OREANDA-NEWS. February 04, 2016. WTI and Dated Brent closed at \\$26.54/b and 25.96/b, respectively, the lowest we have seen oil prices since 2003. Since then we have seen prices rise and hover around the \\$30/b level.

Unlike ethane, naphtha is highly correlated with the price of oil. Therefore, fluctuations in global oil prices will have a major impact on steam crackers, more so in Europe and Asia where most producers utilize naphtha as a feedstock for producing ethylene.

The title of Thomas Friedman’s renowned book The World is Flat suggests that the world is equalizing in terms of opportunity for commerce. In this case, the low oil prices are pushing down global naphtha prices and allowing ethylene producers using naphtha as a feedstock to be more competitive —therefore leveling out the playing field.

Below we see a snapshot of ethylene competitiveness in this low oil price environment by comparing production costs for theoretical 1 million mt/year steam crackers using 100% of the preferred feedstock for that particular region, with the exception of the US ethane/propane mix unit.

gonzalez-steam-cracker-costs

Note: Our cost model uses the net feedstock cost, the difference between the feedstock and co-products, and adds variable costs and general fixed costs to calculate the total cracker production costs. All prices used in our calculations are based on Platts global prices. 

Using Jan. 24 prices, the production costs for Saudi ethylene producers are still among the lowest globally in spite of their recent increase in ethane prices. While the production costs for producers in Saudi Arabia have risen, production costs for Northwest Europe, Northeast Asia, and Southeast Asia — typically the highest-cost ethylene producers in the world — have dropped significantly amid the recent fall in global crude prices.

As shown in the chart, production costs for Southeast Asia are at par with US ethane, a big change compared to June 2014 when oil prices peaked and ethylene producers in Europe and Asia were struggling to remain profitable.

To better understand the math behind the charts, let’s first look at the cost of feedstock to produce 1 mt of ethylene for Europe and Asia. Average monthly naphtha prices for Europe dropped by 24% from December to January. Average naphtha prices for Northeast Asia and Southeast Asia fell nearly 30% over the same period.

Using typical steam cracker yields, the price of the amount of naphtha needed to produce 1 mt of ethylene is \\$836/mt for Europe, \\$850.38/mt for Northeast Asia, and \\$813.71/mt for Southeast Asia, still relatively high compared to the price of the amount of feedstock for ethane based crackers in the US and the Middle East. However, the value of the co-products (such as propylene, crude C4s, pygas, gasoil, hydrogen) for naphtha-based crackers is much higher than the value of the co-products for ethane-based crackers.

The value of the co-products for Northwest Europe totaled \\$657.87/mt based on Jan. 24 prices. The co-products value for Northeast Asia and Southeast Asia totaled \\$753.57/mt and \\$784.08/mt, respectively. When we subtract the feedstock price from the co-product values we get the net feedstock prices, one of the three components we use to calculate the total production costs.

According to Platts editor Maithreyi Ramdas, “Traders are saying that with feedstock naphtha prices at around \\$300/mt, C&F Japan, costs would obviously have fallen for ethylene producers using naphtha.”

“The naphtha/ethylene margins are currently at \\$625/mt, which is pretty healthy considering typical breakeven levels of \\$250/mt,” Ramdas added.

“Producers are making money; margins are much higher because of the low naphtha prices,” sources in China said.

Platts Analytics does not expect this to continue unless oil stays at this level or drops even further. According to Bentek’s latest oil forecast, the price of crude is expected to increase back to the \\$40/bbl level within the next three months, and not expected to hit the \\$50/bbl mark until March or April of 2017.

In the meantime, producers in Europe and Asia will continue to enjoy high profits due to the lower production costs stemming from the low crude prices. In terms of competiveness, as Thomas Friedman says, “the world is flat” — at least for the moment.