Rising labor, piping prices lift US ethane cracker costs

Bulk material costs for Gulf Coast construction projects rose by almost 4% in 2016 as tightening global steel and U.S. labor markets continue to pressure prices, industry experts said.

Bulk material costs for a typical 1.5 million tons per annum (mtpa) ethane cracker on the U.S. Gulf Coast rose 3.7% in 2016, to $604 million, according to Petrochemical Update’s U.S. Ethylene Plant Construction Costs Quarterly Update data for Q1 2017.

Bulk material costs represent 28% of the total construction costs for a 1.5 mtpa ethane cracker and overall project costs rose 3.1% in 2016 to $2.1 billion. The official U.S. inflation rate was 2.1% over the same period.

The cost of piping systems-- which represent the highest bulk material cost component-- rose 5.1% year-on-year to $298.4 million, mainly driven by higher steel prices.

Steel prices have been supported by a shortage in the supply of nickel, a raw material for steel, and a reduction in Chinese steel supplies is expected to impact prices in the coming years, according to experts.

“Nickel prices have found support from reduced output from the Philippines,” Fiona Boyd, Director of Acuity Commodities, told Petrochemical Update.

“The Philippines government has ordered 28 of 41 nickel mines suspended or closed. This comes at a time when demand from key markets like China has been steady,” she said.

The U.S.' General Steel predicts global steel supply will decrease in 2017 while demand rises. U.S. construction spending is forecast to rise 6.7% in 2017, following a rise of 8.3% in 2016, according to the American Institute of Architects (AIA).

“China is reducing its steel production by 20%. This will cause demand to outweigh supply for the first time in over a decade. This is expected to cause a sharp rise in steel prices in 2017 and lasting through 2020,” General Steel said in its 2017 steel building price forecast.

                                  Global steel demand-supply outlook

Source: General Steel (2017).

Bulk material costs for ethane cracker construction also include buildings, concrete, demolition/removals, insulation, piling, piping, site preparation, structural steel/platforms, painting and miscellaneous items.

Concrete costs rose by 5.8% in 2016, to $43.5 million in the base case and electrical and instrumentation costs climbed 4.1% to $59.7 million.

Bulk material costs for ethane cracker construction also include buildings, demolition/removals, insulation, piling, piping, site preparation, structural steel/platforms, painting and miscellaneous items.

Labor inflation

Labor costs rose by around 3.5% across bulk materials components. Labor costs associated with piping systems were estimated at $121 million in January 2017.

Gulf of Mexico craft labor markets are expected to tighten in 2017, as a resurgence in planned downstream maintenance activity will see operators compete against construction projects for roles such as pipefitters and workers.

Some 7,000 additional craftsmen may be needed to undertake planned facility turnaround work in Q1 2017, according to the Industrial Info Resources (IIR) consultancy.

                       Gulf Coast bulk material costs (1.5 MTPA cracker)

Source: Petrochemical Update

Looming start ups

There are currently eight ethane crackers under construction on the U.S. Gulf Coast. Six of these are slated to come on stream by the end of 2017, representing more than 7 million tons per annum of new ethylene capacity. Ten more ethylene facilities have been proposed for the Gulf Coast and the U.S. Northeast, eight of which are in development.

The first wave of cracker construction has seen varying schedule performance between projects, Michael Devanney, of North American consulting firm DevChem Consultants, said.

“Overall there were delays, and now we are seeing some announcements to move ahead of schedule," he said.

In August 2016, Sasol confirmed the estimated cost of its Lake Charles integrated ethane cracker and downstream derivatives complex under construction in Westlake, Louisiana had risen by $2.1 billion since the original estimate of $8.9 million made in October 2014.

The plant will have a total output capacity of 1.8 mtpa, including 1.5 mtpa ethylene production.

Costs rose on higher contractor wage rates, longer contractor engineer hours, as well as greater equipment requirements and 50% more rain days than expected, among other factors, Sasol said.

Mechanical, electrical and instrumentation work began in 2016 and the facility is expected to start up in late 2018 or early 2019.

“Procurement of equipment is almost 100% committed, bulk materials procurement around two-thirds committed and fabrication of the modules and piping spool pieces well advanced,” a Sasol company spokesperson said in a statement.

Among other projects, ExxonMobil Chemical is on schedule to complete expansions of its Baytown and Mont Belvieu, Texas, facilities in the second half of 2017, a company spokesman said during ExxonMobil's fourth-quarter 2016 earnings call on January 31.

Construction began on the furnaces and aboveground piping systems in late 2015 for Chevron Phillips Chemical’s 1.5 mtpa ethane cracker at the Cedar Bayou site in Baytown, Texas, according to Fluor, EPC contractor on the project.

The facility is the first Greenfield cracker project in the U.S. in more than a decade and expected to come online in 2017. Fluor’s scope of work includes engineering and construction for the outside battery limit scope as well as the direct-hire construction for the entire cracker project.

Ethane, derivatives outlook

Low ethane prices have made U.S. ethane-based operators highly competitive on the global markets, even though low oil prices have depressed producer margins.

Operating rates at ethylene and polyethylene plants slipped in 2016 and are expected to remain steady in the short term, but the long-term outlook for these derivatives remains solid, according to analysts.

“Ethylene operating rates slipped 1% early in 2016 and slipped another 1% in the last half of 2016,” Devanney said. Operating rates are likely to remain at around 80% from 2016 to 2019, he said.

Downstream polyethylene operating rates fell by around 1% in late 2016 and the consensus in early 2017 is that rates will stay largely the same through 2018 before creeping up, Devanney added.

Current ethylene demand growth is estimated at 4.5%, higher than the U.S. Gross Domestic Product (GDP) rate of 4%. The latest outlook from petrochemical producers show Polyethylene demand is expected to remain stable in the short term and in the long term demand growth is estimated at around 4.4% over the next 25 years, according to DevChem Consultants.

Increasing U.S. export capacity and the wave of cracker start-ups are expected to impact the US ethane supply-demand balance in the coming years, creating arbitrage opportunities.

The U.S. ethylene market is expected to lengthen in 2017 as new crackers come online, but delays to these cracker projects "could result in some tightness in overall supply,” Tracy Dang, Senior Editor at ICIS pricing group, said.

Many of these crackers are expected to feed existing downstream demand or new derivative plants currently under construction and ethylene consumption is anticipated to remain strong, Dang noted.

Downstream polythene market prices rose in January on expectations of price rises in February, while ethylene prices "remain high amid some supply constraints from cracker turnarounds and unexpected production issues,” she said.

By Heather Doyle