“Since oil serves as the marginal production cost and price-setter for many chemicals, plastics and fibers, a decline in the oil price typically leads to lower product prices,” said Dave Witte, senior vice president and general manager of IHS Chemical. “At the same time, the lower prices and broad macro-economic benefits of lower energy will ultimately lead to higher petrochemical derivative demand. Simultaneously, we see assets that derive margin from a wide gas-to-oil differential—such as those in North America and the Middle East—experiencing margin decline. Large, capital-intensive projects already under way will continue in these cost-advantaged regions. However, we expect a lull in future investment plans as chemical producers wait for forward clarity and for some of the market volatility to ease.”
The largest volume and perhaps the most market-indicative petrochemical is ethylene, which is the basic building block for many downstream chemicals, plastics and synthetic fibers. Improved demand for consumer products from higher GDP eventually translates into higher ethylene demand as much of the resulting plastics production ends up in consumer products. Yet, the IHS scenario analysis said lower oil prices will initially lead to destocking as producers wait for signs of a price bottom even as demand growth accelerates.
On the supply side, lower crude oil prices will change ethylene production costs over time as shown in the attached graphic, impacting the global ethylene market. In 2015, according to IHS Chemical, current global ethylene operating rates will still remain below 90 percent, and the positive effect on global demand will amount to less than 1 million metric tons (MMT) this year.
However, by 2016, depleted inventories, together with faster consumption growth, would generate additional global ethylene demand that is more than 1 MMT above the previous higher crude oil price-based forecast. The greater demand growth would add up to 3.5 MMT by 2020.
Said Witte, “more importantly, the supply pressure on global ethylene producers will intensify if higher demand volumes materialize, which will cause operating rates to rise above 90 percent. Combined with potential investment delays, utilizations could possibly climb as high as 95 percent by 2023. This exceedingly high operating rate would represent a five to six point increase in operating rates and would be one of the most significant outcomes of the lower oil price projections. During the years 2017 to 2020, IHS expects it would signal tight market conditions that the industry has not witnessed in many years, and would drive margin expansion opportunities for producers.”
According to the IHS scenario analysis, the differential between oil- and gas-based feedstock prices in the various regions (Europe, Asia, the Middle East and the Americas) divides cost-advantaged from cost-disadvantaged chemical producers in a very competitive market. Whether the analysis focuses on the elementary feedstock choices (naphtha, ethane or propane), power costs, alternative values for use in crude oil refinery products or heating markets, successful producers must find means to create a competitive advantage at the level of relative oil to natural gas price. Advantaged producers, and even their customers, IHS said, capitalize on these advantages through investments in new multi-billion dollar production facilities.
Said Witte, “With as much as 75 percent of the cost of producing petrochemicals related to hydrocarbon values, those companies with a cost disadvantage may invest to acquire lower-cost raw materials, or attempt to relieve competitive cost pressures through product differentiation. But typically, they cannot overcome the cost disadvantages, and as a result, will likely experience lower margins. There is a bright spot, however, as we expect market participants may be surprised by the strength of global petrochemical demand growth spurred by the lower energy prices. Returns on capital related to existing facilities will be higher than expected, but the incentive to invest in new, gas-based facilities will not be as attractive as outlined in original capital plans.”
The impact of the lower oil prices in the petrochemical market and the short- and long-term outlook for the industry will be addressed by Witte, who will join other industry, technology and financial leaders at the IHS Chemical 30th Annual World Petrochemical Conference (WPC) and Workshops, March 24 – 27, 2015, at the Galveston Island Convention Center at the San Luis Hotel in Galveston, Texas.
The WPC 2015, which will feature 80 executive speakers and more than 1,200 attendees, will focus on securing sustainable output and developing global supply chains. In celebration of the conference’s 30th anniversary, WPC 2015 will also offer special, enhanced programming, greater networking opportunities, and an exciting new venue in Galveston.
The WPC 2015 will offer eight, pre-conference workshops on Tuesday, March 24, and during the course of the next three days that follow, will feature speakers sharing insight and analysis covering a wide spectrum of topics as well as through four, concurrent chemical value-chain breakout tracks. The WPC 2015 will also offer the Petrochemical Technology Renaissance Seminar, the Latin American Summit, new, strategic dialogue sessions that enable discussion with top industry leaders, and numerous social and networking sessions in a resort island setting. To view the conference agenda and register for the event or the training workshops, visit www.ihs.com/WPC2015.