US Chemicals: Ethane oversupply despite including exports

05/13/13 -

US Chemicals – Ethane oversupply despite including exports

• US ethane oversupplied even in a significant uptick in European imports scenario
• European feedstock switching highly reliant on US prices; co-product prices may rise
• We rate US ethylene exposed names – DOW, LYB and WLK - Overweight

Summary

The delta between global naphtha and US ethane prices remains around peak levels with European ethylene cash margins languishing near break-even levels. Exacerbating the woes of the European industry are the old age and sub-scale nature of the regions ethylene facilities. A continuation of these dynamics has spurred a re-think amongst European producers with INEOS taking the lead by announcing its intent to import low-cost US ethane.

Around 3% of the European industry currently runs on pure ethane as a feedstock. Our analysis suggests that if the region started importing US ethane an incremental 8% of European ethylene capacity could be switched over to using ethane as a feedstock in a cost effective manner and at most another incremental 39% could make the switch but at a much higher capital outlay. 

Based on our estimates US ethane prices of 40c/gal would translate to a landed European import cost of 70c/gal and a European ethane price of 81c/gal factoring in a 15% margin. This would imply that at current ethylene prices if US ethane prices were to rise to or above 47c/gal European cash margins would again dip into negative territory – highlighting the ethane import decision dilemma.  Additionally, despite factoring in a significant uptick in US ethane exports to Europe – as much as 35% of the European capacity relying on imported ethane from the US – we still see the US ethane industry being oversupplied in the medium-to-long term. We would also remind investors that such feedstock switches could result in co-product dislocations resulting in dwindling supplies and rising prices of butadiene, propylene and benzene (in that order).