2020 to be year of transition for global olefins industry

Wood Mackenzie expects the combined capacity expansion of base olefins - ethylene, propylene and butadiene - to hit unprecedented levels of around 20 million tonnes in 2020. This represents an increase of 6% on 2019 levels.

Meanwhile, global demand for base olefins is predicted to grow approximately 3.8%. Overcapacity is expected to force monumental changes in the global olefins market balance.

What are the biggest trends to watch in global olefins market in 2020? Patrick Kirby, Wood Mackenzie Principal Analyst, sees five key themes:

• Energy and economy: oil prices a touch lower, GDP a touch higher
• Refining and chemicals integration: stronger refining-olefins integration and evolution of COTC
• NGL developments: lower ethane and LPG prices to benefit gas-based olefins producers
• Olefin derivatives: fall in utilisation rates to impact ethylene affordability
• China: unprecedented level of ethylene and propylene capacity addition

He said: “2020 will see an acceleration of these major market shifts. Success may be defined by how regional industries and companies manage changes and the subsequent impact.”

A crucial factor effecting market pricing, profitability and major trade flows of olefins and derivatives is the crude oil price. There have been recent geopolitical tensions in the global market, particularly between the US and Iran. Meanwhile, oversupply in the oil markets is expected to depress prices in the first half of 2020 before stabilising in the second half.

Wood Mackenzie expects global GDP growth in 2020 to sit at 2.4%, marginally higher than the decade-low 2019 level of 2.3%.

Kirby said: “Our 2020 outlook is built upon signs of the global economy stabilising and the global manufacturing picture looking more positive. This tentative recovery in global GDP has several downside risks that far outweigh our assessed potential tailwinds.

“Brexit remains unresolved and our assumption of an optimal economic separation between the UK and EU is still at risk. A global trade war remains the biggest hazard for economic growth. In a downside scenario, where escalating trade protectionism triggers a recession, global GDP could fall considerably in 2020.”

Refining and olefins integration will continue to be an important theme for the market through 2020.

“As the energy transition unfolds, a clear shift in investments towards refineries with a higher olefins recovery is clear. This illustrates the requirement for a stronger refining-olefins integration and crude-oil-to-chemicals (COTC) evolution.

“2020 will mark the onset of the arrival of two ground-breaking second-generation COTC developments in China. While both investments are strategically driven by polyester companies looking to backward integrate into paraxylene, they will both deliver world-scale ethylene plant additions. Combined, these two investments will provide enough ethylene capacity to meet over half of the entire global ethylene demand growth expected in 2020,” added Kirby.

The impact of the new IMO regulations limiting sulphur content in bunker fuels is likely to impact refinery operations and the olefins industry this year.

Kirby said: “Volatility in refined product pricing is undoubtedly going to happen in 2020. The potential diversion of low-sulphur VGO feedstock - key for FCC operations - towards the marine sector could impact the propylene industry. Our base case assessment is that this is likely to represent an overall reduction in gasoline production and corresponding propylene production for the olefins industry. Additional implications are likely for refiners with high FCC propylene yields.”

Wood Mackenzie expects US ethane prices to be lower than those seen in 2019 due to upstream supply growth and infrastructure developments. Global olefins production units will also benefit from lower LPG prices.

“On average, LPG cracking to produce ethylene is expected to return greater margins than naphtha cracking through 2020. Readily available propane will provide the foundations for a global wave of investments in propane dehydrogenation units.

“Overall, lower ethane and LPG prices will be a boon to US ethylene producers that have seen tight margins because of domestic oversupply. Global ethylene derivative producers will welcome the decreased feedstock prices in a year that is set to see global olefins capacity growth far exceed that of global olefins demand growth,” added Kirby.

2020 will mark the start of what is expected to be the deepest downcycle the olefins market has ever seen.

Kirby said: “The overinvestment in ethylene capacity is driving overinvestment in its primary derivatives, namely polyethylene, monoethylene glycol and styrene. As a result, utilisation rates across the major ethylene derivatives are expected to start falling markedly this year, which will in turn impact ethylene utilisation rates.

“For the first time in seven years, we expect global ethylene utilisation rates to fall below 90%.

“Regionally, Asia will be hit the hardest. Asia’s ethylene utilisation rates are expected to fall by about 6% in 2020, a magnitude of change not seen since the global economic crisis of 2008/2009. The fall in utilisation rates across the ethylene value chain will have a knock-on effect on prices.”

Many markets will demonstrate major change during the year ahead, however no single market can match the transformation that is taking place in China.

“In 2020, China will add approximately 5.8 million tonnes of new ethylene capacity - an unprecedented single year change for the country.

“The steam cracking capacity that will arrive into the Chinese market in 2020 will be at a similar level to the capacity growth of the previous seven years combined. This buildout is just under half of total ethylene capacity investments globally and almost equivalent to total 2020 global ethylene demand growth. Around 80% of this new capacity will be steam cracker based, with the remainder coming from CTO/MTO investments,” said Kirby.