In just over a month, purity ethane prices in Mont Belvieu are off 41%, falling from 50 cnts/gal on 4/30 to 29 cnts/gal on Friday, 6/8. During the same period, non-TET propane was down 35% from 116 cnts/gal to 75 cnts/gal (see left graph, below). Last week when we looked at petrochemical feedstock economics, propane was the preferred feedstock for the first time in years. But a couple of days later that relationship flipped back to ethane. At first glance, that seems strange. Both ethane and propane increased during the first half of the week, then came back off (see right graph). But feedstock economics went from favoring propane by more than a nickel per pound of ethylene to favoring ethane by just over a penny on Friday. To understand how and why this shift happened we’ll need to break out the spreadsheets again.
To recap, last week we took a deep dive into the economics of petrochemical feedstocks, examining the margin of ethylene produced from ethane. To answer the question posed above we’ll need to take it one step further, looking at the relative feedstock economics of ethane and propane. These days almost 90% of U.S. ethylene feedstocks are either ethane or propane. So if you know the relative margins of these two NGLs, you have most of what you need to know about the ethylene business. That’s what we’ll get into in Part IV of our series on petrochemical feedstocks. (You’ll probably have a hard time following this one if you didn’t read Part III.)
Check out Kyle Cooper’s weekly view of natural gas markets in Storage Surplus Below 600 BCF by the End of June.
Economic preferences for different olefin cracker feedstocks are measured in terms of pounds of ethylene produced. The feedstock with the highest margin per pound of ethylene is the most preferred feedstock, based on the following formula:
[Price of ethylene per pound] – [Cost of feedstock per pound of ethylene produced] + [value of byproduct credits per pound of ethylene produced]
This formula puts the preferences for different feedstocks on an apples-to-apples basis. It is simply the price of ethylene per pound, less the cost of producing that pound of ethylene, PLUS byproduct credits. The byproduct credits reflect the value of all the other products that the cracking process yields besides ethylene.
Last week when we made this calculation for ethane, the price of ethylene was 42 cnts/lb. At the time the price of ethane was 29.875 cnts/gal, which meant that the cost of ethane to make a pound of ethylene was about 13 cnts/lb. So the gross margin after ethane cost for the typical Gulf Coast cracker was 29 cnts/lb. [42 – 13 = 29] We then calculated the byproduct credits, which added up to about 7 ctns/lb. Add that to 29 cnts and we get 36 cnts. Subtract off 4 cnts for variable costs and that equals 32 ctns. That’s the margin that we were after. Last week we didn’t look at any other feedstocks besides ethane.