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Harvey Still Pummeling Gulf Coast Olefins Trade, Says IHS Markit

Hurricane Harvey’s flooding rains sharply reduced domestic and in turn global petrochemical production of linear alpha olefins (LAO), and operators still are scrambling to make up for the shortfall, according to IHS Markit.

LAOs are considered an essential component for polyethylene (PE). Steam crackers and refineries source propane and butane olefins for downstream use, but with the increased use of light-end feedstocks like ethane that have resulted from abundant store stores of onshore natural gas, the need for on-purpose olefins has increased.

Harvey, whose unrelenting rainfall flooded the Gulf Coast, led to domestic LAO output falling by more than half, with worldwide production dropping by around 25%. As a result, major petrochemical producers that rely on the Houston-area LAO co-monomer (butene, hexene and octene) production still are working to supply.

“During the recent hurricane that hit Texas, one of the world’s largest facilities for LAO production was flooded and its production of linear alpha olefins was shut down completely,” said IHS Markit’s Mark Wegenka, director of chemical consulting. “As a result, half of U.S. LAO co-monomer production and a sixth of total global LAO production is offline and will be for weeks to come, which is creating a serious supply chain challenge for numerous other major chemical producers that are dependent upon this source for LAOs.”

U.S. LAO production currently “exceeds 90% capacity, and capacity utilization outside the U.S. is much the same, which means there is very little spare capacity in the market, so the impacts are going to be significant.”

LAO usually serve as a “best supporting actor” for chemical processing, Wegenka said. However, they now are getting more attention.

“For many PE producers, this issue is now taking center stage in terms of priority. Securing adequate supply to meet rapidly expanding polyethylene production was already an issue for chemical producers, and now the situation is even more challenging. LAO production was already lagging in some segments.”

Wegenka, in collaboration with IHS Markit’s Mark Morgan and Andrea Borruso, each directors of chemical consulting, wrote the firm’s recent LAO market study, which provides supply/demand balances for products and applications from 2015-2025 period, with a geographic breakdown by region.

According to the report, the global market for LAOs exceeded 5 million metric tons (mmt) at the end of 2016. The lower-range products, i.e. C4-C6-C8, carbon bonds that form the basis for the project, account for around 70% of total LAO demand today, according to researchers.

“Growth in the linear alpha olefins market overall suggests the potential for three to four large-scale, full-range LAO investments during the medium term,” Borruso said.
Those investments don’t include two big Gulf Coast projects underway, the Ineos Europe AG and Sasol Ltd. facility southeast of Houston in La Porte, and the expansion at the Geismar facility in Louisiana by a Royal Dutch Shell plc unit. The Geismar facility once completed would be the largest olefins production facility in the world.

“Margins and pricing supports reinvestment, and demand growth overall is ahead” of average gross domestic product (GDP), Borruso said. “However, on-purpose LAO technology will be vital in meeting the polyethylene co-monomer supply gap that will continue to grow, given the divergence in growth rate between polyethylene co-monomers, poly alpha olefins, and more specialty polymer applications.” 

On-purpose technology may decouple lower alpha olefins supply from the higher C10+ supply, reducing traditional volatility and swings of the market because of the start of broad-range units, Borruso said.

“However, the short-term impact of the hurricane, together with the delay in the startup of some broad-range units in the U.S., has and will create a ripple effect on the C8, as well as C6 supply of linear alpha olefins. Given the inertia of response within the global supply system, this may create a short-term economic effect on allocation and prices relative to C4 cuts.”

Current global demand for PE is slightly under 95 mmt, however, IHS Markit is forecasting PE demand growth to increase to 118 mmt by 2022. That would translate to an average annual growth rate of 4.3%, or 1.4 times GDP from 2017-2022, according to researchers.

“The global polyethylene market is experiencing very strong growth, and that’s for good reason, since, in terms of global plastic demand, there is nothing bigger than PE when it comes to packaging materials,” said the firm’s Joel Morales, senior director, polyolefins Americas. He coauthored the PE report.

PE is the material of choice for both food and consumer packaging around the world, he noted.

Film and sheet applications represent more than 60% of plastics demand.

“A shortage in LAOs to produce PE is likely to lead to price increases for the short-term, which will impact not only the PE producers, but also others down the supply chain, including manufacturers of the plastics packaging, films and bottles, for example,” Morales said. “Ultimately, the consumer may see a slight increase in prices for some goods, due to this LAO shortage, but often, it is the PE manufacturers that are going to absorb much of this increased cost.”

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