Not Since1992 Has Propylene Been So Cheap Versus Ethylene

By John Richardson

EVER since we first started assessing Northeast Asia ethylene and propylene CFR spot prices, which was in November 1992, the market has never been like this. Propylene has never traded at such a big a discount to ethylene.

To give you some details from the above chart, you need to break this down into four historical phases:

1. From November 1992 until December 2010, you can see that there were some big fluctuations between comparative pricing. But on average, ethylene was just $4/tonne more expensive than propylene between November 1992 and December 2010. If you were a plastic converter buying either polyethylene (PE) or polypropylene (PP), this meant that over the whole of this long period of time, the affordability of these two different resins was almost the same. Just to note that in Asia, even though the ethylene and propylene spot markets are very thinly traded, they largely set PE and PP pricing.
2. Phase two occurred between January 2011 and December 2013. If you remember this was the period when propylene demand boomed on lots of innovation in finished goods applications for PP. PP won market share in electronics markets over polystyrene (PS) and acrylonitrile butadiene styrene, for example, thanks to the innovation work. It also gained great ground in autos markets both for homo polymer grades – e.g. film cushioning and seat covers – and increasing quantities of copolymer grades went into bumpers, cladding and exterior trims. Supply was also an issue because the high price of oil drove-down naphtha-cracker operating rates, which meant less co-product propylene. And of course because oil was expensive, most a lot of the new cracker capacity was ethane-based and ethane crackers make very little propylene. So between January 2011 and December 2010 the average cost of propylene was $156/tonne more than ethylene.
3. Phase three was last year, when more on-purpose propylene production came on-stream in response to propylene shortages. This included new propane dehydrogenation (PDH)-based propylene plants in China. And from September of last year, as oil prices fell, naphtha cracking enjoyed a resurgence on much-lower naphtha costs, and so naphtha cracker operating rates went up in Asia. As I discussed on Tuesday, you also have to take into account the historic shift in China since 2011, which I don’t think has ever happened before anywhere else in the world: Propylene consumption has moved above ethylene. But the extra demand for propylene is not driven by real, final demand into consumer goods that anyone actually wants. Instead it is about vast oversupply in propylene derivatives other than PP. This includes acrylic acid and phenol. This oversupply is the result of huge overinvestment in chemicals and in finished-goods manufacturing capacity in China. PP itself in China has also moved much closer to self-sufficiency. This overinvestment was the result of the disastrously wrong 2008-2013 economic stimulus package. So you ended up with the “perfect storm” of increased propylene supply and a big deflationary effect up the value chain from finished goods and polymers all the way to propylene. Between January and December, therefore, propylene was on average $87/tonne cheaper than ethylene.
4.  Between January and October of this year, the Asian spot ethylene market has been exceptionally tight, which has been fantastic news for integrated Asian PE producers, who of course don’t have to buy merchant ethylene. At the same time we have seen further length in the propylene market on more PDH start-ups in China and weak downstream supply and demand fundamentals. The big oversupply in propylene derivatives and in autos and electronics etc. in China has exerted even more of a deflationary effect up the value chain all the way up to propylene. It is worth remembering that propylene derivatives go into a large amount of durable goods applications, and it is these durable goods markets that are suffering the most from China’s economic slowdown. Between January and October of this year, therefore, propylene has been on average no less than $235/tonne cheaper than ethylene.

So what happens next? I don’t believe that ethylene is that structurally tight in Asia, and so the differentials between ethylene and propylene will moderate over the next year. But I still see propylene, because of all the reasons I have given above, trading at around the discount to ethylene that we saw in 2014 – quite possibly considerably higher.

This is a fantastic opportunity for the PP industry. PP can gain more ground from PS and ABS – and also from high-density PE (HDPE). PP also competes with HDPE in applications such as caps and closures, detergent bottles and left-over food containers.

Further great news for the PP industry would be if oil prices stay low – and ideally go even lower. This would help keep the price of PP down, not just relative to other polymers but also in absolute terms. Cheaper oil means cheaper naphtha and so cheaper propylene from steam crackers. It also could mean cheaper propylene from fluid catalytic crackers that are fed by crude oil-derived vacuum gas oil, depending on what also happens in gasoline markets.

But there is already some definite good news for the PP industry: Huge oversupply of propane, thanks to the US shale gas revolution. This will last for at least the next five years. PDH units could thus be run very hard.

We also know that China regards its coal-to-olefins industry as strategic as it creates jobs. And we know that one of the objectives of its 13^th Five-Year-Plan (2016-2020) is to improve the efficiency of its coal-to-olefins process,. Most the recent capacity additions are in coal-to-propylene only, with the propylene then used to make PP. So we can guarantee more of a deflationary effect from China in PP production, and so propylene costs.

Why is very cheap PP so important in both relative terms to PE, and in absolute terms? Because we are in a deflationary world where the only way to win if you are in the commodities game is to sell big volumes at very low prices. This turns conventional wisdom on its head, but hey, hasn’t conventional wisdom already let us down very, very badly?