The world is flat … at least for global ethylene producers while oil prices are low
Monday February 1, 2016
On Jan. 20, 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. 
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 A...