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February 27, 2019

CRISIL Research Sector Round-up: Petrochemicals - Cracker margins under pressure

Softer crude oil prices, changing global trade dynamics and demand slowdown in focus

Petrochemical prices to decline, following softer crude oil prices


In calendar 2018, crude oil prices increased 31% to $71 per barrel, with naphtha prices increasing at a similar pace.The on-going tensions in Libya, sanctions on Iran and falling output from Venezuela resulted in a spike in crude oilprices. Petrochemical prices increased in 2018, too, because of a rise in feedstock prices, following a recovery incrude oil prices. However, higher capacity addition put a brake on the pace of rise.


Slowing demand is expected to keep crude oil prices under check. Consequently, we expect the prices to range $63-68 per barrel in 2019, considering the impact of any production cuts from the Organisation of the Petroleum ExportingCountries (OPEC) to arrest a further decline in crude oil prices, which are currently hovering at ~$60 per barrel.Naphtha prices are expected to decline at a similar pace as those of crude oil prices. This, in turn, will likely hurtpetrochemicals prices.


Prices under pressure, as supply addition outpaces demand growth


Rising global supply is also exerting downward pressure on petrochemical prices, with demand momentum notkeeping pace. Between 2015 and 2018, ethylene capacity rose nearly 23 million tonne, primarily led by the US andChina. Thanks to the shale-oil revolution, the US has captured a prominent presence in global ethylene capacity. Onthe other hand, during this period, ethylene demand is estimated to have increased 21 million tonne. Higher capacityaddition in this segment has kept ethylene prices under check.


In fact, even in calendar 2019, net ethylene capacity is projected to increase ~5.5 million tonne against demandgrowth of 5 million tonne. This, along with ~6 million tonne of capacity addition in calendar 2018 (primarily led byChina), is expected to result in a further decline in ethylene prices. Consequently, we expect the decline in ethyleneprices to be steeper at 13-18%, ranging between $1,000 and $1,050 per tonne.


Even in the case of benzene, global supply overhang is a key concern. In calendar 2019, around 2.5 million tonne ofcapacity is expected to be commissioned. With demand expected to inch up by 2-3% versus 3.5-4% growth incapacity addition, benzene prices are likely to nosedive in calendar 2019.


Thus, with softening crude oil prices, increasing global supply, lower forecasts for global economic growth and USChinatrade war, petrochemical prices could see some trouble ahead. This decline in product prices is also likely tohave a direct impact on cracker margins and product spreads.