June 3, 2022
Natural gas prices rose as inventories dwindled. Natural gas exports have reached record highs and are expected to increase further in the second half of 2022. US chemical industry barometers show robust utilization, production and margins, as rising input costs are passed on to customers.
Very high prices
Global natural gas prices have risen sharply over the past year, and domestic prices have not been immune to strong demand, dwindling inventories and the impact of the invasion of Ukraine by Russia.
Natural gas prices in Europe soared to more than $30 per million British thermal units (MMbtu), as flows from Russia fell short of demand. Buyers looking for other gas resources pushed the Japan-Korea benchmark price for liquefied natural gas (LNG) to $29 on average in April.
Soaring global LNG prices and exports, weak US production growth and strong domestic demand lifted Henry Hub to $6.60 in April. The U.S. benchmark traded between $7 and $8 during the first half of May (Chart 1). This is more than double the average nominal price level of the last decade, but still well below prices in Europe and Asia.
Along with the rise in exports, coal-fired power plant outages and rising coal prices have contributed to increased demand for natural gas from the electricity sector. Meanwhile, northeast gas producers like those in the prolific Marcellus Shale have limited pipeline transportation capacity with which to boost supplies despite higher prices; Growth in associated gas production (natural gas produced from oil wells) in regions such as the Permian Basin has been limited by weak growth in spending in the oil sector.
Exports on the rise
The increase in capacity and utilization is expected to increase US LNG exports from 11.6 billion cubic feet per day (bcf/d) in April 2022 to 13.4 bcf/d by December 2022, and then hold near those levels until new capacity comes online in 2024. Similarly, pipeline capacity to Mexico is also expected to increase, pushing total U.S. pipeline exports from $7.7 billion to cubic feet/d to 9.2 billion cubic feet/d (Chart 2).
In total, the Energy Information Administration predicts that the 22.5 billion cubic feet per day of gas exports in December 2022 will represent 21% of natural gas production marketed in the United States, compared to 18% in December 2021.
With rising exports, strong demand from the power sector and modest production growth, US active inventories quickly fell to 2.1 trillion cubic feet of seasonally adjusted gas in the five months since. ending in April 2022, their lowest level since the cold winter of 2019.
Railcar Loadings Signal Strong Growth in U.S. Chemical Production
The three-week average pace of chemical carloads increased from its recent peak of 35,000 cars on March 19 to 33,700 cars on May 14 (Chart 3). This means that while domestic capacity utilization remains high, production has slowed slightly.
US railcar chemical loadings are a timely but noisy barometer of the industry’s output growth and capacity utilization. Rising prices and supply chain challenges on land and water may be partly responsible for the slight slowdown. The sector’s early position near the start of manufacturing supply chains makes it a leading indicator of industrial production more broadly.
Polymer prices keep pace with rising costs
Recent increases in the price of natural gas have resulted in steady increases in the price of ethane per pound to 16.8 cents per pound – its highest nominal price on the Gulf Coast since October 2018 and March 2012 before that (Chart 4). Gulf Coast polymer (polyethylene) prices rose along with ethane costs to 61.2 cents per pound. The implied margins of the industry’s product lines remain very healthy.
Ethane is a key feedstock that can either be sold for combustion with natural gas or separated and sold to petrochemical manufacturers. Last fall, new production capacity helped ease ethylene and polymer prices on the Gulf Coast. This has been partly reversed since February with rising global oil and gas prices.
Industry lead times continue to lengthen for many product lines as supply chain challenges on land and water persist. So far, chemical producers have been able to cope with recent cost increases, but industry commentary in the Beige Book and the Purchasing Managers’ Index suggests further attempts to price increases may be less successful for the remainder of 2022.
The chemical sector contributes to the rise in producer prices
The effects of rising energy input and raw material prices on the chemicals sector are visible in the components of the Producer Price Index (PPI). Basic organic chemicals (like ethylene and benzene, which are inputs into many other products) saw a slight decline in February 2022 before Russia invaded Ukraine. In the three months ending April 2022, producer prices for organic chemicals rose 7.1% (Chart 5). Plastics and resins (like polymers), which had been slowing since November 2021, rose 2.6% in the three months to April.
Alkalis and chlorine, which fuel a myriad of sectors like detergents, sanitary products, aluminum production, plastics and paper manufacturing, have seen their prices rise sharply over the winter months. Rising energy prices, continued delivery delays related to Hurricane Ida on the U.S. Gulf Coast, and unplanned outages and seasonal maintenance in China, Europe, and the United States have all contributed to driving up costs. The wide use of chlor-alkali products in industrial processes makes them an important indicator of industrial production trends.
Nitrogens are a small component of the chemicals sector, but price appreciation has been outsized. Nitrogens are fertilizer components primarily made from ammonia, a high nitrogen content substance primarily synthesized from methane (natural gas) and air (which contains 70% nitrogen by dry weight).
Sharp increases in natural gas prices in Europe, Asia and the United States have significantly increased the price of nitrogen over the past year. The U.S. PPI growth rate for nitrogen peaked at 43.9% in the three months ending December 2021. It slowed to 13.0% in April 2022. Rising prices for Nitrogen could contribute to higher food inflation in the coming months as farmers reduce consumption (and therefore yield) while trying to pass on higher costs.
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