The importance of olefins – which support the producing of numerous chemicals and polymers – cannot be overstressed. They are a bell weather for the petrochemical industry, and require growth is nearly linked to GDP. Global markets for olefins had been oversupplied for a while now, in large part due to a incensed pace of funding in new projects in China and that is telling on margins for manufacturers across the world.
The ‘Great Build of China’ has also ended in an environment of oversupply across all base polymers. Polyethylene (PE), for one, has been on a downcycle since H2 2022.
Feedstock alternatives
More than anything else – technology choice, scale, and location – it’s the provision and price of feedstock that decides the competitiveness of olefins manufacturing and is important in these days’s hyper-aggressive environment.
Petrochemical feedstocks can be put under 4-broad types:
1. Liquid feedstocks–particularly light virgin naphtha, full variety naphtha, reformer raffinate, atmospheric gas oil, and vacuum gas oil.
2. Gas-based feedstocks– methane, ethane, propane, ethane-propane mixture, n-butane, and LPG (together termed natural gas liquids, NGLs).
3. Coal – which can be transformed to methanol by gasification after which to olefins (methanol-to-olefins, MTO or coal-to-olefins, CTO).
4. Ethanol – made out of sugars, starches and biomass by chemical and biological approaches (fermentation).
The choice of feedstock is sometimes, however no longer constantly, a luck of geography, as with access to hydrocarbons – coal, crude oil or natural gas. But corporations can and do get around feedstock limitations by using modern techniques, consisting of the MTO/CTO options leveraged nearly completely in China, or, as is more and more the case, through importing NGLs from regions wherein they’re abundant and cheap.
Regional variations
Globally naphtha and ethane are the dominant feedstocks for ethylene manufacturing, with each accounting for about 39% in 2020. But the feedstock pattern varies from one region to another. In North America, shale-gas acquired ethane is the primary feedstock, justifying for 87% of all ethylene produced. LPG follows a distant second (11%). This light feedstock slate offers manufacturers in the location a sturdy aggressive position inside the ethylene value chain, significantly PE and monoethylene glycol (MEG), but not so in higher olefins & derivatives. In fact, North America is nowadays the most competitive ethylene producer within the world, even outdoing manufacturers in Saudi Arabia who have long advantage from less expensive allocation of gas.
The feedstock slate is really similar in the Middle East – about 3-quarters of all ethylene comes from gas crackers, but LPG and naphtha evenly account for the balance. In Europe, the feedstock choices are very specific and naphtha is dominant (48%), accompanied by LPG (36%) and imported ethane (16%). In much of Asia, incorporated refinery-petrochemical configurations give naphtha a dominant share of 59%, while China’s massive capacity for CTO/MTO offers this path a substantial 16% share for the region. About 10% of ethylene comes from cracking ethane.
A similar picture is seen in the second most essential olefin, propylene. Globally, steam crackers interpreted for 47% of overall deliver in 2020, followed by way of fluidised catalytic crackers (FCC) (26%). But once more there are considerable regional differences. In the US, FCC splitters account for about 47% of propylene output, and steam crackers for 29%. ‘On-reason’ propylene routes also have a big presence – propane dehydrogenation (PDH) (20%) and olefin metathesis (reacting ethylene and butene) (4%).
In the Middle East, a more equitable distribution of feedstock options is obvious: steam crackers (39%), PDH (23%), metathesis (17%), FCC splitters (13%), and high severity FCC (8%). In Northeast Asia, steam crackers account for approximately 41% of propylene output, but the share of PDH has increased in recent years (in large part due investments in China) to account for about a quarter of all output. Propylene-targeted CTO and MTO routes together account for about 10%.
Relative cost position
While the economics of naphtha vs gas cracking rely on the relative pricing of crude oil and natural gas, naphtha crackers have a tendency to function on the higher end of the ethylene cost curve. The current upsurge in crude oil prices have made the economics of ethane cracking even more appealing and their relative benefit to naphtha-based ones has doubled.
Before the war there was pressure on the industry to rationalize ability to return demand and deliver to a more even keel. 3-areas have been seen prime for this: Europe, Northeast Asia and China. Companies which have closed cracker operations in Europe since 2024 include SABIC, ExxonMobil, Dow, Versalis, Shell and Total. In Northeast Asia, some restructuring has already befell in Japan, South Korea, Taiwan and Thailand. In China, anti-involution guidelines are anticipated to force closure of smaller, inefficient units, even as newer, larger units continue to be constructed. The nation’s climate aims can also result in few CTO-primarily based plant getting clearances due their significant carbon footprint.
In spite of the adverse market conditions, 22.6-mtpa of latest PE capability is anticipated to come on stream between 2022-29, specially in China (61%), North America (15%) and the Middle East (10%). Investment choices are simply made by unbiased entities that decide on what’s best for them, now not on ordinary market fundamentals!
The closure of the Strait of Hormuz (SoH) and their effects
The closure of the SoH has stranded a extensive chunk of olefin and derivatives capacity. Plants in western Saudi Arabia (Yanbu and Rabigh) have access to Suez routes to ship west to Europe and to the Bab-el-Mandab strait to ship east to Asia, whilst those in Oman are lucky to be downstream of the SoH. Moreover, plants in eastern Saudi Arabia (Al Jubail), Kuwait, Qatar, UAE, and Iran itself, including to 31.3-mtpa of ethylene and 9.6-mtpa of propylene capacity, are efficiently shut out of markets. In all, Chemical Market Analytics (CMA), a Dow Jones Company, reckons approximately 15% of world ethylene and about 7% of propylene capability is effected.
Also effected are approximately 9% of worldwide PE capacity in the nation of the Gulf Cooperation Council (GCC) in the SoH, and another 3% in the location but outside the strait. Iran has another 3% of PE capacity offline. In all, CMA in a presentation on the lately held World Chemical Forum in Houston cited that about 15% of world PE ability, signifying annual manufacturing of about 19-mt of which about 13-mt could have in any other case sailed to markets in Asia and Europe, isn’t available. This manufacturing loss is well in extra of the demand loss anticipated and will effect the overall market balance. While PE markets started the year with spare potential of about 13.2-mtpa, the several force majeures in Qatar, Kuwait, Saudi Arabia, UAE, Iran, and Asia (in which crackers in Japan, Korea and Taiwan have needed to take shutdowns due inability to access naphtha) have turned the market structurally tight.
With local ethane and natural gas charges in large part unaffected, PE manufactures in North America is anticipated to assist better exports, but it is able to only in part account for the loss somewhere else. Margins are spiking for the area’s manufacturers and the profitability outlook for the industry has dramatically modified for 2026 and potentially beyond.
A similar tale is playing out in MEG markets as well. The reduction in exports from the Middle East can’t be made up absolutely from US/Canada or China, even if plants run flat out. Therefore, MEG will have to see considerable demand destruction.
The affects on PP markets is extensively much less than in PE, but still huge. About 9% of world PP capacity, representing 9-mt of manufacturing and 6.7-mt of exports is at risk. Here too the manufacturing loss is anticipated to be considerably more than the demand loss, again turning the markets from a structurally loose one with 16.5-mtpa of spare capability to a tight one with a potential supply deficit of 10.7-mtpa. This may also make a contribution to a sharp rise in costs, which could rollover for 1-2 years.
When will markets stabilise?
Much will rely upon how long the conflict lasts. In the best case situation wherein the warfare ceases early this month, and oil stabilizes in the range of $85-90 per barrel, it will take 3-4 months for supply to normalize. Supply chains will take one or 2-quarters to return to pre-warfare degrees, as transport of crude oil, natural gas (as LNG), and bulk cargo along with sulphur and different fertiliser raw materials get precedence over liquid chemical carriers and container cargoes carrying polymers. The sellers’ marketplace, as now, can be short-lived, and ventures which are offline must be able to get back onstream in 3-6 months.
With a extended warfare, lasting properly into the year, all bets are off! Crude oil costs could soar to stratospheric levels ($200 per barrel has been stated as an extreme effect), leading to significant demand destruction for polymers, and delays in numerous petrochemical projects in the planning stages.
