WPC 2020: Propylene outlook transformed by COVID-19, crude crash

20:29 PM | April 7, 2020 | Clay Boswell

The coronavirus disease 2019 (COVID-19) pandemic and the crude oil crash are interacting in complex ways to transform the propylene market, says Carlo Barrasa, executive director/global olefins at IHS Markit. Barrasa spoke Tuesday during a live session of the IHS Markit World Petrochemical Conference 2020 Online.

"During the financial crisis, propylene demand fell 3.5% year over year, but then it rebounded by over 11% the following year," Barrasa notes. "Today however, we're not only dealing with a single event—the spread of the coronavirus—we're also dealing with an equally influential event in the crude oil price shock. On the one hand, you have a virus that can greatly impact propylene demand via lower consumption. But on the other hand, you have lower oil prices, which can dramatically change the chemical production dynamics over the upcoming quarters."

The sharp decline in crude oil pricing has lowered the cost of propylene feedstocks and flattened the production cost curve, he says. Indeed, naphtha cash costs have fallen low enough to be favored over liquefied petroleum gas (LPG).

"Less LPG cracking means more propane will be available, which means PDH [propane dehydrogenation] will likely be the preferred on-purpose vehicle, especially in Asia," says Barrasa. "MTO/CTO [methanol-to-olefin/coal-to-olefin] looks like the odd technology out. Some of these units may keep running due to their downstream integration, but at some point the economics have to win out."

Meanwhile, the economic disruption created by the COVID-19 pandemic has crushed demand.

"Optimistically, we're looking at an environment that can range from flat demand to what we think is a worst-case scenario, where the world loses a month's worth of demand," says Barrasa. "This equals roughly twice the demand loss we saw during the financial crisis. Either way, we're looking at something other than growth."

The lower cost to produce propylene will not translate directly into greater availability. With populations around the world ordered to limit travel in order to contain the pandemic, fuel demand is way down, and crude oil refining—the cheapest source of propylene—is under pressure to cut back operations. "If there isn't enough RG [refinery-grade propylene], this makes room for other sources of propylene supply."