Utilization Rates to Rise at Existing Facilities
The author is an analyst of NH Investment & Securities. He can be reached at ys.hwang@nhqv.com. -- Ed.
1. Petrochemical industry to enter phase of oversupply amid increase in capacity additions (centering upon China)
Ethylene and propylene capacity additions to accelerate oversupply in 2H21
In 2H21, we expect supply burden owing to capacity expansion projects for ethylene and propylene facilities to intensify further. Net capacity additions for global ethylene facilities are projected to arrive at 11.67mn tons (+1.4% y-y) in 2021, a level exceeding the estimated growth in demand of 8.2mn tons (+5.0% y-y). Of note, in 2020, ethylene capacity additions came to 11.5mn tons (+6.3%), a notably high level. Nevertheless, supply-demand environments remained healthy thanks to a pandemic-driven increase in demand for packaging materials and hygiene products, as well as delays in capacity expansion projects. However, with the postponed projects set to wrap up in 2H21, supply burden will likely amplify.
Oversupply situation to sustain through 2023
With capacity expansion projects that started in 2020 set to continue through 2023, the petrochemical industry is inevitably to enter a phase of oversupply. We note that ethylene capacity additions of more than 10mn tons are slated each year over 2020~2023. Capacity expansion in excess of demand growth is expected to total around 19mn tons during those four years, a level representing around 8.4% of 2023F global ethylene production capacity. This situation implies that ethylene facility utilization rates could drop by 8.4%p—from over 90% in 2023 to the low-80% level in 2024. We believe that oversupply will lead to a decline in ethylene spreads.
Propylene supply glut to drive down facility utilization rates
The situation should be similar for propylene. Capacity additions for global propylene facilities are forecast to reach 8.07mn tons (+25.8% y-y) in 2021, a level exceeding the estimated growth in demand of 1.6mn tons. While propylene demand should remain brisk this year thanks to pandemic-induced demand for hygiene products and packaging materials, as well as the unfolding of a global economic recovery, the effects of this robust demand will likely be overshadowed by sizable capacity additions. Capacity expansion in excess of demand growth should total 12mn tons over 2020~2023, a level representing around 7.5% of global propylene production capacity in 2023. This likelihood implies that propylene facility utilization rates could drop from the low-80% level in 2019 to the mid/high-70% level in 2023
Capacity additions concentrated on China to intensify supply burden in Asian markets
We believe that petrochemical capacity additions over the coming years will place a particularly heavy burden upon Korean chemical industry players, as such additions are to concentrate in a neighboring country, China. Of note, China’s capacity expansion projects this year are projected to total 7.22mn tons for ethylene and 6.51mn tons for propylene, levels representing 62% and 81%, respectively, of overall global capacity additions. Having come to 45% (5.16mn tons) in 2020, China’s portion out of global ethylene capacity additions is likely to remain high at 62% (7.22mn tons) in 2021 and 53% in 2022 (6mn tons). Over the past five years, capacity expansions were focused on North America, and thus had relatively small impact upon Asian markets. But, from early-2020, capacity additions have been concentrating in China, and are being conducted on a larger scale. Given such, the widening in capacity is likely to aggravate the supply burden in Asian markets.
China’s petrochem facilities to achieve greater economies of scale
Backed by aggressive capacity expansion, Chinese petrochem facilities are expected to achieve greater economies of scale moving ahead. Back in the 2010s, China’s capacity additions revolved around relatively small, coal-based production facilities. The country’s ethylene plants had limited cost competitiveness, as their production capacity largely remained below 500,000 tons—a level smaller than the 800,000 tons that qualify as large-sized facilities. Furthermore, coal-based production facilities caused various environmental issues that led to limited operations. However, as the Chinese government has begun to encourage the production of large-scale facilities with a capacity of 1.2mn tons or above, Chinese petrochem facilities are likely to show stronger cost competitiveness on greater economies of scale going forward, in turn threatening the market positions of Korean players.
2. Utilization rates to rise at existing facilities in 2H21
Unprecedented strong earnings at petrochem firms in 1H21 attributable to North American cold wave
Unprecedented strong earnings at petrochem firms in 1H21 are mainly attributable to a North American cold wave. At the beginning of the year, petrochem product purchasers began reducing their inventories, expecting higher supply, before a number of chemical facilities were shut down in the US owing to an unexpected cold spell in mid-February, after which, speculative demand began picking up worldwide due to supply shortage fears. Meanwhile, oil prices have continued to rise, resulting in positive raw material lagging effects (from the input of low-priced raw materials) and strong earnings at petrochem firms.
Around 60% of US ethylene facilities stopped operating due to cold wave
While the North American cold wave lasted for only a week in mid-February, large-scale production disruptions followed for about two months. Around 60% of US ethylene facilities shut down operations, and operations did not resume for another one to two months due to maintenance and repairs. Production capacity at US ethylene facilities stood at 39.99mn tons as of end-2020, accounting for 21% of global capacity. Due to the cold wave, roughly 24mn tons of facilities suspended operation, representing around 12% of global capacity. In response to a mix of low inventory levels and unexpected large-scale production disruptions at the time of entry into a peak season, sizable speculative demand was witnessed, leading to an upsurge in spreads. Moderate-paced oil price increase further stoked speculative demand. This, together with favorable raw material lagging effects, pushed up petrochem companies’ earnings to historic levels.
Average utilization rate of ethylene facilities to rise in North America in 2H21
From April, US facilities have returned to normal, and smooth production of chemical products is underway. Spreads for ethylene and propylene products have stabilized down from their April highs, and speculative demand appears to have settled as well. Considering the fact that large-scale regular maintenance for ethylene facilities is unlikely in the US in 2H21, the average utilization rate of ethylene facilities is forecast to rise in North America.
In Asia, smooth ethylene and propylene production is expected in 2H21
In Asia, regular maintenance for petrochem facilities is expected to be smaller-scale in 2H21 compared to 1H21. Small-scale regular maintenance is expected for ethylene facilities, with the portion of shut ethylene facilities likely falling from 6~7% in 1H21 to 2~3% in 2H21. Regarding propylene facilities, in 1H21, 18% suspended operations due to facility troubles, etc. But, the majority are forecast to operate normally in 2H21. We expect smooth operations and product production at propylene facilities moving ahead.