Chris Gick has more than 40 years of experience in the petrochemicals industry. In his current role as Manager of Industry and Market Dynamics at NOVA Chemicals, he is responsible for monitoring, analyzing and interpreting changes and trends that affect the ethylene and polyethylene business.
“Overall, we are cautiously optimistic about 2024. The US economy entered 2024 with some unexpected momentum that bodes well for at least the start of the year. Relatively tight financial conditions still may prove to be a challenge in some sectors, but solid employment and solid real income growth make for increasing optimism that the expected economic slowdown will be modest and that a recession will be avoided.
Growth in the manufacturing sector is still weak but there are signs that the worst may be over. Certainly, the broad-based inventory correction seems to have played out and this will allow fundamental demand to pull through supply chains and lead to the start of another growth cycle, with time.” Chris Gick.
Macroeconomy
The consensus for the U.S. economy for 2024 is that there will be some slowing of growth rates, but no recession. Growth momentum from the 2H of 2023 and stronger high-frequency data like employment and income growth has lifted current full year 2024 forecasts from where they were in the 2H of 2023. In the industrial economy, the far-reaching inventory correction appears to have played out, and indications from domestic polyethylene (PE) sales suggest stabilization and potentially a renewed cycle of growth will initiate this year. Longer term, potential growth of the economy may be lifted above current thoughts of <2% if productivity growth, that was high in 2H 2023, can be sustained above the level observed in the decade before the pandemic.
Crude Oil
For a period extending back into Q4 2023, Brent crude oil prices have been trading within a range mostly above $80/bbl. The price has reflected a balance of downside risks of oversupply due to weaker economic growth and increasing production, against upside risks due to geopolitical conflicts in Ukraine and the Middle East. With better prospects for the economy and at times, increasing geopolitical risk, Brent prices have seen price excursions to $90/bbl or above. However, on June 2nd, OPEC+ announced that all “required” production curtailments would be extended through the end of 2025, but that the roughly 2.2 mbpd of voluntary cuts would start to be reversed as of Q4, subject to market conditions. The market was expecting that all cuts would be extended through year-end. Also, there will be some adjustment to quotas for the UAE based on their increased capacity, starting in early 2025. The market reacted with Brent crude prices falling sharply to below $80/bbl. The key is that OPEC+ signaled a stronger interest in increasing production earlier than expected. This suggests that prices may trade in a lower range than they have for the past six months or so, with Brent seeing more numbers in the $70s per barrel. It’s possible that OPEC+ will change policy, depending on how low prices go. But even if a lower trading range sets in and persists, the cash costs advantage for North American producers will remain robust. And upside risks remain given geopolitical uncertainty due to the ongoing conflicts in Ukraine and the Middle East.
Natural Gas
In the February through April period, natural gas traded consistently at levels below $2/MMBtu. These low prices caused producers to reduce production from record levels in early 2024 by 5-6% in an effort to rebalance the market over time. In May, prices lifted into a range between $2 and almost $3/MMBtu on seasonally early warm weather, increasing LNG exports and short covering by speculators. But still-high storage this summer likely will lead to relatively low prices much of this year, with the risk of a spike if weather drives higher demand next winter and if storage has rebalanced. Low gas and ethane prices have reduced NAM ethane-based producers cash costs. This large (~30 cpp or more) cash cost advantage vs naphtha-based producers enables continued rebalancing of the domestic PE market through exports.
Ethylene
Outside the effects of weather disruptions, the USGC ethylene market has been fundamentally oversupplied since March 2018. But the market is likely to rebalance this year or next as new derivative capacity ramps up, ethylene exports flow and increase over the next couple of years, and PE operating rates are high as producers continue to be able to balance the domestic market through exports. PE market participants will need to pay more attention to changes in the ethylene market as this tightness emerges and leads to more volatile and potentially higher average prices.
Polyethylene
The global PE market became oversupplied in late 2021 and the degree of oversupply has increased since, driving operating rates to 80% or lower. Global oversupply has led to producers in high-cost regions experiencing negative margins on a full cost basis. To balance the market, high-cost producers have been reducing rates, idling assets, and extending maintenance outages, as is the case with ethylene. This oversupply is expected to continue absent a significant level of rationalization, with the rationalization requirement estimated to be between 20 B lb and 30 B lb. To date, there are just a few known plans for shutdowns. SABIC Europe will shut down ethylene and some PE at its site in Geleen, the Netherlands; ExxonMobil will shut down a cracker and associated LLDPE reactor at Gravechon, France, by the end of 2024; Idemitsu Kosan and Mitsui in Japan will consolidate their ethylene units and shut down a 660 MM lb cracker in the process – it’s not known if any PE will be affected; PetroChina Langzhou PC will shut down two small crackers and build one 2.6 B lb unit for a net increase of 1 B lb, in 2028. Existing Langzhou PC PE assets will not be shut down and in fact, capacity added. The Chinese government has stated that this scrap and build approach will become more common. None of these plans, however, addresses the short-term issue and much more needs to be done.
In North America, the industry seems to have finally moved past the gyrations driven by pandemic-related issues like the logistics constraints and the inventory correction. As was part of the original planning for new projects announced starting in late 2010, advantaged costs allow for production in NAM to service demand centers in other regions. Exports are now flowing freely - despite low Panama Canal water levels and regional port disruptions like Baltimore - at record levels approaching 50% of production and the domestic market is being balanced through these exports. Inventories at the producer level have risen to allow servicing of businesses that have increased in size, while days sales of inventory have returned to levels that are balanced with sales levels that are aligned with industry average operating rates above 90%. Capacity expansions in NAM will be on pause until later in the decade following the startup of Baystar’s Borstar reactor, NOVA’s AST-2 reactor, and Shell’s reactors. The impact of these asset startups will be felt for the most part in 2024 and beyond.
The start of 2024 has seen strength in domestic sales, up 2.9% through April, and continued record-level exports. Nameplate operating rates have trended upward with effective rates near 90%. While NE Asia margins are negative on a full cost basis, margins for N. American producers are positive mainly due to low feedstock costs. The domestic market remains very competitive, with price increases achieved in January and April.
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