Source: Platt's, CMAI
On close inspection of the naphtha-ethylene relationship, the average
spreads between prices of feedstock and the highest-yielding
commoditiy are below the $3/barrel range, encouraging naphtha to
stay with the high-performing catalytic reforming process.
Q1 Q2
2003
Q3
Q4
Q1 Q2
2004
Q3
Q4
Q1 Q2
2005
Q3
Q4
Source: Nymex
The spikes in propane and West Texas Intermediate Cushing front
month contracts appear to be an anomaly to what is expected in
12–24 months out.
www.eprm.com
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