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November 19, 2019

Slipping through the cracker margins

Ethylene oversupply and plunging prices amid demand slowdown to hurt petrochemicals players; specialty chemicals makers to gain

Between 2018 and 2020, nearly 19 million tonne of capacity addition in ethylene is expected, compared with demand growth of 15-16 million tonne. This should lead to a net surplus of 3-4 million tonne over the next two years. Of this, nearly 8 million tonne of the capacity addition is expected in 2019 itself, and demand growth of ~5 million tonne. About 4 million tonne of the incremental capacity is planned in China, as part of its attempt to reduce import dependency.

 

The massive oversupply would lead to a sharp drop in ethylene prices in 2019.

 

In the first half of 2019, ethylene prices dropped 28% on oversupply concerns. In the second half, increasing ethane capacity in the United States would add to the downward pressure on ethylene prices, with demand momentum not apace. Subsequently, in 2019, while crude oil prices are expected to fall ~10% on-year to $63-68 per barrel, the decline in ethylene prices would steeper at more than 30%.

 

With incremental capacity set to lap demand growth, we expect ethylene prices to nosedive to $820-870 per tonne in 2019 – levels last seen in 2009. There was a gradual correction in ethylene prices since June 2009 after the Global Financial Crisis abated.

 

A recovery in prices seems unlikely over the next 6-9 months in the absence of a significant uptick in demand, even as global capacity additions would increase the ethylene surplus. As a result, we expect ethylene prices to slide even in 2020 to $800-820 per tonne.