Ethylene Focus09 Mar 2009 • by Natalie Aster
The Middle East is fast becoming the epicentre of global ethylene production.
Middle Eastern ethylene producers in 2008 have witnessed an unprecedented period, where the prices have reached the highest and the lowest level within the same year, gifting local producers higher profit margins compared to other producers in the world.
This position is further enhanced when one considers that the majority of ethylene production in the region comes from the ethane feedstock, whilst in the other parts of the world naphtha dominates.
The region's competitive advantages are well-documented. Not only is it perfectly located to supply the key markets of Asia and Europe, but the region sits on more than 40% of the world's gas reserves.
Its predominantly ethane-based producers enjoy long term supplies based on fixed prices a fraction of those elsewhere.
In Europe, 90% of ethylene is obtained from cracking naphtha, gasoil and condensates whilst cracking of ethane and propane is primarily carried out in the US, Canada and the Middle East. The price of ethane in Saudi Arabia is set at US$0.75 per million British thermic units.
In Iran, ethane costs $1.25 per million Btu. By contrast, making naphtha-based ethylene in Asia this year costs five to six times as much as ethane-based ethylene in Saudi Arabia.
The cash cost of ethylene production in the Middle East region stands at around $200 per tonne, said Mohammed Al-Mady, vice chairman and CEO of Saudi Basic Industries Corporation (SABIC) at the third Gulf petrochemical and chemicals association meeting in December.
While in Western Europe and the US, the cash cost of ethylene production in 2007 reached well over $700 a tonne.
"To understand the ethylene production we have to know the chemical and the economic basics," says Dr. Suleiman Al-Khataf, senior researcher at the King Fahd University of Petroleum and Minerals, and the head of Saudi petrochemical and refining centre.
"For every 100 tonnes of ethane feedstock it produces 80 tonnes of ethylene."
Around 60% of ethylene is used for the production of polyethylene. Low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) mainly go into film applications such as food and non-food packaging, shrink and stretch film, and non-packaging uses.
High density polyethylene (HDPE) is used primarily in blow moulding and injection moulding applications such as containers, drums, household goods, caps and pallets. HDPE can also be extruded into pipe for water, gas and irrigation, and film for refuse sacks, carrier bags and industrial lining.
Cracker operating rates are a prime indicator of Ethylene chain profitability. Historically, Ethylene chain profitability was seen to increase exponentially at operating rates above 90%. Global Ethylene capacity utilisation has remained above 90% since 2004 until 2008's economic meltdown.
A new Olefins Market Dynamics report, published by Nexant ChemSystems in May, finds that operating rates were expected to remain above 90% through 2007-2008, before declining sharply in 2009-2010, but the sharp decline in prices have obliged producers to decrease the operation rate or to shut down their production units completely.
According to US-based consultants SRI, no less than 27 million tonnes of new ethylene capacities were announced for startup in the Middle East by 2016, and over 17 million tonnes are set to come on stream in the period 2009-2012. The biggest capacity addition will occur in Iran and Saudi Arabia.
Large capacity addition is currently underway in the Middle East, and China are poised to change the geographical demand supply dynamics.
The share of developed regions (North America and Europe), currently at 46%, is likely to come down significantly by 2012 on a global capacity base of 132 million tonnes, while over 28 million tonnes of new capacities are planned or being added in Middle East and China during next few years. The bulk of these facilities are coming up in Saudi Arabia, Iran and China.
The Middle East will supply the growing demand for ethylene derivative imports in Asia-Pacific, but also most other markets, including Western Europe and North America, where producers are facing problems due to the prices of the feedstock as well as legislation issues.
"The current ethylene supply situation in the Middle East has tightened in recent months as some Iranian steam crackers have planned shutdowns, and ethane availability in Iran is reduced due to the seasonal increase in demand for domestic heating/fuel requirements. Demand for ethylene derivatives from the Middle East has increased in recent weeks as supply chains in both Europe and Asia look to restock following the major destock which took place in the fourth quarter of 2008," says Paul Cherry, LyondellBasell, Monomer Supply, Asia.
The scale of ethylene production is enormous; the size of a typical world-scale ethylene unit now ranges from 500,000 to 1?100?000 metric tonnes per year.
Iran has recently inaugurated the world's largest ethylene production complex, located in the southern Iranian city of Assalouyeh (see page 8 for more details).
The Jam Petrochemical plant will have an ethylene production capacity of 1?321?000 tonnes per year. The plant will be increasing its output capacity to 4.2 million tonnes over the next few years.
Currently, major ethylene producers in the Middle East include SABIC, Iran's National Petrochemical Company (NPC) and Kuwait's Equate Petrochemical.
In Saudi Arabia, SABIC produces ethylene through its subsidiaries Saudi Yanbu Petrochemical, Arabian Petrochemical, Al-Jubail Petrochemical, Jubail United Petrochemical, Eastern Petrochemical and the Saudi Petrochemical Company - which is one of the largest single-unit ethylene plants currently in operation in the world.
The industry is facing big challenges where huge capacities are going on stream in a time where prices have plunged, but, the feedstock cost advantage of the Middle East producer remain the safety belt for them, as they kept posting profits in time the majority of producers are posting huge loses.