The new decade started with some optimism as the United States and China signed phase one of a trade deal on 15 January. Crude oil prices were at approximately $58 per barrel for WTI and $65 per barrel for Brent. However, this soon changed with the rapid and uncontrolled spread of COVID-19 globally, which caused several countries to lock down and halt most business activity and impose strict social distancing measures. Air and road travel are severely restricted currently, drastically decreasing demand for transport fuel. In addition to the demand shock from COVID-19, the crude oil market has suffered a supply shock as well following the failure of the Vienna Alliance to agree on an extension and deepening of output cuts in early March, which sent crude oil prices tumbling to the low $20s per barrel in March.

This low crude oil price environment would typically be advantageous for naphtha crackers, which dominate production in Asia and Europe. Given these circumstances, some immediate questions come to mind: How low can Asian naphtha cracker cash cost go? Are US ethane crackers still going to be competitive?

Cash costs in Asia could increase depending on coproduct supply and demand, but with the current naphtha forecasts, overall cash costs should remain relatively competitive until 2021. It will be a challenging year for US ethane crackers, especially with additional capacities from new crackers that came onstream in 2019 and several more coming onstream in 2020-21 in the United States. That said, even though Asian naphtha crackers have moved lower in the cost curve, there is still a challenging year ahead. Two mega crackers in China, Hengli Petrochemical and Zhejiang Petrochemical, started commercial production in the first quarter of 2020, adding ethylene supply to the sluggish market.

In addition, several more capacities in China are expected to come onstream in 2020, along with some cracker expansions in other parts of Asia. Derivatives demand, on the other hand, is expected to slow down amid the COVID-19 pandemic. However, some of the demand loss from reduced overall derivative requirements could be partially offset by lower monomer and derivative imports from other regions. Lastly, integrated margins in Asia are expected to remain relatively modest and low despite low cash costs due to the weak global economic situation and massive slowdown in China, which is the key demand center for Asia. A sharp demand recovery is unlikely considering the current situation.

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