One of the most valuable lessons I learned during my time at Oil Analytics (OA) was understanding how ethylene crackers, which produce ethylene as a fundamental building block for numerous industrial and consumer products, can serve as a proxy indicator for economic growth due to their strong ties to manufacturing, construction, and consumer markets. Unless, you have been an Oil trader in the past, you wouldn’t have heard about this before. Here’s why:
1. Link to Industrial Output
Ethylene is a critical feedstock for a wide range of downstream industries, including plastics (polyethylene), automotive (synthetic rubber), packaging, and construction (polyvinyl chloride, PVC). High operational rates at ethylene crackers typically indicate robust demand in these sectors, suggesting healthy industrial activity. Conversely, weak cracker utilisation often reflects reduced manufacturing output or slowdowns in construction.
2. Global Trade and Export Demand
Ethylene production levels and trade data also mirror global economic dynamics. For instance, strong demand for ethylene derivatives in exporting nations (such as China and Southeast Asia) signals robust industrial and consumer activity. Conversely, declines in trade volumes, as seen recently due to logistical challenges such as Panama Canal disruptions, can reflect broader economic vulnerabilities.
3. Consumer Spending and Packaging
A significant portion of ethylene is used to produce polyethylene, which is ubiquitous in consumer goods and packaging. Rising demand for these goods typically aligns with increased consumer spending and economic growth. For example, a downturn in ethylene production or inventory build-ups often indicates weaker consumer sentiment.
4. Capital Investments and New Capacity
The development of new ethylene crackers or expansions also signals confidence in long-term economic growth. For example, large-scale projects on the U.S. Gulf Coast and in China highlight expectations of future demand growth. However, when overcapacity occurs, it can lead to financial strain, reflecting challenges in global growth projections.
5. Regional Disparities
Regional differences in cracker activity can reveal localised economic trends. For instance, U.S. crackers running at high rates due to low-cost ethane feedstock reflect competitive advantages, while European closures signify economic and energy challenges.
At OA, we developed models to calculate ethylene cracker utilisation at local and global levels, which I successfully translated into a leading indicator for broader economic metrics such as the Purchasing Managers’ Index (PMI).
To demonstrate this, I have plotted the following chart below:
It clearly illustrates the relationship between ethylene cracker utilisation rates and the Purchasing Managers’ Index (PMI) over time, showing how changes in industrial activity (tracked by cracker utilisation) can precede shifts in economic sentiment (reflected by PMI). Notably, ethylene cracker utilisation tends to align closely with signals of economic expansion or contraction, making it a valuable leading indicator.
Moreover, ethylene cracker rates are closely tied to macroeconomic factors such as inflation, high interest rates, and geopolitical instability. These issues are likely to suppress consumer spending and industrial investments globally.
Typically, imbalances between supply and demand reflect broader economic challenges. When manufacturers are unable to absorb additional ethylene supplies, it signals muted industrial activity—a key component of GDP growth.
I have successfully used this as part of my macroeconomic toolkit while working as a macro and oil trader. It is a leading indicator of other leading indicators. It has also proved to be a very strong metric for trading crude futures (flat price) in directional trades.
Ethylene crackers are a reliable barometer of economic health due to their central role in industrial supply chains and consumer markets. Rising cracker utilisation and capacity expansion generally point to economic growth, while closures or underutilisation suggest broader economic pressures or regional challenges.
Snapshot of the Current Situation:
As of November 2024, global ethylene cracker utilisation rates are reported to be around 79–82%, reflecting a continued downturn from pre-2019 levels, which were above 90%. This decline is largely due to an oversupply in the market driven by significant capacity expansions, particularly in China, alongside subdued global demand and economic headwinds. These factors have led to low profitability for many operators, resulting in closures or rationalisation of less competitive facilities, particularly in regions such as Europe.
The current rates indicate a challenging environment for the ethylene industry, with a combination of structural overcapacity and slow demand recovery globally. These dynamics are expected to persist in the near term unless economic growth accelerates or additional rationalisation (plant closures) occurs.
Regions such as Europe are facing acute challenges due to rising energy costs and ageing infrastructure, which have made many ethylene crackers unprofitable. Notably, ExxonMobil and SABIC are shutting down crackers in France and the Netherlands due to these pressures. While developing nations in Asia are faring better, they, too, face risks from overcapacity as demand growth slows in key economies such as China.
This uneven landscape underscores the lack of synchronised global economic growth, as strong performance in some regions cannot offset stagnation in others. Current cracker utilisation rates suggest that industrial output is either contracting or growing too slowly to sustain pre-2020 growth levels. This aligns with stagnating manufacturing indices and Purchasing Managers’ Index (PMI) levels across many economies.
– Caio Marchesani