The petrochemical industry has been impacted by current events, causing massive swings in the market. This includes the already volatile Propylene and Olefin market. Victoria Meyer is joined by the Director of PERIN Resources, John Stekla. John is an accomplished senior sales and marketing executive with broad international and domestic experience in petrochemicals, lubricant and fuel additives, and performance chemicals. They talk about the current market trends in the Propylene and Olefin market and how it has been impacted by the COVID pandemic. They also talk about petrochemical investments in the US, and the opportunities and challenges the industry is facing.
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Conversations On The Propylene And Olefin Market With John Stekla
I am delighted to have with me John Stekla, who is a Director at PERIN Resources. You may know John as an expert in the ethylene industry. He has decades of experience with leading companies, including Chevron, Williams, CMAI and IHS. John’s going to be talking with us about what’s going on in the market, olefins, polypropylene and other great topics. John, welcome to the show.
Thank you, Victoria. I’m very flattered and pleased that you invited me to participate.
Tell us a little bit about PERIN Resources.
PERIN is a chemical marketing company as a way to put it. It was started many years ago by a former coworker of mine at Chevron Chemical, where most of my career of eighteen years had been with Mark Brueggeman. Mark invites very experienced chemical veterans, once they finally took their retirement from big companies to join him, bring some of their expertise and connections to the company. We try to fill the gap between very large producers and perhaps the mid and smaller-sized customers. We have collectively well over 300 years of experience amongst the ten principles that are actively involved in PERIN. We do a lot of olefins, ethylene and propylene experience. We’ve got a glycol expert, refinery, another propylene expert and an alpha-olefin expert. We try to bring our experience that we then share with a lot of companies and in a lot of respects looked at ourselves as problem solvers. We ask, “What’s your biggest problem? What either can’t you find or what can’t you get rid of?” We do quite a bit of business in byproduct streams and finding homes for unloved streams.
Propylene is still a byproduct business. There’s not enough on-purpose production yet to take swings out of the market.
I know as a result of that, you, in particular, get involved with a lot of the new petrochemical assets and investments here in North America. We’ve seen a huge wave of investments in petrochemicals over the past decade. You’ve been working closely with them. What do you see as the opportunities and the challenges that come as a result of these investments?
Recycling a little bit of that, I left Chevron after 28 years when I started my petrochemical career. I was at IHS for about 5.5 years. It was a superb time to be the ethylene and feedstock guy there because for the first two years, I was writing obituaries about the United States petrochemical industry. We had shut down about 8% of the ethylene capacity in North America. There was no light on the horizon, and then the miracle of shale developed. Also, sheep feedstocks came in. By the time I left, I was writing birth announcements after birth announcements. It was a tremendous inflection point for the industry, which is just fascinating to be a part of.
What we are seeing is a continuation of that boom and typically, what you’re doing when you’re looking at locating your plant, you chasing the cheapest feedstocks that you can find. That’s the good news and bad news of the United States in which our prices are set by free-market dynamics. You are very sensitive to supply and demand, and that’s going to drive the cost of your feedstocks. Most of the places in the world, especially ethane, is set by some government decree by formula, by some other factor and so it is a little bit more fixed. Availability might not be just available.
One of the things I had done, and if you invite me back perhaps we can go into this a little bit more detailed, but I had done some work on what drives the price of ethane, which was the motivator for bringing it in, and now that we’re exporting so much, how that affects the export competitiveness of integrated domestic producers. I’ve done some research to say, “The given price of ethane, here’s what you can successfully compete against, with a given price of Brent crude oil, because that drives the cost structure and otherwise.” I had to define that because with China becoming so much more self-reliant on production. That’s changing the dynamic a little bit. Since your capital cost of construction in China are probably 1/3 what they are here, that can overcome a whole lot of additional logistics costs to bring in your feedstocks. That’s a discussion for another day. We talked about what’s going on here and the opportunities. It’s changing because it’s supply and demand dynamics.
I don’t think that you need to be cognizant of what you think your feedstock position is going to be. Will there always be cheap feedstock? One of the things that companies benefit from when they come and talk to us early and I saw this with IHS, is that we have relatively short memories in the industry. If you’ve only been involved since 2008 or 2009, you’re going, “Ethane is correlated in natural gas and it will be cheap forever.” You forget that for the previous twenty years, we were the highest priced ethylene producer in the world because ethane prices were so high and extremely variable. You have to take the long-term view.
In investment here, we’re recognizing that you’re building your plants for the export markets totally. All the domestic markets are well-satisfied. We don’t import much any of the olefin’s chain. We’re all looking for export markets. One, you’ve got to make sure that the export demand will remain there. Two, you will be in a cash cost to production position to support those exports. Typically, if you look back in history that you need somewhere between $0.08 to $0.10 of pound production advantage to cover your export logistics costs.
It’s a good rule of thumb.
When it comes to producing plants here, it is appearing that the States are becoming a little bit less supportive of projects. They still are. Louisiana is very supportive of the Formosa Sunshine Project, which is gigantic. One of the things that we’re seeing that they have been recently sued by two environmental groups. There’s going to be a rise of environmental activism that you need to be aware of and be prepared to deal with. Certainly, the cost of production is skyrocketed. If you look at whatever your engineering forecast is, you could probably increase that by a factor of 40% or 50%, which would be more accurate. One of the challenges a lot of people had is finding experienced operators.
If you’ve got too much demand, you’ve got to kill off demand by price.
If you look at a relatively constrained market like Lake Charles, where we’ve had several plants built and refining the weight for one company who have trained a guy and then they poach them away. There’s this constant revolving circuit of experienced maintenance or people in support. Finding an adequate supply of workers has been a challenge as well. It’s still a good place to build. I still think that there’s land. I still think that there is feedstock available, although we’ll have to start bringing in more expensive tranches from directly outside the Gulf Coast area, but it is one of the places you can come in and do your thing.
The boom that we’ve seen over the last years, while it seems to have taken a little bit of a pause, you don’t think it’s necessarily over yet.
I think so. Certainly, the global coronavirus pandemic has flattened out the whole market. It has caused projects to delay. We’ll have to see how the global market recovers. The other thing I might mention is that for companies that aren’t in the United States or North America with investment, it’s a challenge to get up to speed to learn how to work in the markets, to learn how to work with the States and understand who the contacts are working with the local educational boards for tax relief. There’s a huge learning curve if you’re new to the market diving in.
Let’s talk a little bit about petrochemical trends. You mentioned the COVID pandemic. What impact has COVID had broadly on the chemical markets? I know we’ve seen some price spikes and escalation and certainly supply-demand disruptions. What are you seeing from where you sit?
One of the businesses that, that we are insignificantly is in the propylene chain. We have a pretty interesting refinery propylene, truck and rail business, as well as we’re one of the largest marketers of power-grade propylene and truck and rail in North America. We’re very sensitive to that market in particular. That would be a very interesting topic. Maybe we’ll go down that little ways to talk about it. When you look at the pandemic, what happened? People started shutting in. They stopped driving, stopped flying. We saw refining operating rates drop off to the lowest levels in history. They’ve since recovered to about 85% operating rates which is where they were and going back more than a year.
We’re starting to see some increased demand, especially since jet kerosine production dropped off tremendously. When you look at refining operating rates dropping, what else doesn’t come out of the pipe? You’d look at one of the major byproducts, which is refinery, grade propylene or propylene molecules. One of my coworkers, Jerry Winters, who has a long history with ARCO and Lyondell, had done some analysis of FCC operating rates. He estimated that as much as 15% or 2.8 billion pounds of propylene, there was that much of a reduction in propylene output from the refineries, which is a tremendous amount.
Other things we don’t see, elemental sulfur became extremely tight because sulfur gets recovered from sour crudes. It then gets sold off for things like sulfuric acid, for whatever it is, and we saw the price of sulfur at the beginning of last year at about $36 a ton. It’s currently $192 a ton. It has gone up about more than about 5.5 X sulfur or anything related to sulfur, with fertilizers and different applications. We see unexpected consequences like that. In addition, we saw our ethylene units, our crackers dropped down their operating rates because most ethylene derivatives get used in disposables, in packaging. Now some products like surfactants were extremely strong.
Everybody was cleaning.
Operating rates drifted lower to about 90% to 92%, where you want to run it 98%, 99% or 100%. There were less propylene molecules being produced as well. When you’re running ethane feed, between 3% and 4% of your output will be in propylene molecules. It’s not huge, but with all the crackers, it is significant and then at your on-purpose production, your PDHs, some of them struggled to produce. If you look at one PDH it at, let’s say, 500,000 tons. That’s equal to more than ten ethylene units’ outputs. PDH goes down and has a huge impact. That alone will drive your supply and demand balance tight. We saw less propylene production, significantly lower. We, in fact, saw the lowest levels of propylene inventory levels in history as we went into the 3rd and 4th quarter of 2020. On the flip side, the demand for propylene was extremely strong because most of it goes into PPEs.
Polypropylene non-wovens for face masks, gowns were extremely strong, and in fact, we saw propylene demand in Q4 of 2020 grow almost 7% over Q3. We saw demand strong and increasing, supply crashing. It led to crazy price increases starting in December 2020 and into early 2021, exacerbated by the freeze. When the freeze came, it crashed everything. We saw propylene prices became a specialty chemical. You could see the train wreck happening as we went through the year in slow motion and then it finally came upon us. COVID had a tremendous impact certainly on that factor. On the ethylene side, now that people are getting out, they’re getting the stimulus payments and spending more money, we’re starting to see ethylene rates go back up. Theoretically, that should bring a little bit more supply to the market.
I don’t think people inside the industry recognize some of the interconnectedness of it. Certainly, people outside the chemical industry don’t see what those knock-on effects are and understand how connected it is. Your point about when we’re driving less and flying less, and the refineries are operating at significantly lower rates, it then sets pattern effect all the way down the value chain to propylene, polypropylene, the face masks that we’ve all come to know, if not, love. It’s an interesting dynamic. One of the things is how global of a market is propylene itself? I know that propane, obviously as a feedstock of choice, is globally traded. I guess polypropylene is also to a certain extent because as a solid material, it’s easily transportable, etc. How global is the propylene market or is it still a regional market?
There’s a huge learning curve if you’re new to the market diving in.
It is becoming more and more a global market. There used to be polymer-grade propylene. In fact, I used to sell polymer grade propylene exports but the unit, which was owned by Chevron, was damaged in a hurricane. They never rebuilt it. For a long time, we didn’t have the capability to export liquid polymer grade propylene until the enterprise built their export facility in 2019. We were limited to solid or propylene-derivative exports. Overall, we would export nominally about 200,000 tons of propylene equivalents a month leading up to about 2020 or so. Once PDH has got built and we had a lot more production, that level grew to maybe we were starting to approach 400,000 tons a month of propylene export derivatives.
It is a global market but certainly not as broad as ethylene. It is there. As we were referring before, that market’s changing, dynamics are changing, their building an incredible number of PDHs in China, more than twenty. They’re looking at exporting propane as their feedstock, whether it would be from British Columbia due to the tremendous excess of propane out of Western Canada or out of the US. They’ve made the decision. We can bring the feedstock in with our lower capital cost units, make our propylene and propylene derivatives, and compete successfully and fight off derivative exports from the US, Japan, or Korea.
That ties to their long-term strategy viewpoint of being much more self-reliant, certainly in this entire chemical and petrochemical space. Do you see that volatility in the propylene market reducing? When do you anticipate things coming “normal” again, if we even know what normal is anymore?
That’s the one thing that was evidenced by this. Propylene is still a byproduct business. There’s not enough on-purpose production yet to take swings out of the market. It will always have the potential to have these wild swings because of the difference between an on-purpose product and a byproduct. They’re just subject to extremely sensitive to supply and demand balances. It will probably continue to be quite volatile once refining operating rates get back up and once we get all of our PDHs and our crackers running normally, supply will improve and then we’ll begin to see the prices begin to settle back down a little bit. They went up about $0.40 a pound, top of 88.5%. They’ve already come down about $0.37. They closed it at $0.57 in 2020. You can see, it goes up, goes down. That doesn’t do anyone any good. It’s so difficult as a propylene customer to consume and make your derivatives because you don’t know what your prices are going to be. The supplier, it’s a finite supply. If you’ve got too much demand, you’ve got to kill off demand by price. It’s always a challenge to manage.
It’s one that’s not going to go away. You’ve been in the chemical industry for decades now and have seen a variety of changes. If you were going to start over knowing what you do, would you still join this industry? Is this an industry that you recommend for people to join and participate in?
I do. It’s an outstanding industry. The people in it are tremendous that I can think of just one guy in my career from a customer-supplier perspective who I had a little bit and not a huge issue. I’ve had more trouble with bosses than I’ve had with customers in the industry.
That happens a lot.
The chemical industry runs through my family. I married a customer and I never cut her price. I want you to know as hard as you try to negotiate, I never cut her price and my son is following in dad’s footsteps. He’s got his Undergraduate in Chemistry. He is finishing his MBA at the University of Buffalo and his first job was in chemical sales. He grew up listening to us talk about the industry over the dining room table, and usually in the most positive ways. Although my wife would always think that the buyer was correct and I would always think that the seller was correct. He got to see both sides of the negotiation. That’s one of the reasons I’m still working. I enjoy going to work every day because I learn something different every day from one of these guys. That’s a key for all of us when you’re working. Try to learn something every single day. That’s why I love going to work at IHS. We have many subject matter experts I could learn from, Peter Feng in Styrene or Nick Vafiadis. I was learning something every day, which I just found fascinating.
We’ve talked about the impact of COVID and the dynamics of what’s going on here in the olefin’s world. Let’s turn the tables maybe a little bit more to you. As we start seeing maybe some reopening of the economy, what are you going to be doing in your free time? Assuming we have some free time, economies reopened and you’re able to get out and about. What are you looking forward to?
I’m an old-fashioned guy. To me, human interaction is something I miss terribly. I miss going out, sitting down with customers, visiting their plants, kicking the tires and putting on my steel-toed shoes. Although, I was in a plant, things are starting to open up. I miss the face-to-face human interaction, like all of us. From my perspective, I like to see people’s face. I like to see the emotion and hope we can get this mask thing behind us. I’m looking forward to getting out. It’s hard to develop relationships to build a new business upon over the phone or indirectly. You’ve got to put a lot of work into, what do they say, “It takes nine calls to make your first sale.” It’s been a struggle to try to expand. I look forward to getting out and expanding the horizons and learning something new.
John, thanks. This has been super great. I’ve enjoyed talking with you. If people want to get in touch with you or learn more about you and learn more about PERIN, how should they do that work? Where can they go?
They can email me. It’s JStekla@PerinResources.com. Feel free to send me a text. I’ll be glad to talk to everyone. All the advice we do is for free. When we’re working with companies, while I will contract with people, we’re in people’s plans trying to say, “You need to expand this truck turnaround area. You need to change this PGP offloading connection over here.” We try to add a lot of value to what we do. I’ll be glad to talk to anyone that would like the chat.
Thank you so much for joining us. I appreciate you being on the show. I’m sure people will enjoy this episode as well.
Thanks, Victoria. Thank you again for having me out. I appreciate it. Take care.
About John Stekla
John Stekla is Director at Perin Resources. John is an accomplished senior sales and marketing executive with broad international and domestic experience in petrochemicals, lubricant and fuel additives, and performance chemicals.
John is an experienced petrochemical consultant with broad knowledge of olefins, aromatics, petrochemical derivatives, natural gas liquids, and feedstocks. Led the commercial effort to develop a joint venture world-scale cracker project on the US Gulf Coast and the effort to expand ethylene pipeline connectivity in the U.S. Gulf Coast area.
He has decades of experience producing companies and leading consultancies, including Chevron, Williams, and CMAI / IHS.