By: Frank Esposito
March 29, 2013
HOUSTON — Global polyethylene demand growth is expected to ramp up fairly soon, averaging almost 5 percent annually between 2012 and 2017.
That's the outlook of market veteran Nick Vafiadis, who spoke at the IHS World Petrochemical Conference, held March 20-21 in Houston. Vafiadis serves as senior director of global polyolefins and plastics for Houston-based IHS Chemical.
Annual growth of 4.6 percent in that five-year span will have global demand sitting at just over 216 billion pounds by 2017. "That growth exceeds the current level of North American demand," Vafiadis said. "That's like growing another North America in the next five years. The market has mass and momentum."
In North America, that momentum is coming from newfound supplies of natural gas, mainly from shale rock formations. These new supplies can be used to make ethane and then ethylene feedstock. The discoveries have led to a wave of expansion announcements, including around 11 billion pounds of new PE capacity that's set to hit North America toward the end of that five-year forecast period.
Vafiadis pointed out that those projections don't even include new capacity from Ineos Group and Dow Chemical Co. that just were announced in late March. "Strong margins are leading to capacity increases," he said.
Much of the new North American PE capacity will be targeted at export markets, which are expected to grow by 5 percent over the forecast period. Domestic demand also is expected to improve toward the end of that period.
One positive impact of the new North American PE capacity should be a resurgence for the region's PE processors, especially makers of film and bags, Vafiadis explained.
"As North America gets new production capacity, there will be an increase in processor capacity in the U.S.," he said. "The domestic market will become more competitive. Some big U.S. processors will expand to take advantage of the new [PE] capacity in North America.
"We're starting to hear about repatriating processor capacity. We're going to see increased exports of [PE] finished goods."
On the pricing front, PE prices in North America and elsewhere are expected to move to global parity, Vafiadis said, because of new capacity and increased competition. "New capacity is fighting for limited demand growth," he said.
There could be some challenges to North America's PE growth spurt. "Everyone can't build," Vafiadis said. "That would strain resources too much. But the early bird gets the worm. You need your capacity to start up first to reap the greatest reward."
North American PE makers also need "a new channel into the export market to move their product," he said. In addition, PE processors need to market their finished goods into international markets.
Globally, PE capacity additions in that span are expected to exceed 57 billion pounds. But some regions will benefit more than others. Growth in the Middle East, Vafiadis said, will continue to move forward as countries there invest in infrastructure and a growing population drives consumer markets.
Europe's PE market, however, is expected to struggle, he added, with demand down and imports on the rise. More than 2 billion pounds — about 7.5 percent of Europe's PE capacity — is expected to be shut down by 2017, Vafiadis said.
In China, PE capacity and demand are headed up, but operating rates are expected to remain low. The challenge for that country's PE market, Vafiadis said, is to rationalize higher-cost plants and to move away from commodity products.
No new PE capacity is slated for Latin America through 2017, which will improve that region's operating rates. Globally, new PE capacity should lower global operating rates almost 1 percent, from 84.2 percent in 2007-12 to 83.4 percent in 2012-17, according to Vafiadis. North America's PE operating rates will be the highest in the world in that 2012-17 period, ranging from 85-90 percent.
"U.S. producers [from 2012-17] will have the luxury of being able to export and get healthy returns to every region in world," he said. "That will keep operating rates high.
"Post-2015, U.S. producers will have to rely on export sales outside of South America. China's influence will leverage down export prices and the domestic price as we move to global price parity."
When the new PE capacity arrives in North America, some producers "will put an emphasis on domestic supply," Vafiadis added. "So we could see North American prices drop lower for a short period until global operating rates improve."