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Apr 13, 2020
Naphtha Cracker Production Cost Sensitivity Analysis in Low Crude Environment
The new decade started with some optimism as the United States
and China signed phase one of a trade deal on 15 January. Crude oil
prices were at approximately $58 per barrel for WTI and $65 per
barrel for Brent. However, this soon changed with the rapid and
uncontrolled spread of COVID-19 globally, which caused several
countries to lock down and halt most business activity and impose
strict social distancing measures. Air and road travel are severely
restricted currently, drastically decreasing demand for transport
fuel. In addition to the demand shock from COVID-19, the crude oil
market has suffered a supply shock as well following the failure of
the Vienna Alliance to agree on an extension and deepening of
output cuts in early March, which sent crude oil prices tumbling to
the low $20s per barrel in March.
This low crude oil price environment would typically be
advantageous for naphtha crackers, which dominate production in
Asia and Europe. Given these circumstances, some immediate
questions come to mind: How low can Asian naphtha cracker cash cost
go? Are US ethane crackers still going to be competitive?
Cash costs in Asia could increase depending on coproduct supply and
demand, but with the current naphtha forecasts, overall cash costs
should remain relatively competitive until 2021. It will be a
challenging year for US ethane crackers, especially with additional
capacities from new crackers that came onstream in 2019 and several
more coming onstream in 2020-21 in the United States. That said,
even though Asian naphtha crackers have moved lower in the cost
curve, there is still a challenging year ahead. Two mega crackers
in China, Hengli Petrochemical and Zhejiang Petrochemical, started
commercial production in the first quarter of 2020, adding ethylene
supply to the sluggish market.
In addition, several more capacities in China are expected to come
onstream in 2020, along with some cracker expansions in other parts
of Asia. Derivatives demand, on the other hand, is expected to slow
down amid the COVID-19 pandemic. However, some of the demand loss
from reduced overall derivative requirements could be partially
offset by lower monomer and derivative imports from other regions.
Lastly, integrated margins in Asia are expected to remain
relatively modest and low despite low cash costs due to the weak
global economic situation and massive slowdown in China, which is
the key demand center for Asia. A sharp demand recovery is unlikely
considering the current situation.
IHS Markit experts are closely analyzing the olefins and
derivatives market with
near-term and
long-term market intelligence giving you the visibility needed
to make confident strategic decisions.
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