Market analysts said profits of ethylene producers who run gas-based crackers -- Iran, Saudi Arabia and Qatar -- would exceed that of producers across Asia using naphtha as feedstock, by $500-800/mt.
Ethylene margins over feedstock naphtha was pegged at minus $138.375/mt in Northeast Asia and at minus $163.2/mt in Southeast Asia. While ethylene margins have remained stubbornly negative in the SEA markets since October 4, they went to sub-zero levels in Northeast Asia a fortnight ago.
"Olefins producers in Asia are finding it increasingly difficult to compete with their counterparts in the Middle East," said J.J Kim an analyst with Woori Investment and Securities, a South Korean investment bank.
"As producers based in Asia continue to incur a cost of $1,000/mt for producing ethylene, producers in the Middle East are incurring a cost ranging between $200/mt to $500/mt," said Hassan Ahmed the Head of Research at Alembic Global Advisors, a New York based industry advisory group.
"Currently Iranian petrochemical facilities receive their gas allocation at $1.25/MMBtu which, according to our calculations, translates into ethylene production costs of around $250/mt. To put this number into perspective, ethane-based ethylene production costs in Saudi Arabia are around $200/mt, $250/mt in Qatar and $615/mt in the US while naphtha-based ethylene production costs in Asia currently stand at $1,000/mt," Ahmed elaborated.
Ethylene producers in Japan and South Korea have regularly complained of depleting margins in the past two weeks. "Producers in South Korea can't offer spot ethylene cargoes at these prices. They are directing all their ethylene to downstream plants that produce products," a source at South Korean producer Samsung Total said. Talks of Asian producers planning to slash operating rates
was also heard in the markets last week, though no such announcements have come.
Traders in the SEA markets complain of eroding margins. "We are buying at low prices and selling at low prices," a company source at Malaysia's RCL Industries said.
Middle East based producers have a deep impact on prices in SEA. Recently ethylene prices in the SEA markets plummeted as Iran's Jam Petrochemical Company's steam cracker that can produce 1.3 million mt/year of ethylene restarted operations late October after a turnaround.
PRICE OF GAS FOR MIDDLE EAST PRODUCERS IS RISING
As Middle East producers balance domestic demand for natural gas with that in their steam crackers, the feedstock is becoming increasingly costlier for the ethylene producers. However, the feedstock prices still do not compare with those in Asia.
OPEC has reduced Saudi Arabia's oil production quota in order to help manage weaker global demand for crude oil, resulting in the country's output now being pegged at around 8.4 million b/d. Since most of the gas in Saudi Arabia is of the associated kind, the country needs to be producing 10 million b/d to provide enough ethane for steam crackers to run at 100% of capacity.
"One solution around this problem is to seek a top-up from non-associated gas field operators," Ahmed said. "The cost of extraction from non-associated fields may be as much as $2/MMBtu, well north of the $0.75/MMBtu the petrochemical industry in Saudi Arabia sources its gas at. For this very
reason, we believe, crackers will run at reduced operating rates," he added.
In Iran, which is another major producer, the government has begun privatizing its petrochemical companies and that is leading to costlier gas for producers. "The Iran government has made it clear that it will not be able to sell gas to privately run companies at a price like $1.25/MMBtu," Ahmed
said.
Qatar Petroleum has been charging the country's petrochemical companies a higher price for the gas they sell to them. "Our analysis suggests that natural gas prices charged to the chemical industry in Qatar may have risen from $1.25/MMBtu in 2004 to around $3.00/ MMBtu in 2009 and beyond," Ahmed said.
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