Where Is the Market for U.S. Ethylene Headed?

One other factor contributing to the increase in U.S. ethylene-derivative exports has been the rapid rise of global oil prices relative to U.S. natural gas prices. This has made the U.S. ethylene industry more cost competitive globally, in particular with regards to Europe and Asia. Roughly 60–70% of U.S. production comes from the cracking of liquefied natural gas (mostly ethane), with the balance from naphtha and other oil-based feeds; in Europe and Asia, it's the reverse. In the Middle East, the feed slate heavily favors natural gas, but this is gradually changing, as naphtha is increasingly used to generate more by-products, including propylene.

Ethylene is the chemical industry's most important "building block." It is used in the production of most key plastic resins and petrochemical intermediates, including polyethylene, PVC, polystyrene, and ethylene glycol. The other two major building blocks are propylene and benzene; in the United States, in terms of volume, ethylene is bigger than those two combined. Ethylene's end-markets are quite diverse and range from packaging, anti-freeze, and textiles to building materials, industrial machinery, computers, transportation equipment, and a host of consumer products.

Energy (natural gas and oil) accounts for the bulk of ethylene's production costs, so its price tends to follow energy prices rather closely. Being a commodity, ethylene prices are shaped by demand/supply conditions, particularly over the short term. Crude oil prices have skyrocketed above $80/barrel (West Texas Intermediate) this year, from a low of $50/barrel in January. However, we expect oil to stabilize around the $70/barrel range during the next few years. Natural gas prices have increased too, but not as sharply as oil prices, reaching $6.50 per million Btu (Henry Hub) as of October 12, up from $5.70 in January. Global Insight forecasts that gas prices will climb further by the end of 2007, and remain within the $8–9 range over the rest of the decade.

U.S. ethylene contract prices reached an all-time high of $0.565/pound at the end of 2005, as production in the U.S. Gulf was hit hard by hurricanes in the fall of that year. Since then, prices have followed a roller-coaster pattern caused by swings in both energy prices and market demand, accentuated by a couple of small inventory cycles. Contracts fell to a low of $0.395/pound in February 2007, but surged back to $0.525/pound in September, fueled by rising feedstock costs—in particular, oil-based feedstocks. We expect ethylene prices to hover around this level through 2008, but then enter a period of correction that could last a couple of years, as global supply balloons.

No new ethylene cracker is planned in the United States for the foreseeable future. The reasons for this are essentially twofold. First, notwithstanding the country's current cost advantage, the price of domestic natural gas has zoomed up in recent years, which has seriously undermined the United States' long-term ability to compete in global markets. Second, the U.S. market is maturing, and the opportunities for growth have migrated overseas, primarily to Asia. In contrast, a massive amount of new capacity from the Middle East and Asia will come on stream in 2009–11. As a result, ethylene supply will considerably exceed demand during that period. U.S. and global ethylene production capacities are currently pegged at about 28 million metric tons and 121 million metric tons, respectively. By the end of 2011, while U.S. capacity remains largely unchanged, global capacity will zoom up to 156 million metric tons.

The last decade has witnessed the spectacular rise of the Middle East as a major global ethylene player. By 2015, the Middle East (mostly Saudi Arabia and Iran, but also Qatar, the United Arab Emirates, and Oman) will account for nearly 20% of global ethylene capacity, compared with about 10% today. China is also undertaking a huge expansion of its ethylene production base to meet the growing needs of its rapidly expanding manufacturing infrastructure. In spite of this buildup, however, China will remain a net importer of ethylene derivatives for some time to come. Other Asian countries—including Thailand, India, and Singapore—are also pushing ahead with major expansion plans of their own.

The Middle East—with its abundant and cheap feedstock resources, plenty of cash, and strategic appeal to foreign investors—has moved to fill the gap in the Chinese market through an aggressive export strategy. This strategy also includes a strong export push to India, Western Europe, Japan, and the United States. Just about 10 years ago, North America (largely the United States) was the world's primary exporter of ethylene derivatives; the Middle East came in second, while Europe's trade was relatively well-balanced. Since then, the Middle East has replaced North America as the dominant inter-regional exporter of ethylene derivatives, while Europe has become a net importer. Over the next 10 years, the Middle East is poised to become the world's only net inter-regional exporter of ethylene derivatives, while North America becomes a net importer.