WoodMac: China, North America face propylene oversupply

Oil and gas analyst Wood Mackenzie Ltd. forecasts that global propylene production capacity will increase to 165 million tonnes/year (tpy) by 2030 from a current 109 million tpy, prompting a radical shift in historical supply relationships.

“The $120 billion global propylene market has regularly been in a shortage situation over the past 4 years, causing high prices, and therefore, a loss of market share relative to competing materials,” says Stephen Zinger, head of WoodMac’s chemical research for the Americas.

While propylene traditionally has been a byproduct of both ethylene from steam crackers or refined fuel products from oil refineries, these sources have not been able to keep up in recent years with global demand growth, according to WoodMac’s latest global propylene long-term market study

These supply shortfalls have been particularly acute in China, where demand growth exceeds investments in traditional sources of propylene, and in North America, where the shift to shale gas-based ethane feedstocks have reduced propylene yields from steam crackers, explains WoodMac.

As a result of these supply shortages from steam crackers and refineries, substantial investments have poured into alternative technologies to boost global propylene supplies, including methanol-to-olefins (MTO), methanol-to-propylene (MTP), and propane dehydrogenation (PDH).

In addition to creating near-term threats of oversupply in China and North America, these investments in MTO, MTP, and PDH technologies over the next 5 years also will permanently alter the paradigm of propylene’s global supply and market pricing dynamics, says Zinger.

North America’s PDH push

The wide adoption of PDH technology likely is to occur in North America, where ample supplies of domestic shale gas are adding downward pressure to the cost of propane used as feedstock for PDH units, according to WoodMac.

In addition to other new PDH units and expansions under consideration by C3 Petrochemicals (Ascend), Formosa Plastics, Petrologistics, REXtac, and Williams Energy Canada, Dow Chemical Co. and Enterprise Products Partners LP each are spending more than $1 billion to construct and start up new PDH units by early 2016 (OGJ Online, Aug. 6, 2014; June 26, 2014; Mar. 18, 2014; Jan. 31, 2013; Jan. 8, 2013).

Following start-up of these two new PDH units, North American propylene prices likely will start to decline as the market becomes saturated with supplies, according to Zinger.

“Although propane prices have been low and PDH profit margins have been very strong for the past 4 years, [WoodMac] expects this trend to dramatically change after the start-up of these new PDH units and several new propane export terminals, causing propane prices to rise and the spread between propylene and propane to return closer to historical levels,” Zinger said.

In an attempt to avoid this impending risk of higher propane feedstock prices for PDH units, BASF is investing MTP technology using natural gas as feedstock for the methanol intermediate chemical, according to WoodMac.

Between 2005 and 2030, the market share of PDH and MTO-MTP-sourced propylene will increase from nonexistent to more than 25% of total North American supply, Zinger explains, adding that this will represent a permanent change in the paradigm of marginal propylene supplies to the market.

A self-sufficient China

As the largest importer of propylene and propylene-derivative chemicals currently, China is seeking to adopt a long-term propylene self-sufficiency strategy with a focus on PDH investments, which began with Tianjin Bohai Chemical Industry Co.’s commissioning of the first PDH unit in late 2013, according to WoodMac.

In addition to four new PDH units scheduled to start production this year, there are more than a dozen additional PDH plants in China currently under investment consideration, the study shows.

But China’s plan for propylene self-sufficiency also includes investments in MTO and MTP technologies, which will capitalize on the country’s vast coal reserves, according to Vince Sinclair, head of Asia chemicals research for WoodMac.

Joining China’s first MTO plant, which China Shenhua Coal-to-Liquid Chemical Co. Ltd. commissioned in 2010, will be 12 additional MTO plants in operation by yearend, with dozens more still under investment consideration, Sinclair said (OGJ Online, Sept. 30, 2010).

Propylene prices in Asia already have started to weaken as a result of these new domestic supply investments in China, according to WoodMac.

Between 2005 and 2030, WoodMac forecasts the market share of propylene sourced from PDH and MTO-MTP technologies will increase to about 45% of China’s total capacity, pushing the country toward full self-sufficiency and negatively impacting export-oriented producers in South Korea, Saudi Arabia, Taiwan, Singapore, and India, which currently serve as China’s largest sources of propylene-derivative imports.

Another driver behind the wave of investments in China’s on-purpose propylene capacity is a strategy on the part of independent propylene-derivative manufacturers to reduce their dependence on imports and domestic supply from the oligopoly of state-owned majors, WoodMac said.

Europe’s import dependence

While North America and China are addressing their propylene shortfalls with alternative technologies and feedstocks, WoodMac forecasts Europe will solve imbalances to its propylene supply with additional imports.

“European crackers are shifting to lighter feeds where possible as evident by the announced intentions to import ethane from the US by Ineos, SABIC, and Borealis, while others continue to study similar options,” explains Alex Lidback, WoodMac’s head of chemical research for Europe, the Middle East, and Africa.

“Currently, there are two PDH units in Europe, but all indications are that new PDH and MTO-MTP investments are not viable options,” said Lidback.

Contact Robert Brelsford at rbrelsford@ogjonline.com.

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