Jun 09 2023
The seasonal rebound in global ethylene derivative demand forecast for the second quarter failed to materialize, and market participants now expect sluggish demand and oversupply to persist through the end of 2023.
China, in particular, has disappointed expectations. Producers had hoped a recovery in Chinese domestic demand would absorb local supply, reducing exports and tightening the international market, but that has not occurred. Worse, new ethylene capacities continue to come online.
"So far the recovery is much slower than what we expected," a Northeast Asia trader told S&P Global Commodity Insights. "It seems like there are not many bullish factors even in the second half of this year."
The 45 million metric tons per year of ethylene capacity slated for startup during 2020-2024 – 25 million tons in China alone – are expected to exceed demand by more than 9%, according to Paul Joo, director/olefin and olefin derivatives, APAC at Commodity Insights.
Europe remains challenged by volatile upstream energy and utility costs, and despite the fall in headline inflation, the Russia-Ukraine conflict is expected to remain a drag on the economy. Conditions in the ethylene did not improve as anticipated during the first half of 2023, and market participants now expect continued weak demand and oversupply during the second half.
European prices for derivative ethylene glycol (EG) have lingered at historic lows and, in most cases, at levels below cash cost. Demand for downstream polymer polyethylene terephthalate (PET) has also been historically weak, with consumers economizing in the face of rising food prices and interest rates.
"I'm not optimistic," a European trader said. "The low volumes, the naphtha price and these imports flowing in, and producers [are still] in expensive mode."
US adding ethylene export capacity
European suppliers also expect more import pressure from cost-advantaged ethane-based producers in the US.
Reduced derivative rates in the US have freed ethylene for export, such that Enterprise Products Partners' 1 million metric ton per year ethylene export terminal in Texas operated at 120% to 125% of capacity through much of 2022. The company is expanding the terminal's capacity by 50% in 2H 2023, and will add another 50% by 2026.
The ethane advantage is also expected to support strong downstream EG production despite weak demand for PET bottling.
China, the largest global consumer of EG, has dramatically increased its domestic production capacity, but poor margins in Asia have discouraged production, while imports from the US have increased, sources said. EG exports to Europe are expected to continue at subdued levels amid antidumping duties ranging from 3% to 60%, depending on the company.
Oversupply is expected to linger, barring a significant disruption such as a hurricane striking the US Gulf Coast, where EG production is centered. Even then, because EG production outstripped demand during the second quarter, stocks should be sufficient to offset outages, sources told Commodity Insights.
Asian EG suppliers said reduced production rates in the regions will continue until margins strengthen, and they expect output to remain low for the next few years. Downstream textile and bottle-grade PET demand has lagged EG supply, a source said.
EG plants could transition from economic run cuts to permanent capacity shutdowns of older, inefficient plants where possible, sources noted. Capacity additions slated for 2023 would offset such rationalizations, but startups could be delayed given a shaky economic outlook, traders said.
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