2008 Year in Review
For chemical and plastic resin producers in the US, the holiday season of 2007 was relatively merry and bright.
Prices throughout the chemical chain rose slightly and continued this trend into the new year. But as we reach the end of 2008, the scene is bleak for many and prices throughout the plastic resin chain are mostly cut in half.
How did we get here?
The standout moment of 2008 for so many was when crude oil traded at $147/bbl in July. All the way up, chemical markets nervously watched their costs rise, and were relieved that they were able to pass along those costs.
Polyethylene prices steadily rose about 15 cents per pound during the first six months of the year to the mid-80s cents/lb range, and polypropylene prices rose about 25 cents during that time to nearly $1/lb. Upstream, ethylene monomer prices rose about 15 cents to nearly 70 cents/lb while propylene monomer prices rose about 20 cents to above 80 cents/lb.
Further upstream, the natural gas liquids that feed the ethylene and propylene plants saw considerable volatility culminating in what some considered to be records gains by July. Ethane, the primary feedstock for ethylene, started 2008 at $1.15/gal and steadily dropped until May, reaching 89 cents/gal before turning around and riding the bullish wave to more than $1.40/gal by July. Natural gasoline, a popular feedstock for olefins plants that run heavier raw materials, started the year above $2/gal, and steadily rose to above $3/gal by July.
Margins overall, were good for producers of ethylene and propylene, as well as for producers of polyethylene and polypropylene. However, margins were not good for the buyers of polyethylene and polypropylene, and demand gradually eroded in June and July.
August was a pivotal month for the chemical chain this year. Energy prices began dropping in mid-July, and continued to slide into August. By early September, crude oil was trading at around $106/bbl. Ethane was down to about $1/gal and natural gasoline had retreated to about $2.30/gal. Ethylene had dropped nearly 20 cents to 50 cents/lb, and propylene was in the 60s cents/lb range.
However, polymer prices did not slide. Polyethylene and propylene price increases did not find support, but prices stayed at July levels. Traditionally, polymers have seen a lag of about two months from their upstream markets. The volatility in 2008 and increased transparency in the upstream markets has shortened this to about 1 month, and this was why in the face of sliding prices in energy, natural gas liquids and olefins, polymers prices took the month of August to pause. Sellers kept their prices at July levels, and buyers largely backed away from the market.
The one-two punch of hurricanes Gustav and Ike in September were expected to revive higher pricing for the upstream markets, as so much Gulf region production was shut in for the better part of a month, with some sites heavily damaged and shut for much longer.
But as we saw, buyers didn’t blink. There was no panic, and there was no clamor for material. Resin buyers did not return to the market, and without them, upstream prices continued to slide. The dizzying highs seen in the second quarter had driven buyers away and downstream processing plants across the country had reduced their operating rates. The volumes they had taken on in June and July from contract deliveries were still carrying them in September. And now prices were sliding quickly.
In any market, when everyone is seeking to unload high-priced inventory, the slide in prices can resemble an avalanche. Everyone seemed to be a seller in September and October. Consumers and trader were competing with producers for a shrinking demand pool.
By the end of October, ethylene was trading near 20 cents/lb and propylene was in the 30s cents/lb range. Ethylene and propylene plant closings began to be announced, and the effect of this demand loss on the upstream natural gas liquids market was swift. Ethane sank more than 20 cents in October, to nearly 40 cents/gal. Natural gasoline prices fell nearly 80 cents/gal to about $1.20 during October. Polyethylene and polypropylene prices began to fall, but did not drop as far as their upstream markets: polyethylene ended October in the 60s cents/lb range while polypropylene was in the 50s cents/lb area.
November continued to bring more pain for chemical sellers, as more plants announced closings and prices reached lows not seen in more than 5 years. 23% of ethylene production was shut, and most plants had sharply reduced operating rates. Processing plants had largely closed up for the remainder of the year. Prices continued to plummet.
In December, ethylene has traded down to nearly 15 cents/lb. Propylene trade has just about stopped, and propylene contracts were in the 20 cents/lb range. Resins were selling at nearly 30 cents/lb. Crude oil is in the $40s/bbl range. The profits of the first 8 months of 2008 have been erased.
While the shutdowns have limited the cycle of selling product at a loss, a situation that occurred for many in November, the outages themselves of course bring a new fixed cost into fourth-quarter balance sheets, especially for companies that did not let go any workers.
The larger effect as we face the end of the year is that prices have appeared to stabilize. Perhaps a market floor has been found. Buyers are not so handily able to name their price, as supply has dried up. Seizing on this possibility, several polyethylene and polypropylene producers have already issued price increase notices for January.
2008 will be remembered as a year that saw petrochemical pricing power shift dramatically from sellers to buyers. 2009 may be a power struggle as producers leverage their supply to regain control.
Steam cracker operating rates will be the bellweather to watch in the first months of 2009. With more outages expected, operating rates of the nation’s ethylene units is expected to be close to 60%, and no better than 75%. These plant operators will be watching the incremental price of polyethylene and polypropylene closely, waiting for those prices to increase enough to where demand will improve for their olefins. Many are expecting a bleak first quarter, and will be cautious before returning operating rates to anything near levels seen a year ago.
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The PetroChem Wire is a daily newsletter serving the petrochemical industry. It counts every major chemical and refining company among its subscribers, as well as many major manufacturing concerns, global conglomerates, industry consultants, equity analysts and government agencies.
Contact:
Kathy Hall, Executive Editor
+1 720 480 6288
kathy@petrochemwire.com
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Copyright 2009