U.S. Gulf Coast ethane cracker margins have come back to earth after several weeks of extraordinary profitability. The decline has been driven primarily by lower ethylene and propylene prices, which have reduced representative Gulf Coast steam cracker margins based on spot ethane feedstock costs and spot olefin prices. Even so, margins remain healthy by historical standards.
The chart on the right shows the rapid rise and fall in these representative spot margins. Margins currently stand near 19¢/lb, down from almost 30¢/lb in April (red dashed oval), but still above the long-term average of about 15¢/lb (left graph).
The decline mirrors recent weakness in olefin prices as shown in the graph below. Ethylene has dropped from nearly 33¢/lb in May to 25¢/lb, while propylene has fallen from 55¢/lb to 39¢/lb. Those declines have erased much of the spot margin spike enjoyed by U.S. petrochemical producers earlier this year.
That spike was primarily due to the Iran war and the closure of the Strait of Hormuz. Fears that a significant portion of Middle East petrochemical production and exports could be stranded triggered a scramble for petchems and sent olefin prices soaring. Since then, however, buyers have adjusted to the disruption. Inventories have been drawn down, alternative supply chains have emerged, and demand has softened in response to higher prices. The market has shifted from pricing the fear of disruption to pricing the disruption itself. The Strait remains closed, but the panic premium that drove ethylene, propylene, and cracker margins to multi-year highs has largely disappeared.
