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March 30, 2021 12:36 PM

Ethylene shows two sides of the same coin

Jim Johnson
Rubber & Plastics News Staff
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    HOUSTON—Steve Lewandowski has a new spin on the famous bull-vs.-bear market when it comes to demand for ethylene, a building block for synthetic rubber.

    And the vice president of global olefins at IHS Markit is using Greek mythology to explain forces in play these days.

    Anyone who paid attention in 10th grade English remembers the Minotaur—half bull, half man.

    Well, Lewandowski believes another mythical creature of his own making is at play for ethylene. The Ursataur—half bear, half bull.

    "To say 2020 was an eventful year would be an understatement when you look at the ethylene market in the global markets," he said, citing the impacts of COVID-19.

    "I was trying to look for one word that would describe the market today and I came up with the term 'Ursataur,'" he said during a presentation during the World Petrochemical Conference organized by IHS. "I took some liberties and looked at Greek mythology and came across the Minotaur, which is half man, half bull.

    "I chose a market mythology here. It's a half bull, half bear market, hence the genesis of the Ursataur, this bearish and bullish hybrid of the ethylene market in the space we're looking at today," he explained during his virtual session.

    "On the bearish side, there were a lot of fundamentals driving this view," he said, including capacity increases in Asia and, specifically, in China. Those expansions began in 2019 and should continue through the next couple of years. "We felt this overcapacity would put a lot of pressure on the (supply) chain.

    "Definitely this new capacity outpaced demand growth," Lewandowski said.

    Other forces at play have the IHS official recognizing a bullish side to the market, including operating rates at plants, called crackers, that convert ethane into ethylene, delays in projects and some unreliability with the existing crackers.

    Mother Nature, thanks to hurricanes and the recent deep freeze in the South, also has caused problems on the supply side, Lewandowski said.

    "Additionally, there's a lot of restocking going on," he said. As the country and the world moved through the pandemic in the last year, companies decided to sell down their ethylene supply as the health crisis unfolded.

    "Let's pull our inventory—as opposed to making new product—and manage our cash that way, which was probably a smart thing at the time, until demand came back much quicker than we thought and there was no inventory to go to service that demand," he said.

    COVID-19, along with influencing inventory control, also contributed to the bullish side as the pandemic delayed construction on projects for additional ethylene supplies, Lewandowski said.

    "So where is this market going shorter term? My outlook is more capacity is coming. … This capacity is going to play a toll on the balance. Much more excess capacity. So it will kick in. It's going to have to drive prices and margins down. We're going to have to shed some production. And the only way to do that when you have oversupply is by pricing and margin," he said.

    Carlo Barrasa is an executive director of IHS Markit's North American Light Olefins service, and he sees different sides to the propylene situation as well. "We've really been experiencing a tale of two markets," he said.

    East of the Suez Canal, he said, "we've seen a tremendous amount of pricing pressure."

    But westward, he added, "we started off the year with a significant inventory overhang" that was quickly reduced.

    "Definitely, the term of a tale of two markets—east vs. west—still holds because we think that prices will still have a little more room to run at the end of the first quarter and into the second quarter," he said. "But when we transition into longer term, oversupply is coming."

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