JEDDAH – Given the significantly low levels of global gas prices (currently at $2.4/mmbtu as of May 10, 2012, at the lowest levels in a decade), the Saudi government will not increase ethane prices in 2013, as it is keen to preserve the feedstock advantage for the local petrochemical producers, Al Rajhi Capital’s Saudi Petrochemicals Sector report released Saturday said.
Earlier, in its previous sector note, Al Rajhi Capital had talked about a likely rise in feedstock prices from $0.75/mmbtu to $1.25/mmbtu in 2013.
The report noted that in January 2012, the Saudi government postponed its plans to raise the prices of ethane and methane (currently $0.75/mmbtu, which was set in 1998).
Prices of natural gas (Henry Hub) touched its lowest level since September 2009 (while gas futures slid to a 10-year low) on the back of ample supplies (shale gas and other new discoveries coupled with high storage levels and new drilling technologies) and fragile demand, largely on account of lower winter temperatures in the developed countries.
The Henry Hub 2012 YTD average price contracted sharply by 42 percent to $2.3/mmbtu compared to the 2011 average of $4/mmbtu. The report ruled out any immediate impact of this decline on the Saudi petrochemical players. However, in the long run, shale gas discovery will lead to decline in cash cost of US petrochemical producers, hotting up competition in this space.
EIA currently estimates an average gas price of $2.45/mmbtu and $3.17/mmbtu for 2012 and 2013 receptively. Though Al Rajhi Capital expects a rise in gas prices in the near-term, it believes EIA estimates are slightly bullish. For the remainder of 2012, “we estimate the average price of natural gas to be in the range of $2-2.4/mmbtu, while for 2013, we estimate the average price to recover and remain at around $2.6-3/mmbtu,” the report said.
Saudi petrochemicals exports would continue to rise, Al Rajhi Capital said, forecasting the growth in exports will be driven by routine plant shutdowns in Asia and not necessarily because of growing demand.
According to the Saudi Ports Authority, petrochemical exports from Saudi Arabia rose by 16.1 percent y-o-y to 2.51mt in January 2012. In fact, China, the main importer of petrochemicals globally, has been slowing down in the past few quarters. The Chinese PMI remained weak since the start of the year and stood at 49.3 in April 2012.
Moreover, the report said shale gas discoveries would not to impact Saudi companies in the near-term.
According to industry sources, apart from significant new investments in ethane-based crackers (expansion at Formosa Plastics, Chevron Phillips Chemical, Dow Chemical, Shell are slated to take place between 2016-2017 with production capacities in the range of 0.8-1.5mtpa each), several producers in the US are converting their ethylene plants to use lighter feedstock such as ethane, instead of naphtha due to discovery of shale gas. In addition to new crackers, four US producers (Westlake Chemical, LyondellBasell, INEOS and Williams) are chalking up plans to carry out expansions or debottlenecking at existing sites. The total additional capacity from these expansion programs amounts to around 995,000 tons/year. The upgraded plants are slated to come online by end-2013 through 2014. ICIS estimates that these capacity expansions total an estimated 7.4mtpa of ethylene capacity by 2017, representing 28 percent of the existing US ethylene capacity of around 26.6mtpa.
The report believes a fall in feedstock prices will lead to improved margins for the US producers of ethylene and its derivatives (who are shifting to lighter feedstocks) in the near-term. However, the report forecast that the plants of US companies will not affect the performance of the global petrochemical industry as we believe the US will remain a net importer of petrochemicals over the next 5-6 years.
Besides, naphtha prices rally would impact new projects, the report poined out.
Since 2006, the Saudi government has stopped allocating new ethane supply to Saudi petrochemical companies due to increased demand for gas for electricity generation and water desalination. At the same time, the government is also promoting production of specialty chemicals in order to diversify the Saudi economy. Higher output of specialty chemicals is derived from cracking of naphtha and associated heavy feedstocks such as propane and butane as compared to cheaper ethane feedstock used for production of basic olefins.
All these factors have triggered higher input costs for the Saudi petrochemical companies. Many new projects like APC and Al Waha (SPC’s subsidiary) have been allocated propane at a discount to international prices. This pricing system is different as compared to that of established players like SABIC, who receive ethane (majority of its feedstock) at a fixed price of $0.75/mmbtu. – SG