Commodities 2021: Global ethylene length to weigh on markets in H1 2021

Houston — The global ethylene market faces further demand uncertainties while awaiting direction in the post-pandemic economic recovery in H1 2021.

The US and Europe will keep looking to send extra cargoes to Asia, seen to remain a key demand center, while maximizing use of Enterprise Products Partners' joint-venture terminal and supporting European cracker run rates.

"Demand is not bad now but there is no confidence, the increase in demand did not happen in September as expected," a European source said. "There is plenty of C2 around, cracker run rates are being trimmed, no one wants to make spot C2, if you take two-three crackers down it won't show."

While the rest of the world looks to Asia to consume excess ethylene, Asian demand will heavily rely on global control of COVID-19, particularly with surges in other regions that pressure derivative export volumes. Most market participants were closely monitoring vaccine development and global economic recovery.

Unplanned European outages remove surplus volumes

In Europe, unplanned outages removed surplus volumes by about 10% of the region's typical annual capacity as of November. Underlying supply length will continue to weigh on the market in 2021, sources said, where "both imports and exports could be possible".

European ethylene prices had more than doubled to Eur600.50/mt ($712.49) by mid-November since since hitting an all-time low of Eur278.50/mt ($330.40) in mid-May, at the initial coronavirus peak.

Europe will keep watching arbitrage with Asia for exports while competing with imports from the US and Middle East. That dynamic could restore price pressure for Asian ethylene at the same time when Asian domestic supply recovers from unplanned outages by January 2021.

Given Europe's supply shortages, the US was likely to remain a key exporter to Asia. After Beijing exempted an additional 25% tariff on ethylene in March, China customs data showed US ethylene imports jumped to 20% in July from 1% in H1 2020.

In addition, Enterprise's terminal was expected to reach its nameplate 1 million mt/year capacity by the end of 2020. Before the terminal shipped out its first cargo in January 2020, US ethylene export capacity was 300,000 mt/year from a single terminal operated by Targa Resources.

But by Q3, US ethylene export cargoes rose 118% on year to 452,825 mt, US International Trade Commission data showed. Outflows fell in August and September, reflecting hurricane-related outages, but remained well above 2019's 289,107 mt of exports

The spot FD Mont Belvieu ethylene price reached a year-to-date high of 26.5 cents/lb Sept. 1, up from an all-time low of 8 cents/lb April 3 amid the pandemic impact, Platts data showed. Prices had retreated from that September high by late November on oversupply and year-end selling, but were expected to rebound in the first half of 2021 amid planned turnarounds.

Meanwhile, ethane has remained the dominant feedstock worldwide. US spot non-LST ethane prices reached a 2020 low in March of 9.25 cents/gal, more than doubled to 22.75 cents/gal by early May, and maintained a price above 20 cents/gal throughout the second half of 2020 with a brief drop into the high teens after Hurricane Laura's August landfall in Louisiana.

While turnarounds in the US, Asia and Europe were planned for H1 2021, industry sources expect delays amid coronavirus social distancing safety protocols at least before summer.

Global ethylene margins to narrow as cost of production increases

Since the hurricane-related price peak in September, the US ethylene prices and margins moved lower as ethane prices rose.

US ethylene margins were projected to narrow from $230-260/mt in October to below $50/mt by the end of 2020. Meanwhile, the US ethane cost of production will rise from $225/mt levels in November to $300/mt by the end of 2020, and to $350-400/mt for 2021, on a continued decline in wet gas shale production, according to Platts Analytics.

Nevertheless, with US ethylene spot prices were projected to range between $400-500/mt until 2022 -- significantly lower than Europe and Northeast Asia -- with spot prices seen at $570-$660/mt and $600-$740, respectively, Platts Analytics said.

US ethylene exports are therefore expected to rise in 2021 to 70,000-90,000 mt/month as Enterprise's terminal becomes fully operational.

China will likely import US ethylene in 2021 to help fill its net deficit of about 140,000-200,000 mt/month in 2021. US ethylene will price to allow for arbitrage to Western Europe or Asian markets.

European margins, which had risen in October on lower NWE naphtha-based production costs, were expected to fall below $200/mt by the end of 2020 and stay rangebound in 2021 between $100-$200/mt.

In Asia, margins will fall to $200/mt by the end of 2020, from current level of $363/mt and stay depressed in 2021, as new startups from China outpace regional economic run cuts.