12 January 2009
Trends for Chems
Ethylene Margins Turn
Negative in December
David Begleiter, CFA
Research Analyst
(+1) 212 250-5473
david.begleiter@db.com
James Sheehan
Research Associate
(+1) 212 250-6048
james.sheehan@db.com
Jason Miner, CFA
Research Associate
(+1) 212 250-8619
jason.miner@db.com
Deutsche Bank Securities Inc.
All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
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may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision. Independent, third-party research (IR) on certain companies covered by DBSI's research
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http://gm.db.com/IndependentResearch or by calling 1-877-208-6300. DISCLOSURES AND ANALYST CERTIFICATIONS ARE
LOCATED IN APPENDIX 1.
Channel Check
Price and Margin Trends
HDPE prices, cents/lb.
55
60
65
70
75
80
85
90
95
100
105
110
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
LLDPE prices, cents/lb.
55
60
65
70
75
80
85
90
95
100
105
Jan-08
Feb-08
Mar-08
Apr-08
May-
08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Ethylene contract prices, cents/lb.
35
40
45
50
55
60
65
70
75
80
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
HDPE margins, cents/lb.
0
3
6
9
12
15
18
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
LLDPE margins, cents/lb.
-3
0
3
6
9
12
15
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Ethylene contract margins, cents/lb.
0
5
10
15
20
25
30
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Prices and Outlook
Product Price Outlook
Acetic acid $0.585 Down
Ethylene $0.285 Flat
Propylene $0.185 Flat
LLDPE $0.500 Flat
HDPE $0.550 Flat
Polypropylene $0.470 Flat
PVC $0.590 Down
PET $0.580 Down
Global Markets Research Company
Eroding margins drive operating rates to record lows (ex hurricanes)
With weak demand and lower co-product prices combining to drive down
integrated ethylene margins in December, polyethylene producers are seeking
12c/lb of price increases to kick off ‘09. Despite signs that pricing hit a bottom in
December, we believe an uptick in spot prices mainly reflects pre-buying and very
low operating rates (at record lows for a non-hurricane impacted period). We
expect declining profitability to prompt the further idling of plants as well as
permanent shutdowns in ‘09 as the US recession continues to suppress demand.
December ethylene contract prices drop 9.5 cents/lb; may have hit a bottom
Contract ethylene prices fell 9.5c/lb in Dec. to 28.5c/lb (following a 13c/lb decline
in Nov.), reflecting weak demand and expectations of lower prices. Derivative
export demand has stabilized at a lower level. Spot prices likely hit a bottom,
surging 5c to 20.5c/lb in the 2nd half of Dec. due to curtailed production capacity
(operating rate: 65%). Spot ethylene prices fell 3c/lb to 18c/lb (avg.), following a
17c drop in Nov. Due to continued macro weakness and a flat-to-up outlook for
feedstock prices, we expect ethylene contract prices to roll over flat in January.
Ethylene margins tumble to -3 cents/lb in December
Ethylene production costs rose 1.5c/lb in December to 26c/lb, with lower
feedstock prices more than offset by lower co-product values. With selling price
declines now having overtaken the decline in feedstock costs, some cash margins
have turned negative. Average ethylene margins (blended contract/spot) fell to -
3c/lb in December from 4c/lb in Nov. Contract ethylene margins fell 11c/lb to 2c/lb.
Spot ethylene margins (a proxy for the health of the ethylene chain) contracted
5c/lb to -9c/lb. With pricing remaining flat and co-product values remaining low,
we expect avg. ethylene margins to stay slightly negative (-1 cents/lb) in January.
December polyethylene (PE) prices down 10 cents/lb
December high density PE prices fell 10 cents/lb (to 55 cents/lb) after falling 20c/lb
in Nov. Demand was off 25%-30% from normalized levels, export demand was
muted, and operating rates were <80%. A modest pick-up in demand reflects prebuying
ahead of a 12c/lb (combined) price increase for Jan.-Feb. With buyers
pushing back due to weak finished products demand and minimal cost-push, we
expect prices to move sideways and margins to contract slightly in January.
Propylene prices fall 10 cents/lb in December
Chemical grade propylene prices fell 10 cents/lb in December to 18.5 cents/lb, and
are down 65 cents/lb over the past 4 months. The price decline reflects subdued
global demand, negative GDP growth, low derivative operating rates, and the
anticipated startup of new propylene and derivative capacity in the Middle East
and Asia, which offset higher alternative fuel values, the perception that prices
have hit bottom, and reduced production rates. We expect propylene prices to
stabilize in January due to capacity reductions and an end to inventory de-stocking.

Ethylene margins turn negative in December
Production costs rise slightly due to lower co-product values. Average ethylene
production costs increased a modest 1.5 cents/lb in December to 26 cents/lb (down 50%
YoY), with lower feedstock prices more than offset by the continued decline in co-product
values (propylene, benzene, and butadiene). Lower co-product values result in a lower coproduct
credit to the ethylene production cost. Naphtha cracking costs increase 5 cents/lb
for every 10 cent/lb drop in propylene prices, according to CMAI. Ethane prices fell to 35
cents/gal in December, down 6 cents/gal versus November, remaining below natural gas
values due to weak petrochemical demand.
Ethylene margins turn negative in December. Ethylene margins in August-October were
artificially inflated, reflecting the fact that the decline in ethylene contract prices did not keep
pace with the sharp drop in feedstock costs, coupled with relatively high co-product prices.
Because price declined caught up with feedstock costs in December (and then some), cash
margins have turned negative. With the decline in contract prices in December, average
ethylene margins (based on combined contract/spot) contracted to -3 cents/lb in December
from 4 cents/lb in November. Contract ethylene margins fell by 11 cents/lb to (positive) 2
cents/lb. Spot ethylene margins (a proxy for the health of the ethylene chain) contracted by 5
cents/lb to -9 cents/lb. 2008 spot ethylene margins averaged just 1.6 cents/lb, reflecting
feedstock cost pressure in the first half of the year and collapsing demand in the second half.
On a quarterly basis, Q408 average ethylene margins were 7.5 cents/lb, down from 9
cents/lb in Q308.
Ethane widens its advantage versus naphtha. With 56% of US ethylene produced from
ethane vs. 24% from naphtha in December, the cost advantage of ethane over naphtha
widened to 8 cents/lb of ethylene in December, vs. 2 cents/lb in November. This was mainly
attributable to higher naphtha cracking costs, reflecting lower co-product values.
Polyethylene margins edge lower, but remain healthy on a low volume base. With
contract prices down 10 cents/lb in December, declining faster than input costs, polyethylene
margins continued to contract but remain healthy on declining volumes. Using high density
polyethylene (HDPE) as a proxy for the polyethylene market, margins decreased 2 cents/lb to
12 cents/lb in December. Q408 HDPE margins were 14 cents/lb, up from 11 cents/lb in
Q308 and finishing the year strong (margins averaged 8.5 cents/lb for the full year 2008).