By John Richardson
Here is, first of all, some history. Today’s chart is further evidence of the complete turnaround that has taken place in spot propylene and ethylene markets in Northeast Asia (by Northeast Asia this in effect means China drives everything that matters in Northeast Asia):
- In 2011, during a period of extreme propylene scarcity, prices were $251/tonne more than those of ethylene, and this continued into 2012 where the premium was a reduced but still historically very large $132/tonne.
- But since then the bottom has truly fallen out of the market. Last year, the propylene discount over ethylene was at $271/tonne – easily the highest since 2000. So far this year it is at $371/tonne.
You can use propylene as a very good proxy for the behaviour of the overall Chinese economy. Companies in China dashed into investments in propylene because of the availability of very cheap lending. Cheap lending flooded the economy as a result of China’s historically huge economic stimulus package.
And crucially, a large number of investments were not fully integrated downstream into propylene derivatives. This led to a flood of spot propylene supply and so the collapse in pricing.
Taking advantage of cheap feedstocks
What happens next? You might conclude that this is one of those temporary market anomalies that will soon correct itself as propylene production is more carefully matched to derivatives production.
But history is also being made in propane costs. The collapse in propane prices, thanks largely to US shale gas production, has greatly improved the economics of propane dehydrogenation-based propylene and derivatives plants in China.
Naphtha is of course cheap because of lower oil prices, and so this has improved the economics of naphtha crackers that are long on propylene.
Coal is also cheap, thanks to declining overall coal demand in China Coal-based propylene production (the coal-to-olefins process and the coal-to-propylene only process) has also become more profitable.
Why not therefore the continuation of very cheap propylene prices relative to ethylene on high merchant propylene production?
Another reason to reach this assumption is that the Northeast Asian ethylene market looks likely to remain very tight on lack of new spot supply.
This is why I believe there is a very good chance that we will see “standalone” polypropylene (PP) producers in China – those who need to buy some or all of their propylene feedstock – push their operating rates higher.
And the longer that current excellent standalone PP margins remain strong on cheap propylene, the more likely is it that we will see incremental capacity additions by these standalone producers. Variable cost standalone Northeast Asian margins were at an average of just $10/tonne in January 2005-July 2014, but rose to $162/tonne between August 2014 and August 2016, according to ICIS Consulting.
The implications for China’s polymers markets
Might we thus see China’s PP self-sufficiency at a level greater than the ICIS Consultancy base case assumption in 2017? Yes. Our base case for 2017 is that China will need 4.7m tonnes of PP imports in 2017.
I’ve been told that PP has pretty much reached the limit of the extent to which it can replace high-density polyethylene injection grades in Asian and global markets.
But I remain unconvinced. Technical boundaries could be pushed much harder by converters. What might seem technically impossible today may become possible tomorrow because of global deflationary pressures.
And we could also see PP gain further ground against other polymers, such as acrylonitrile butadiene styrene.
How petrochemicals markets behave in general will constantly take all of us by surprise as the New Normal continues to develop.