Some US Gulf coast ethylene units are increasing naphtha cracking as a model shows ethane's gross margins turned negative last week for the first time since October 2018.
Cracking heavier, refinery-originated feedstock stems from the recent global collapse in demand for crude oil and gasoline as much of the US and Europe remain shut in an effort to slow the spread of Covid-19.
"We see heavier is better at every decision point," said one producer.
Naphtha cracking margins have improved from -10¢/lb on the even of widespread coronavirus shutdowns two months ago to a high of 10¢/lb earlier this month. Meanwhile, ethane cracking margins fell from 5¢/lb on 26 February to about -0.5¢/lb currently.
The shift in feedstocks challenges the industry's build out over the last few years that sought to capture margins from cracking lower cost natural gas liquids, primarily ethane. Beyond building ethane-only crackers, many producers reconfigured existing flexicrackers to boost ethane cracking, further reducing the ability to switch to a heavier feedslate. Ethylene producers could in theory switch systems back toward naphtha cracking, but most companies are slashing capital expenditures and it remains uncertain how long low prices for naphtha will last.
Naphtha currently comprises between 6-8pc of the US feedslate and likely cannot go much higher due to constraints on both production and storage of co-products such as butadiene and benzene, market participants said.
"Disposing of the heavy co-products is a challenge these days, which is probably limiting the magnitude of switching into naphtha," said one producer.
An Argus model showed ethane cracking margins slipping into negative territory last week, fueling discussions of looming rate cuts. Propane, which had positive cracking margins all year, slipped into negative territory two weeks ago, as Asia propane demand has remained steady and bolstered prices at Mont Belvieu, Texas.
One trader said yesterday that operating rates are lower at a flexicracker in Texas and an ethane-only cracker in Louisiana. If Permian production continues to decline, natural gas, the floor for ethane prices, could rise, further eroding ethane cracking margins and possibly leading to more cracker rate cuts.
