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New ethane crackers could signal tough times for petchem industry

Supplyand demand dynamics in polyethylene will be transformed over the next few yearsfrom a seller's market to a buyer's market, as expansion by the petrochemicalindustry creates too much supply. Expansions are likely to reverberate byputting pressure on natural gas liquids prices.

World War P

In abattle dubbed "World War P," Robert Bauman, president of PolymerConsulting International, said that investments in new polyethylene capacitywill create a flood of supply and cause extreme price competition after severalof the petrochemical crackers that are under construction are completed.

"Conventionalwisdom said that oil was at $140 in 2008, and it's going to go there again solet's make all these investments," Bauman said at the Platts NGL Conferenceand Petrochemical Seminar in Houston on Oct. 6. "Of course, that was thefarthest from the truth and the price of oil has dropped beyond expectations."

Thecreation of ethylene and polyethylene by the petrochemical industry hastraditionally focused on using naphtha refined from crude oil as a feedstock.The high price of crude oil in recent years made investments in newethane-based crackers or cracker conversions from naphtha more attractive,especially when the higher ethylene yield from ethane is taken intoconsideration.

HigherNGL production in the U.S. also helped, as increased supplies and fallingprices for ethane helped it to become economically advantageous as a feedstockwhile supplies became more secure.

Baumansaid that the investment by the downstream industry has been like a pendulum,where little or nothing was invested 10 years ago and now there is too much.

Arough guide for assessing whether ethane is advantaged over naphtha can be seenwhen the price of crude oil is more than seven times that of natural gas,according to Bauman. On Oct. 6, he said the ratio was 16.4 and noted that NorthAmerica is still the second-lowest-cost producer of ethylene and ethylenederivatives in the world.

Production ramping up

Productiongrowth of NGLs has slowed, but is generally expected to continue rising incoming years. The expectation that profits from higher production will continuegrowing has translated into more downstream investment.

"Therewere a number of happy producers out there," Bauman said. "And whatdoes a happy producer do when they have money? They plan for more capacity."

Therewill be two waves of petrochemical plant capacity expansions in the U.S. in thenext several years, Bauman said. The first wave has seven new crackers, whichwill add 9 million tonnes of annual capacity, in addition to 10 ethyleneexpansions that will bring the total to around 12 million tonnes.

Asecond wave of 13 cracker builds that are due to become active after 2020 couldadd another nearly 14 million tonnes per year.

"Today,low density polyethylene is probably the most profitable commodity polymer inthe world," Bauman said. "Once you start building capacity in amarket that's not growing, that premium will go away."

Increasedcompetition, falling prices and a lack of labor will likely lead to delays inthe construction schedules of these plants, and could potentially lead tocancellations in some cases.

"Delaysof six to 24 months could be expected, and I have heard of budgets that are20-70% over what companies thought that they would be spending," Baumansaid. "Of the 13 [second-wave crackers] announced at the end of 2014, sixremain with only three or four likely to proceed."

that received a greenlight recently is the plant announced by Royal Dutch Shell plc to be built in Beaver County insouthwestern Pennsylvania. The announcement surprised most people in theindustry including Bauman.

Thesenew plants will overwhelm growth in demand, which will not support them, hesaid. New processing capacity will boost ethylene supplies by 33%, but demandis growing at only 2% to 3% per year, which will force exports to become abalancing factor.

"Morethan six million tonnes of additional polyethylene will have to be exported,assuming you get the export market's logistics and ships in place," Baumansaid. "There's going to be a tremendous amount of polyethylene coming onstream."

S&P Global Plattsand S&P Global Market Intelligence are owned by S&P Global Inc.