Sad But True: U.S. Ethylene Producers See Little Margin Improvement

How about some good news to start the year? Over the past few weeks, ethylene margins have blasted into the stratosphere. These are good times for steam crackers, those petrochemical plants that use mostly NGL feedstocks to produce ethylene and other building-block chemicals. As you might expect, this newfound prosperity has a lot to do with ethylene’s price. In December alone, the price of ethylene was up 50%; versus April it’s up a whopping 4X, coming in yesterday at 37.5 cents per pound (c/lb). There are a whole range of factors responsible, including petchem outages due to the hurricanes, new downstream derivative units coming online, robust exports from the Enterprise Morgan’s Point dock, and, oh yes, strong demand for downstream products — everything from food packaging to construction materials. Is the spike in ethylene prices going to last? And what does it mean for NGLs, which account for more than 95% of the feedstock supply for U.S. ethylene. We’ll explore those questions and more in this blog series we begin today.

Falling crude oil prices and other factors have crushed margins in the steam cracker/olefin unit segment of the petrochemical industry.   Margins per pound of ethylene have declined from more than 60 c/lb in October 2014 to less than 20 c/lb today (November 2015) for NGL feedstocks, including ethane.  We expect some petrochemical companies might be feeling a chill in the air.  That’s because five new Gulf Coast world scale steam crackers and a couple of smaller units are under construction or being developed to add still another 20 billion/lbs of capacity by the end of 2018.    In today’s blog, we assess NGL feedstock margin declines.

Ethane has been in the doghouse for years since the shale gas boom kicked in, with production greatly exceeding demand and hundreds of thousands of barrels per day being “rejected” into the natural gas stream – owing to the fact that netbacks for liquid ethane are lower than pipeline natural gas. One way to understand that relationship is to track the price ratio of ethane at Mont Belvieu, TX to natural gas at Henry Hub, compared on a BTU basis.  That ratio of ethane-to-gas languished at 95% between Q1 2014 through the summer of this year, and in November 2014 dipped to only 61%.  That means that the BTU value of ethane at that point was only 61% of natural gas. Ethane that cheap is an awesome value for steam crackers using the feedstock to produce ethylene and other petrochemicals.  But a couple of months ago (September 2015), the price of ethane started to ramp up relative to gas, blasting through 140% in late October.  Is that bad news for future ethane prices? What does that portend for ethane once all the new steam crackers being built come online and overseas exports – also coming soon -- ramp up.  Today we look at the recent rebound in the ratio of ethane to natural gas and consider whether this is a signal that ethane is out of the doghouse.