Naphtha-dependent regions cutting ethylene cracker rates: Dow CFO

Regions dependent on naphtha to feed ethylene crackers have been cutting rates in response to sharp feedstock cost increases amid volatile crude prices, Dow Chemical CFO Howard Ungerleider said March 17.

"Already in the last two weeks in Asia, you've got a dozen crackers that represent, I think, around 10 million metric tons of capacity that are trimming rates between 10% and 20%," Ungerleider said during the JP Morgan 2022 Industrials conference.

Then, Russia, which he said was "a few percent" of the world's ethylene market, could struggle with producing and exporting, given widespread sanctions imposed in response to its Feb. 24 invasion of Ukraine.

Western Europe has about 10% of the world's ethylene, Ungerleider said, adding that most fed by naphtha and powered by coal were trimming rates.

"You're already starting to see what's going to play out, and likely it will continue," Ungerleider said.

Asia and Europe both depend mostly on naphtha, which is priced off of oil, to feed crackers. Ethane is the dominant cracker feedstock in the US, which is cheaper, as it is priced off of natural gas.

Ungerleider said he saw ethylene prices rising unless demand turns bearish, which could prompt further rate cuts or plant shutdowns in the next three to six months to rebalance supply.

European ethylene prices rise sharply since Feb. 24

The FD Northwest Europe marker was last assessed March 17 at $1,623.61/mt, up 32% since it was assessed at $1,229.29/mt on Feb. 24, the day Russia invaded Ukraine. European producers had already faced record-high natural gas costs to run plants, as well as oil and naphtha price volatility after Russia's invasion prompted feedstock prices to surge as well.

In Asia, the CFR Northeast Asia and CFR Southeast Asia ethylene markers were each last assessed March 17 at $1,300/mt, up 3% and 5.7%, respectively, since Feb. 24.

Both regions face negative margins amid current feedstock costs, prompting rate cuts, Ungerleider said.

"The vast majority of naphtha-based crackers, frankly, in Asia-Pacific are negative cash margin and have been for quite a while now," he said. "Either pricing of derivatives has to move up, or production rates will come down."

Meanwhile, US producers reliant on cheaper ethane have seen ethylene costs decline in recent weeks. US spot ethylene was last assessed March 16 at 23.25 cents/lb, or $645/mt, down nearly 21% from 37 cents/lb, or $816/mt, from Feb. 25, S&P Global Commodity Insights data showed.

Ungerleider said an inflationary environment typically coincides with a more costly hydrocarbon environment, and consistently robust demand allows producers to hike product prices – including downstream derivatives – to cover higher input costs.

"As long as demand is healthy, which demand is still healthy, that allows us to raise prices," he said. "Inflation is real. Our costs were up 20% last year. They're in that same range in the first quarter [of 2022] — even worse from a hydrocarbon perspective, given the naphtha world and what's going on with energy costs in Europe."