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North America PE market ready to ride a wave of shale gas

By: Frank Esposito

November 6, 2012

CHICAGO (Nov. 6, 1:25 p.m. ET) — North American polyethylene makers are getting ready to ride a wave of shale gas.

Natural gas from shale rock formations is making the U.S. and Canada among the lowest-cost producers of ethylene feedstock in the world - and that status could lead to almost 15 billion pounds of new cost-advantaged PE capacity being added in the region between 2012 and 2017, according to market veteran Nick Vafiadis.

Vafiadis is global director of plastics for the IHS Chemical consulting firm in Houston. He analyzed the PE market at a Plastics Processors Conference hosted by his firm, Oct. 24-25 in Chicago.

“In the short-term global PE demand may be slowing as China demand weakens and Europe contracts,” Vafiadis said. “Long-term, the low-cost regions will be North America and the Middle East, which are set to compete for global demand growth. The market has never had two cost-advantaged regions before.”

New PE capacity will be fed by massive planned expansions for ethylene feedstock. More than 200 million pounds of new ethylene capacity will come online this year, with more than 2.5 billion pounds scheduled for 2013 and almost 3.9 billion pounds set for 2014. In spite of the new capacity, Vafiadis said that U.S. ethylene operating rates will be above 95 percent in 2013, which will give producers some leverage in pricing.

“Every one of these new ethylene projects seems to have a strong payback,” he said. “On paper, they’re viable, and we think most of them will occur.”

Global PE demand growth is set to average 4.7 percent from 2012-17, according to IHS. Growth for the material in Northeast Asia will average 6.2 percent, with North America a bit lower at 2.7 percent, not much above Europe at 2.4 percent.

During that 2012-17 period, global low density PE demand should grow 2.3 percent, with global LDPE capacity increasing almost 18 percent. Demand for high density PE should average five percent growth, with capacity climbing more than 27 percent. Linear low density PE will be stronger still, with annual growth of 5.4 percent and a capacity increase of more than 34 percent.

By comparison, global GDP growth is expected to average 3.6 percent in that five-year period, according to IHS. Among major PE end uses, demand from film/sheet and injection molding is expected to average five percent growth in that time frame.

In the U.S., PE demand growth should average 2.5 percent from 2012-17, slightly less than the IHS expectation of 2.9 percent GDP growth in that period. That’s still an improvement from the 2007-12 period, when U.S. PE demand actually averaged a demand loss of more than one percent per year.

Most of the new PE planned for North America will be targeted into the export market, Vafiadis said. “There’s no way [producers] can move this much into the domestic market,” he added.

Another U.S. market change, according to Vafiadis, could be the erosion of a domestic premium in pricing in favor of a global price.

In 2012 and 2013, regional PE supplies should be “relatively tight,” he added, with low producer inventory levels helping to drive prices. But beyond that point, Vafiaidis said that he sees PE’s supply/demand balance improving, making it more difficult for producers to raise prices.