Fitch: Lower Crude Not Expected to Derail Cracker Expansion
01 April 2015 - 4:51AM
Business Wire
The recent drop in global crude oil prices could negatively
affect chemical company financials, according to Fitch Ratings,
although we expect ethane crackers to maintain a cost advantage in
the long term despite the increased competitiveness of naphtha
feedstock. Some downward pressure on cash flow is anticipated and
challenges are also expected under a condensed expansion
construction schedule, however.
With the sharp drop in global crude oil prices, naphtha prices
have declined further than US ethane feedstock prices, putting
downward pressure on ethylene cracking margins in the US. However,
with the decline in naphtha prices and corresponding decline in
ethylene prices, naphtha-based co-product prices also declined,
effectively putting pressure on cash margins of ethylene produced
from the heavier feedstocks. Additionally, Fitch doesn't expect
Brent crude prices to remain in the $50 per barrel range long term.
US crackers' cost advantage should expand again as the spread
between naphtha and ethane widens, but not back to the peak levels
of 2012.
Fitch estimates projects totaling 16 million tonnes per year of
additional capacity, or 58% of current annual US capacity, have
been announced. A vast majority of the capacity expansions are
still slated to come on line around 2017 and are located in Texas,
possibly creating a skilled labor and supply shortage in the
region. The combination of significant construction cost overruns
and lower cash flows may reduce balance sheet flexibility even
further than previously expected, especially for the smaller
companies that are currently building capacity.
Post-expansion, Fitch's view remains that the lack of US
ethylene and ethylene product chain demand growth, or of sufficient
export demand, could cause a period of underutilization. In a
stress scenario of prolonged slump in ethylene margins, companies
lacking product chain diversification would be most at risk.
However, with Fitch's current outlook, capacity expansions are seen
as a credit positive, all else being equal.
For additional information, please see our report titled,
"Return to the Dark Side of the Boom," which can be found through
the link above or on our website at www.fitchratings.com.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch
Wire credit market commentary page. The original article, which may
include hyperlinks to companies and current ratings, can be
accessed at www.fitchratings.com. All opinions expressed are those
of Fitch Ratings.
Applicable Criteria and Related Research: Return to the Dark
Side of the Boom (Lower Crude Not Expected to Derail Cracker
Expansion Plans)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863890
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