Bill Hyde: Feedstock pricing, operating rates to vary

CUYAHOGA FALLS, Ohio—While the pandemic did make pricing for key raw materials volatile during 2020, it wasn't necessarily as bad as some may have expected.

If you look back, in fact, 2020 wasn't even the most volatile for pricing for feedstocks used in synthetic rubber over the last decade, according to Bill Hyde, IHS Markit executive director for olefins and elastomers.

"Taking the ratio of the current price versus the average over the last 11 years, prices did go low for some things in 2020, but in other things not as much. It's an interesting dynamic," Hyde said in a talk during the Rubber in Automotive Conference, hosted virtually June 1-3 by Rubber & Plastics News.

He said the automotive market is facing some significant headwinds. Because of what transpired in 2020, people tend to forget that light vehicle sales had been dropping globally starting in 2017, well before the COVID-19 pandemic hit.

With light vehicle production down about 16 percent last year, Hyde quipped that the least risky prediction he has to make is that auto sales will rise in 2021. But by how much and where are the real questions.

In some key markets, like China, the recovery is almost complete, "if you listen to official data," he said. But other regions such as Western Europe, which is still locked down, will see a slower recover, with the U.S. expected to be somewhere in the middle.

Hyde added that auto forecasts must take on some additional factors above and beyond the uneven fundamentals, including the chip shortage caused by the surging demand for semiconductors along with the crippling winter storm in the Gulf Coast region.

"Almost from a natural disaster perspective, that winter storm caused more damage to the petrochemical market than any hurricane we've tracked in the history of the industry," he said. "It essentially shut down the state of Texas."

In some cases, it took 1 1/2 months to get assets restarted and even longer to start ramping up to previous production rates.

Looking forward, IHS Markit projects light vehicle production won't get back to 2019 levels until 2023-24, and it will take until 2025 to reach 2017 peak levels.

Again, China will recover faster, hitting 2017 sales by 2024, with Western Europe taking until 2028 and North America until 2030, according to Hyde.

"We're looking at an extended period of recovery, and relatively slow growth in light vehicle production," he said. That in turn will impact such synthetic rubber markets as SBR and polybutadiene, and to some extent butyl and EPDM.

Outlook for feedstocks
For most of the key petrochemical feedstocks used in synthetic rubber, the auto industry and SR aren't the big drivers for demand. Only for butadiene is the mobility market the key driver, while other sectors are more important for ethylene, propylene and styrene.

Looking at ethylene, Hyde said the market has seen several years where global demand growth was more than capacity additions, but starting last year and for the next couple of years, that won't be the case.

"And that puts pressure on operating rates. Pushes them down," he said. "They were around 90 percent year, but for next year, ethylene operating rates will be in the low 80-percent range."

That begs the question on who will have to cut back. In the ethylene market, Hyde said it's all about the incremental cost of production, along with any costs from tariffs "and other government interference in the free flow of the markets." So if a producer can make ethylene and transport it to another destination at a lower cost than domestic production there, than the domestic supplier will have to cut back.

Through the end of 2022, he said ethane-based ethylene production in the U.S. likely will have a much lower cost than some other regional ethylene producers. "What we expect is that ethylene crackers in North America will run at higher operating rates," Hyde said, "and some of the European and Northeast Asian units will have slightly lower operating rates."

Demand for propylene for years grew rapidly, at a pace of 6 percent a year back in the 1990s. That has slowed somewhat, clocking in at 3.5 percent the past decade and still expected to be above 3 percent for 2021-30, still above GDP, the IHS Markit analyst said.

Two thirds of that growth, however, is forecast to be in Asia, mostly in China. By contrast, the Americas will be responsible for just 10 percent of demand growth the next decade, with the Europe, Middle East and Africa region at 22 percent, with most of that in the Middle East.

The main propylene derivative is polypropylene, and that will benefit somewhat from lightweighting in vehicles, but most of its growth will come in packaging. Capacity additions are on the horizon, so Hyde sees operating rates in North America hovering in the 60 percent range, bringing about soft margins but strong availability.

Butadiene saw demand drop through the floor in 2020, with global usage down nearly 600,000 metric tons. He expects that to recover significantly in 2021, though that mostly will be a rebound effect. Once it gets past this bounce, growth rates are expected to slow down and, if China were discounted, there would be weak demand for butadiene over the next several years.

Compounding those fundamentals, there are a number of capacity additions coming on that will outstrip demand growth. "Basically, we're swimming in new butadiene capacity," Hyde said. "If you're consuming butadiene, that's really good news because it has been quite tight over the years. In our view, there will be a big shift in market leverage away from the producers to the consumers."

Styrene also is seeing a large amount of new capacity being brought on, starting in 2020 and going for the next several years. He said almost all of that is in Asia, mostly in mainland China. Outside of Asia, the market will see a bit of debottlenecking or even some rationalization..

That will bring operating rates that had been pushing close to 90 percent in 2019 and before down to about 80 percent. This will put pressure on the market, he said, and bring about another feedstock market where conditions favor buyers overs producers.

Pricing
With the petrochemical-based feedstocks, pricing has a close correlation to crude oil prices. Hyde said after the sharp drop in WTI crude prices in 2020, the non-U.S. oil producers will have a delicate balance to maintain, and that the behavior of Saudi Arabia and Russia will drive market trends over the next several years.

"Our view is they will be successful at maintaining a good value for their oil, but not get greedy and raise the price to the point where there is a strong production signal, which then results in an oversupply and a crashing price," he said.

Ethylene prices were trending downward before the coronavirus pandemic, but Hyde said pricing didn't take much of a hit because demand is driven by packaging, and demand for that stayed high as people ordered a lot of food for delivery and made more purchases online than in big box stores.

As the energy sector spiked up, ethylene prices went up, but are expected to be weak over the next several years, he said.

The winter storm led to higher prices for propylene in March and April, but that will ease back, with pricing forecast to be more stable.

Butadiene has seen volatile pricing conditions over the past several years, with costs high in 2017 and 2018, before crashing in 2019 and remaining low last year. There has been a rebound in the sector this year, leading to tight markets, which are expected to continue for the next few months.

"We think the incremental demand is restocking," Hyde said. "We don't think it's fundamentally driven. So when these inventories get back to target levels, demand will fall, and we will get back to more traditional supply/demand fundamentals, and pricing will ease back, but will ease back to a level higher than 2015. Nothing like 2017 or 2018, but it won't be weak."

Styrene pricing is heavily influenced by ethylene and benzene. A number of operating problems impacted pricing besides the winter storm, but by next year those are expected to level out, with fairly flat pricing going forward, he predicted.

Overall, pricing for these feedstocks is expected to have some volatility because of the likelihood of unplanned events causing outages in production. "But most markets are in overcapacity, so the volatility risk is certainly lower than it has been, but it won't be zero."