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Singapore — A rise in ethylene production capacities in the US and Asia, the start-up of a new export terminal in the US and expected weakness in ethylene's downstream markets paint a heavy supply picture of the global ethylene market for 2020, which will in turn weigh on spot prices.

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Commodities 2020 | S&P Global Platts

"We do not have positive thoughts on the outlook for next year because of the downstream markets," an Asia-based market source said.

In the US, around 8.18 million mt/year of new ethylene production capacity has come on stream since 2017, with another 2 million mt/year planned by the end of 2019, according to sources close to the matter. Another six naphtha-fed steam crackers with 8.3 million mt/year of capacity are slated to start-up late 2020 and beyond.

In Asia, China's Hengli Petrochemical and Zhejiang Petrochemical would add a total of 2.9 million mt/year of ethylene capacity in 2019-2020.

On the other hand, spot ethylene demand would likely be pressured by declining downstream demand and prices, such as for polyethylene and monoethylene glycol, market sources said.

NEW US TERMINAL TO RAISE OUTFLOW, HIT EUROPE'S OUTPUT

The US currently has a single ethylene export terminal, operated by Targa Resources deep in the Houston Ship Channel, with an export capacity of 300,000 mt/year, though actual outflows average about 200,000 mt/year.

Enterprise Products Partners' new 1 million mt/year export terminal will ramp up throughout 2020 and launch its second phase in the fourth quarter of 2020.

Once fully operational, the gap between spot US ethylene prices and those in Asia and Europe will likely narrow with less landlocked product, beginning in 2020, though ethane-based US ethylene will retain its cost advantage.

As a result of new US capacities, European producers would need to reduce ethylene production rates and offer prices, in light of additional imports into the region, market sources said.

They added that ethylene cargoes from the US were unlikely to move to China in the near-term amid US-China trade tensions. According to the Chinese customs department, the country's total ethylene imports for January-September rose 8% from a year earlier.

China's ethylene imports from the US, however, plunged 88% over the same period, the data showed.

EUROPEAN PRODUCERS BATTLE FOR MARKET SHARE

European ethylene producers will try to keep their market share amid the competitive inflow from the US, and will likely do so by leveraging on contract prices as well as offering attractive spot volumes to domestic customers, according to market sources.

Over January-September, US ethylene exports totaled 223,422 mt, up 39.5% from a year earlier, the latest customs data showed. Of the total, US ethylene exports to Taiwan fell 22% from a year earlier to 49,015 mt. On the other hand, US ethylene exports to Belgium was 98,089 mt for January-September compared to 7,323 mt a year earlier, while exports to Spain was 11,477 mt compared to 20 mt, the data showed.

In Asia, for 2020, a heavy steam cracker turnaround schedule is expected in Japan compared to 2019. However, market sources said the expected supply tightness would be easily covered by additional capacities.

The European steam cracker turnaround schedule is not expected to be as heavy as in 2019, so supply in the first half of 2020 will likely be healthy to heavy, given the expected weak macroeconomic environment.

NAPHTHA FEEDSTOCK PRICE EXPECTED TO FIRM IN 2020

Market participants expect the naphtha feedstock price to firm in 2020, following the implementation of the International Maritime Organization's global sulfur limit for marine fuels at 0.5% from January 1, 2020, down from 3.5% currently. The market price for crude oil and naphtha will likely rise as crude runs increase to meet rising demand for distillate bunker fuels.

In Asia, the ethylene/naphtha spread narrowed to an average of $152.63/mt on October 25, 2019, the lowest level since May 2012, and lower than the typical breakeven spread of $300-$350/mt, S&P Global Platts data showed. But steam cracker operations remained high in 2019, supported by healthy margins for propylene and butadiene production, which would likely fade out in 2020, according to market sources.

In Europe, the crackers are already reported to be turning down operating rates in order to cope with a tough combination of weak derivative demand and ethylene imports from the US, sources said.

Meanwhile, the market is anticipating an impact from Enterprise's new ethylene export terminal.

Spot CIF Northwest Europe ethylene prices will average $1,008/mt in 2020, compared with $1,068/mt in 2019, according to S&P Global Platts Analytics.

Naphtha prices are expected to rise in 2020 along with crude prices, further exacerbating the gap between LPG and naphtha prices.

US ethylene prices are expected to maintain their advantage over other regions on the back of cheap ethane, but cracker outages can cause volatility, sources said.

In June, US spot ethylene hit an all-time low of 11.75 cents/lb FD Mont Belvieu.

At the end of November, the US ethylene price has been hovering around 23 cents/lb.

Commodities 2020 | S&P Global Platts

-- Kristen Hays, kristen.hays@spglobal.com

-- Miguel Cambeiro, miguel.cambeiro@spglobal.com

-- Fumiko Dobashi, fumiko.dobashi@spglobal.com

-- Shermaine Ang, shermaine.ang@spglobal.com

-- Edited by Geetha Narayanasamy, geetha.narayanasamy@spglobal.com