Chemical Industry Summary
Global prices and trade for the major polyolefins reflect a reasonable balance of supply and demand that has been supported by a number of global outages, planned and unplanned, particularly in North America. Improved global growth will be required to maintain strong demand growth and chemical operating rates as new capacity in North America, Asia and the Middle East comes on-line beginning in 2017.The October update by IMF of the world economic forecast calls for 2016 GDP growth of only 3.08%, down slightly from the April forecast.
Recent weeks has seen the firming of global crude oil prices and North American natural gas prices. Industry fundamentals are mixed and are mildly positive at best. It can be argued that increased energy prices and higher daily volatility is a result of a stream of news flow that suggests that an increasing number of crude oil producing countries may be willing to coordinate actions to facilitate the re-balancing of global energy markets. However, it is not clear that this will occur and CMR believes that global oil will remain in surplus for the next 1-2 years.
Macroeconomics and Geopolitics
Americas
Americas –Estimates of US GDP growth in 2016 continue to be trimmed. The Conference Board now believes that Q3 GDP will be near 2.5% and that full-year growth of the US economy will only be 1.4%. The US Bureau of Economic Analysis has published the final (third) estimate of US GDP growth in Q2 of 1.4%, up 0.3% from the prior estimate. Growth in Q1 growth was only 0.8%. Similar to the last several years, this year’s initial forecast for annual growth in the US is proving to be over-optimistic.
The US jobs report for September came in at 156,000 jobs added. This was the second mediocre result in a row and was lower than anticipated. These results provided support for the delay of the Fed’s interest rate increase decision (the last decision anticipated before the November elections). Previously, both June and July saw strong jobs growth with 55,000 jobs added in July and 292,000 jobs added in June.
In September, the US manufacturing PMI index eased to 52.0, a three-month low. US manufacturing activity was impacted by slower orders and exports. In September, US auto sales of light cars and trucks rebounded to 17.65 million units, down 2.3% last year’s result. On a year-to-date basis, US auto sales are up only 0.4%.
The US housing market continues to show strength. In August, US housing starts totaled 1.142 million on a seasonally-adjusted annual basis, up 2.3% from last year’s result, but down 5.8% from last year. Single-family housing starts of 722,000 were down 2% with 2015. In its October forecast, the NAR (National Association of Realtors) forecasted housing starts at an annual rate of 1.183 million for 2016, up 6.4% from last year. For 2017, the NAR forecast has been trimmed to 1.26 starts, up 6.5% from its 2016 forecast. Average prices for existing home sales in September was $240,200 down about 1.6% from August, but up 5.0% from last year.
Mexico’s PMI in September of 50.3 continued a recent positive trend of improved production boosted by lower inventories and improving orders. In contrast, Canada’s PMI of 50.3 recorded in September was barely in expansion territory and was the weakest month seen thus far in 2016. New order volumes and production levels are down from the first quarter that had seen improvement.
Brazil’s manufacturing sector was still strongly in contraction territory, recording a PMI of 46 in September, the 20thmonth in contraction territory. The Brazilian economy remains in recession. In its recent October forecast, the IMF expects Brazil’s GPD to fall 3.2% in 2016, following a 3.8% drop last year. The IMF does not expect a return to 2% growth until 2019.
Europe
A period of economic uncertainty has emerged from reports that the US Justice Department is seeking a $14 billion fine for Deutche Bank’s involvement in the sub-prime market during the 2008 financial crisis. This amount is in excess of the bank’s total capitalization and could potentially result in its failure and contingent impacts on the financial system. The German government has ruled out a potential bail-out, it is likely that a negotiated settlement could be significantly under the headline figure. Impacts of implementation of the UK’s Brexit vote continue to unfold. The British Pound is at a multi-year low in mid-October, trading at US$1.22. The timing and extent of the exit (perhaps a “hard exit”) will evolve in the coming months as trade and other agreements are negotiated. The Brexit has temporarily halted the EU’s economic stimulus initiative. The positive impact and potential upside to the European economic outlook associated with the stimulus and improving economy has been negated by Brexit.
The reported September PMI index for the Eurozone was reported at 52.6, up incrementally from the 51.7 in August. Manufacturing activity in Germany continues to improve with September registering a PMI of 54.3, a three-month high. The August PMIs for Netherlands (53.4), Austria (53.5) and Spain (52.3) all represented high points for the last several months. France and Greece should improvement from recent months but were still showing mild contraction of activity.
Manufacturing activity improvement in Eastern Europe continues to be sluggish, but improving incrementally, with several countries in mild expansion territory. In September, Russia’s PMI edged up slightly to 51.1 after two months near neutral. For September, the Czech Republic’s growth was 52.2, up incrementally from 50.1 in August. Poland’s PMI continued to show improvement recording a PMI result of 52.2in September.
Asia
China’s manufacturing sector continues to remain in the doldrums, with a September PMI index recorded at 50.1, essentially no expansion. This was the second neutral month that has followed a 9-month period of manufacturing activity contraction. China’s auto production in August was 1.99 million vehicles, up 10.8% from the same month in 2015. However, on a year-to-date basis, light vehicle sales are up only 3.0%.
Since the beginning of September, Asian polymer prices have been steady with Far East Asian HDPE blow molding grades in the range of US$1,125 to US$1,150/metric ton (MT)this summer. Ethylene prices in SEA are currently near US$1,035/MT, down US$40/MT in the last six weeks reflecting improved availability. In the last six weeks, spot propylene in SEA has traded in a relatively tight band betweenUS$790/MT and US$810/MT. The spread to polypropylene is near US$200/MT with PP trading very near US$1,000/MT since early August. Chinese propylene prices have remained above US$850/MT, up US$100-125/MT from the summer and are currently US$850 to US$870/MT.
Feedstock – Crude Oil
In the last month, global crude oil prices have responded to press reports on proposals that producers will attempt to coordinate production cuts to resolve the world oil glut. At the beginning of September, a preliminary OPEC meeting was held in Algeria, ahead of the annual meeting in Vienna scheduled for November 30th. While this meeting produced a targeted production cut goal of 700,000 barrels per day, there was no executable plan agreed to as to how this target would be achieved. In fact, September production by OPEC was at a record level of 33.64 million barrels per day, up 1.3% from August’s 33.2 million barrels per day. OPEC members Iran, Iraq and Nigeria are pushing to achieve higher production levels, in-line with historic output levels. Non-OPEC member Russia has recently come out in support of production cuts, but coordinated industry efforts with such diverse national interests involved cannot be easily achieved. Even with production cuts, record global inventories will prevent re-balancing before late 2017.
As of October 10th, WTI spot prices were $50.79 per barrel, up over 10% from a year ago. For the week ending September 30, US crude inventories not in the SPR (Strategic Petroleum Reserve) totaled 500 million barrels, up 8.4% from last year and down 5% from a month ago. US crude production for this same week as estimated by the DOE at 8.47 million barrels per day, down 7.7% from 2015, and down 12% from the peak production of 9.6 million barrels per day. However, OPEC production advances in Iran and Iraq have offset any global gain from reduced US production.
For the week ending October 7, Baker Hughes reported oil-directed rigs increased 14 from last month to 428. Since this summer, oil-directed rig count is up 35%. Including gas-directed rigs, the total rig count of 524 is up 30% from the May-2016 low of 404, a number that represented the lowest count since this indicator was started in 1991. The percentage of oil-directed rigs continues to hover near 80%.
Feedstock – Natural Gas & NGLs
The impact of fewer gas-producing wells being put into service and lower oil-associated gas production is boosting US natural gas prices, despite seasonally high inventories. In late September, US natural gas prices increased andtopped$3.00 per million BTU for the first time in 2016. Prices continue to ease up and are now currently near US$3.15/MM BTU. On September 30, US underground natural gas volumes of 3,680 billion SCF were 1.3% higher than a year ago. This volume is 87.6% of underground storage capacity in the lower 48 States and nearly identical to the prior 5-year average maximum for this time of the year. For the week of October 6, there was a net addition to underground storage of 80 BSCF, the second highest of this injection season. The key swing factor for gas prices going forward is the severity of the US winter weather. An unusually cold winter could push NA oil and gas prices towards parity.
Enterprise’s new Morgan’s Point, TX ethane export terminal is now operational. The first ethane shipment arrived in Grangemouth, Scotland on September 27. The 27,500 cubic meter shipment was loaded on the vessel INEOS Intrepid, the first of eight dragon-class ships dedicated to ethane transport.
For the week ending September 30, the EIA reports that US propane/propylene inventories were 104 million barrels, up 5.6% from last month and up 3.6% from a year ago. Inventories are beginning to approach peak levels seen in November of 2015, ahead of winter heating season. Spot prices for propane are currently near US$0.59/gallon, up about US$0.10 per gallon from last month. Propane tends to follow crude oil pricing that has surged in recent weeks.
US Olefins & Polyolefins
With both crude oil and natural gas prices strengthening over the last few weeks, the critical oil-to-gas price ratio has leveled off to a range of 15:1 to 17:1. The ratio is still above the 8:1 economic equivalent level, but well below peak levels that hit high marks of over 40:1 in 2013. The North American cracker economic advantage has been reduced. Ethane prices are coming off of floor value that is set by natural gas pricing.
US contract ethylene prices for September settled up 2.75cents/lb, matching the August settlement, and resulted in a net transaction price of 32.25cents/lb for the month. This upwards movement followed spot prices that traded in the range of US$0.35 to US$0.40 per pound for much of the month. In the 3-month period of August to October, US cracker unavailability has averaged over 8%. This is due to planned & unplanned outages coupled with difficulties with plant re-starts. Through August and into September, US ethane prices have moved upwards, but have not exceeded US$0.20 per gallon reflecting steady natural gas prices and good ethane availability.
US propylene prices settled up 6cents/lb in September with contract pricing at US$0.42 per pound for chemical grade and US$0.435/lb for polymer grade.
In the month of August, import volumes for US PP continued to slideat25.5 thousand MT, the lowest level thus far in 2016. The most recent month that US import/export numbers are available, imports of polypropylene to the US were 21 thousand MT, half the levels seen in the February and March. US PP exports volumes of 102 thousand MT were the highest level seen in five years.
For October, US contract butadiene prices have settled up 2.0cents/lb at US$0.46/lb. This was the first month since 2011 that the industry did not have a split settlement posted by the major US producers.
PE contract prices were up 5cents/lb in September, following a rollover in August. US PE producers had announced a 4cents/lb increase in October, but it is unclear if this increase is getting any traction. The primary rationale for this increase is the globally tight market and firm prices in other geographic areas. In addition, US ethane prices have recently escalated, following the rise natural gas prices.
US exports of PE in August of 425 thousand MT were 9% below the prior YTD average due to limited availability. This volume represents 25% of industry capacity. August PE imports of 285 thousand MT were the highest level thus far in 2016. Net exports for PE are now up 12% from a year ago, very similar to the increase seen in 2015.
September PVC prices rolled over for the third consecutive month with contract pipe grade at US$0.74 per pound. Thus far in 2016, contract PVC prices have risen a cumulative 7cents/lb. For October, three producers have nominated a 4cents/lb increase for contract PVC. This with be unusual to achieve an increase so late in the year. However, CMR believes that it is likely that PVC producers will be able to re-coup recent movement in ethylene prices, equivalent to about 3cents/lb on a PVC basis. September also saw US GPPS polystyrene prices up 3cents/lb, with contract benchmark near US$0.95/lb. Prices for US contract benzene for September were up US$0.20 per gallon to US$2.48/gallon, but have settled down 17cent/gal in October to a level of US$2.31/gal.
European Olefins & Polyolefins
For October, European the contract ethylene price was up €15/MT to a level of €940/MT. In the last month and one-half, spot ethylene prices for NWE are generally flat in the range of €880 to €900/MT on an FOB basis. Contract European propylene prices were up €35 per ton in September, at a level of €725/MT. However, spot propylene prices have moved down approximated €60/MT since the beginning of September to near €725/MT.
European contact butadiene pricing for October was up €40/MT to a level of €720/MT. However, consistent with other global areas was up about US$200/MT in the last six weeks.
The European benzene contract price for September was down €25/MT to a level of €627/MT. Spot benzene has been steady, trading in a range of US$675 to US$700/MT in the last six weeks.
From August to mid-October, polyethylene prices in Europe have remained relatively flat. HDPE blow molding grade for NWE remains in the area of €1,200/MT on a spot basis. LLDPE in NW Europe has recently traded near €1,200 per ton, up €30/MT to €35/MT since the beginning of August.
Global Chlor-alkali
The Chlorine Institute reported that the effective operating rate for US chlor-alkali in August was 84%, down 3% from the 87% level reported for July. Industry participants have announced minor price increases for caustic of US$15/short ton (ST) in July and US$10/ST in August. In its second quarter reporting, Olin reported commented that is anticipates some positive movement in caustic pricing in Q3. Olin’s EBITDA guidance for the third quarter is in the range of US$200 million to US$250 million, up over 20% over the second quarter as the cumulative impact of the recent price increases is seen.
Eurochlor recently reported chlorine production numbers for both July and August, with both months seeing near 828,600 tons of chlorine. Operating rates for the two months are also near identical at 84%. CMR has updated its view on impending European mercury cell capacity shutdowns. CMR believes that 27% percent of mercury capacity will be shut down, representing 7% of total European capacity. A further 530,000 tons are still undecided and could represent a further 16% of mercury cell capacity and 4% of total European capacity. The EC mandated deadline to get out of mercury cell capacity was moved from 2020 to 2017.
AMERICAS
INEOS Oligomer to build a new PAO facility
INEOS Oligomer looks into establishing a 120KTAlow viscosity polyalphaolefins (LV-PAOs) production plant in a location yet to disclose. The PAO is slated to come on-stream in 1H 2019.
Comments: Since 2013, INEOS has been expandingits LAOs and PAOs production capacity through bottlenecking and establishment of new production facilities in response to US federal regulation of lubricant reformulation. The Lubricant Reformulation is expected to be effective in the second half of 2017, targetedto reduce CO2emission and attain better fuel economy. The planned PAO production facility is part of INEOS’ effort to capitalize on anticipated growth for PAOs mainly due to the upcoming change in standard of lubricant additives. The planned PAO facility will secure its feedstock from a new 420KTALAO facility in Chocolate Bayou, Texas;dueto be on-stream in 1Q 2017. Major producers of global PAOs market include INEOS, CP Chem, ExxonMobil and Chemtura. The market segmentation is split into low viscosity PAOs (LV-PAOs) and high viscosity PAOs (HV-PAOs). ExxonMobil and Chemtura lead high viscosity segment; while INEOS is dedicated to LV-PAOs production and maintains a leading position in low viscosity segment. Meanwhile,INEOS also has strategicallybroaden its portfolio into HV-PAOs through a 200KT capacity metallocene-based HV-PAOs plant which was announced early this year.
Brazil Petrobras to withdraw from petrochemical segment
Petrobras has announced its plan to divest from petrochemical businesses as part of its latest corporate strategy that concentrates on exploration and production (E&P) and refining.
Comments: Petrobras is a highly integrated energy company that is involved in exploration and production (E&P), refining, distribution, electricity, petrochemicalsand biofuels. The company has relevant shares of the two major Brazilian petrochemical companies, Quattor (40%) and Braskem (30%). However, the plummet in crude oil prices and corruption scandal have hit Petrobras very hard with reportedthree consecutive record quarterly losses. These movements to seek to divest from petrochemical and biofuel segment are expected to help Petrobras ease the pressure from creditors.
EUROPE
Slovnaft to modernize Bratislava ethylene unit
Slovakia’s Slovnaft plan to invest US$24 million to upgrade its four-decades old steam cracker at Bratislava site. The modernization work will increase operational reliability as well as improve overall energy utilization during production.
Comments: Solvnaft is a subsidiary of Hungary’s national refinery and retailer operator MOL Group with a leading position in Central and Eastern Europe. The company mainly exports its LDPE to Czech Republic, Poland, Hungary and Austria. Eastern Europe is expected to register healthy growth for LDPE in the near future. The company previously completed its LDPE4 project, which replaces all its old LDPE lines with a new 220KTALDPE facility in Bratislava. LDPE4 project allows Slovnaft to offer LDPE with better quality while strategically expanding its market penetration in the region with a focus on LDPE film end-uses. This upgrading work on the steam cracker at the same site is to support LDPE4 facility with more cost-effective and reliable feedstock. The company is expected to benefit from the cost-structure improvement in LDPE production due to a series of upgrading works.
Borealis evaluates PDHin Belgium
Borealis plans to build a propane dehydrogenation (PDH) unit in Belgium with a feasibility study to be conducted over thenext nine months. The planned PDH project would be located at Borealis’ existing site in Kallo, Belgium witha production capacity of 740KTA. The final investment decision is scheduled to be concluded in 3Q 2018. If moving forward, the PDH project is likely to start up in 2H 2021.
Comments: The propylene market has tightened in Europe over the past two years as crackers have increased the share of light feedstock, resulting in less propylene as a by-product. The growing deficit has been supplied by imports from the Middle East. Grupa Azoty inPoland and several producers in Russia have responded with planned world-scale propylene projects. Grupa Azoty is investing in a 400KT PDH unit due on-stream in 2019, of which roughly 250KT will be available for the export market. Russian producers are facing financing delays and building downstream derivative plants, making them unlikely to contribute propylene to Western Europe this decade. Borealis has recently focused on enhancing its European propylene businesswith a 30KT propylene upgrade of its Porvoo cracker in Finland (scheduled for completion by end of 2017) and now the much larger potential PDH investment. Borealis’ site in Kallo is well suited for this project since it already contains a 480KT PDH plant and supporting infrastructure.
Russia’s SIBUR completes Polyolefins capacity expansion
Sibur has completed modernization work at its low-density polyethylene (LDPE) and polypropylene (PP) in Tomsk, western Siberia. The moderation allows Sibur to increase PE capacity by 9.3% to 130KTAand expandPP capacity by 20KTAto 270KTAat Tomsk site.
Comments: The decision on upgrading the Tomsk plant prior was made priorto international sanctions, the crude oil slump and while the Russian polyethylene and polypropylene film markets were growing rapidly.Sibur’s new LDPE grades will offer improved durability, processing and anti-slip properties primarily for packaging film applications, which constitute the overwhelming majority of domestic LDPE demand in Russia. The finished polypropylene expansion should help Sibur’s recently-integrated subsidiary Biaxplen with feedstock for its increased biaxially-oriented polypropylene (BOPP) films production. The new output of LDPE and PP also target to substitute imports and eventually relieve reliance on imports.
MIDDLE EAST & AFRICA
Iran’s NPC to study methanol-to-propylene project
National Petroleum Company (NPC) and Japanese trading company Sojitz have a memorandum of understanding (MoU) to build a 120KTA methanol-to-propylene (MTP) project in Iran. Feasibility study on this MTP project will be conducted first. If the project realizes, the MTP facility will be built in Assalouyeh.
Comments: Iran initiated a very comprehensive national program in 2002 to integrate the vast amounts of crude oil and natural gas resources. Despite previous economic sanctions, Iran still increased its petrochemical capacity to approximately 60,000KTA in 2015 from9,000KTAin 2001. Iran has cost-advantaged methanol derived from natural gas and targets to increase methanol capacity to 2,500KTAover next five years. With abundant natural gas resources, building methanol-to-propylene (MTP) production units paves an economical way to develop the propylene value-chain derivatives, especially polypropylene. Meanwhile, Iran also has been reportedly in talks with French Air Products to build a 500KTA MTP unit.
Orpic breaks ground on Liwa Plastic Complex project
Oman’s state-operated Oman Oil Refineries and Petroleum Industries Company (Orpic) has begun construction work at its Liwa Plastic Complex in Sohar. The complex will produce 880KTAof polyethylene (PE) and polypropylene (PP) with scheduled start-up due by 2020.
Comments: Oman Oil Refineries and Petroleum Industry Co (Orpic) is one of the largest companies in Oman with one refinery in Muscat, one complex in Sohar that includes in one aromatics plant and one PP plant. There is a pipeline connecting these two sites. The PE plant in Liwa Plastics Industries Complex will be the first one ever in Oman. HDPE and LLDPE manufactured in Liwa complex will expand Orpic’s portfolio of polymer products to gain more profits from downstream activities. Along with the Liwa project, Orpic has another two projects, Ohar Refinery Improvement and Muscat-Sohar Product Pipeline, underway to improve these existing facilities. All projects totaling US$7 billion are part of corporate strategy to transform itself from a refinery-focused company to a vertically-integrated petrochemical player.
Shell signs cooperation agreement with Iran for petrochemical projects
Shell has inked a memorandum of understanding (MoU) with Iran’s National Petrochemical Company (NPC) for potential development of petrochemical projects in Iran.
Comments: As economic sanctions against Iran begin to ease, the country is reintroducing itself to the global economy by working with western companies. Major E&P players like Shell and TOTAL are establishing business with Iran. Western companies have advanced technology and know-how to offer while Iran has economic feedstock in the form of large crude oil reserves resulting in a mutually benefitting business relationship.
ASIA PACIFIC
BIOBASED
BASF, Avantium partner up for biobased materials
BASF and Dutch renewable company Avantium have formed a JV, named Synvina, for production and marketing of biobased fur and icarboxylic acid (FDCA) and polyethylebefuranoate (PEF). Synvina plans to build a production facility with a capacity of up to 50KTAat BASF’s Verbund site in Antwerp, Belgium. Meanwhile, the JV firm also looks to license the technology for commercial scale production.
Comments: BASF and Avantium are partnering to bring production of Avastium’s FDCA and downstream PEF to an industrial scale. Avantium’s YXY process used to make bio-based FDCA is a two-step process involving the catalytic dehydration of plant-based carbohydrates in an alcohol, then an oxidation of the resulting methoxymethyl furfural in acetic acid to make FDCA. Polymerization of FDCA with monoethylene glycol results in PEF. The JV’s goal is to develop a world-leading complete supply chain for PEF. While the 50KT FDCA plant is being constructed, Avantium will continue its partnerships with Mitsui and Toyobo to further develop PEF films for food, electronics, industrial, and medical packaging applications. The transparent films have been reported to have significantly higher oxygen barrier, water barrier and mechanical strength properties than PET films.
SHALE GAS DEVELOPMENT
U.K. greenlights 2ndshale gas project
British government has granted its second ever shale gas hydraulic fracturing permit to Cuadrilla Plc at a site in Northwest England. The project targets 2017 for first fracking taking place and tentatively start production of gas into the grid in early 2018.
Comments: UK is a country relying heavily on imported natural gas to meet domestic demand. Most imports are coming from Norway but recently from United States shale gas. According to the British geological survey published in 2013, the UK possess at least 800 trillion cubic feet of shale gas reserves. With U.K.’s gas consumption standing at 3 trillion cubic feet, U.K. could be self-sufficient natural gas, even if only a tenth of the shale gas could be recovered. British government would like to duplicate the success of US shale gas, thereby powering U.K. economy. However, shale gas development in UK has a little to no progress in the past five years due to restrict regulations as a result of 2011 earth tremors. Cuadrilla Plc’s shale gas project is only the second one ever to be approved. U.K.’s ambitious shale gas-boosted economic strategy is still a long way to go. Given the current situation, importing U.S. shale gas becomes an economically-feasible alternative to gas consumers, making U.S. shale gas into new market. INEOS’ first shipment of U.S. shale gas just arrived in Scotland in late September.