Commodities 2023: Europe set for greater ethylene import attention amid energy volatility

The global ethylene market is widely expected to come under pressure in 2023 from weak demand, thin margins and volatile energy costs, though some market participants see a return of some pre-COVID normalcy.

While the US will look to increase its competitive advantage from lower feedstock costs, the European market's energy cost struggles are seen lingering within the more challenging global market that emerged in the second half of 2022.

With recession and higher inflation key concerns, European ethylene and derivative margins may to come under further threat in 2023. Also putting pressure on Europe are US exports as supply chain disruptions, sharply lower freight costs and the lack of extreme weather events allow the US to be competitive in Europe's higher cost market.

One European ethylene consumer said the surge in energy costs could be an existential threat to viability of the region's chemical production going forward.

"The delta between different parts of the world, was making Europe more expensive and was expected to lead to even more imports of a variety of different products," the consumer and derivatives producer said.

Asian ethylene also was expected to remain under pressure from feedstock volatility and weak derivative demand in 2023.

The demand outlook for early Q1 2023 has been bleak amid an overall slowdown in finished goods exports due to a weak economy, several market participants said, but could improve in Q2 as the peak season for several derivative markets typically starts in March and April.

Eyes also were on possible startups of new naphtha-fed steam crackers in China, as project delays amid manpower shortages and logistical issues due to the pandemic slowly clear up.

"If new crackers start on time and run at maximum, key ethylene exporters in Asia will definitely feel the heat as China is currently the largest importer. This will definitely put Asian producers under pressure," said a China-based trader.

Four new crackers with a cumulative capacity of 4.587 million mt/year were slated to come online in China in 2023.

Increased ethylene export competition expected from US

In addition, Asian producers could see increased competition from the US, where producers have seen less downstream domestic demand, leaving more for exports.

"Ethane-based ethylene is simply more cost competitive, and with US producers looking to export material constantly, this will definitely impact trade flows in Asia if the US continues to ship ethylene over as naphtha is likely to remain volatile," said a trader based in Southeast Asia.

However, US ethylene exports were expected to remain maxed out in the first half of 2023, as they have been for much of 2022.

Enterprise Products Partners has operated its joint-venture 1 million mt/year ethylene export terminal at 120% to 125% of its nameplate capacity for much of the year. The company plans to expand that capacity by 50% in the second half of 2023, and double it to more than 2 million mt/year by 2025.

Ethylene margins could improve slightly going into 2023 if derivative demand rises, but downstream oversupply could mute a rebound.

Rob Stier, senior lead of global petrochemical analytics at S&P Global Commodity Insights, said the US ethylene market could see "a month or two of increased margins" in the first half of 2023 if derivative producers increase output to restock inventories after destocking through the end of 2022.

Downstream MEG hit by weak demand, production cuts

The global downstream monoethylene glycol price outlook remained mixed amid weak demand, economic uncertainty and rising costs, traders said.

Suppliers were bullish and said prices needed to move up in line with rising oil costs. However, traders said production cuts would continue until margins strengthened.

Demand in the downstream textile and polyethylene terephthalate bottle industries lagged behind MEG supply.

Asian trade sources said China will continue to target exports to Europe, as prices remained high in Europe.

"Europe and Asia, where naphtha is the dominant feedstock for crackers, will continue to see high production costs. Across the 2020-2023 time frame, global capacity grew by over 45 million tons versus a demand growth of just over 26 million tons. This is one of the main reasons behind the cyclical industry trough in 2023," according to Chemicals Insight APAC at S&P Global Commodity Insights.

In the US, with domestic demand expected flat and hefty antidumping duties still levied on exports to Europe, US suppliers were looking to find new or additional outlets for MEG for 2023.

In addition to confirming reduced run rates, Dow and Indorama Ventures said they would focus on higher-value applications than MEG for feedstock ethylene oxide, such as surfactants and polyurethanes.

"MEG is the weak spot in EO," said CEO Jim Fitterling during Dow's October Q3 earnings call.

In addition, in late October, India dropped its antidumping investigation on MEG imports from the US, Kuwait and Saudi Arabia, renewing attention for US export cargoes to the country.