New PE capacity to drive prices lower, while PP becomes more competitive

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HOUSTON — New North American polyethylene capacity eventually will mean lower selling prices for that material. While in polypropylene, new supplies of propylene monomer will lead to some new resin capacity as well, making the material more competitive vs. high density polyethylene.

Those were among the primary messages from market analysts Nick Vafiadis and Joel Morales at the 2014 IHS World Petrochemical Conference in Houston. Both Vafiadis and Morales spoke at the event March 27.

At least 14 billion pounds of new PE capacity are anticipated for North America by 2018, as producers look to capitalize on growing supplies of low-cost natural gas feedstock in the region.

That amount is more than the domestic market will be able to absorb, so part of that new capacity will need to be exported. As North American exports move beyond traditional South American markets, Vafiadis said PE prices are likely to decline.

“There’s no way that [export expansion] will not have an effect on North American prices,” he explained.

The new PE also should lead to expansion among the ranks of North American processors, according to Vafiadis, with some work returning to the region from overseas. IHS expects PE demand from the pipe and profile market to average annual growth of more than 5 percent from 2013-18. Annual PE growth in rotomolding, injection molding and film and sheet is expected to be at least 4.5 percent in that period.

Global PE demand has increased 25 percent since the 2008 recession, growing from 145 billion pounds then to almost 180 billion pounds in 2013. Demand for the material is growing at 1.2 times the global GDP, according to Vafiadis, and should top 224 billion pounds by 2018.

On the capacity side, the global PE market added almost 42 billion pounds in 2008-13, with most of that new capacity centered in the Middle East and China. Capacity growth exceeded demand growth in four of those six years, he said.

From 2013-18, the global PE market is expected to add 55 billion pounds of capacity, which will be more than demand growth in that period. The big change in that time span, Vafiadis said, will be the return of North America to the scene.

This new global capacity will serve to keep global PE operating rates under 85 percent to 2018. North American PE operating rates will be the highest in the world at slightly more than 90 percent, he added. Western Europe will have the world’s lowest PE operating rates in that period at 75 to 80 percent.

Vafiadis also expects global PE prices to tend toward parity as more capacity additions hit the market. But even with that being the case, producers’ PE profit margins are much higher in North America — more than 30 cents per pound than they are in other parts of the world. PE margins in Western Europe and Asia, for example, are less than 15 cents per pound.

North America will see “a surging tide” of PE, Vafiadis said, as at least 14 billion pounds of new capacity is expected to arrive by 2018. “Many will say conditions have never been better for domestic producers,” he added.

But that’s too much capacity for the domestic PE market to absorb, according to Vafiadis, so much of that material will need to be sold into export markets. The 22 billion pounds of new capacity that’s been announced represent “unprecedented capacity additions.” That growth also is expected to lead to better PE demand within North America and expanded production of finished plastic products here.

Potential challenges to this PE wave include a collapse of the crude oil vs. natural gas price spread and a slowing down of global economies. Anti-shale and anti-plastic legislation also could have an impact, as could rising capital costs.

Elsewhere around the PE world, Vafiadis said that Western Europe “is struggling to get out of the mire of a low-tide environment.” Domestic PE demand there fell 10 percent in 2008-13, and 10 percent of the region’s PE capacity — more than 3 billion pounds — is scheduled to be closed by 2018.

But economies and PE demand there are improving, and the market should become stronger as old capacity shuts down, Vafiadis said. Producers also are trying to restore profitability by emphasizing specialty grades of PE such as metallocenes.

The Middle East should add another 11 billion pounds of annual PE capacity by 2018, with most of that being sold into export markets. The region continues to have a stronger cost advantage vs. the rest of world because of abundant natural gas, Vafiadis said. Domestic demand in the Middle East also has been bolstered by strong economics and infrastructure projects.

In Northeast Asia, China’s domestic demand now accounts for 25 percent of total global PE demand. By 2030, China’s stake will increase to almost 30 percent. More than 20 billion pounds of PE capacity will be added in China through 2018, with coal-to-olefins technology challenging existing naphtha-based production, Vafiadis said. He pointed out, however, that some plastics processors have been leaving China because of rising labor costs, and that recycled PE now accounts for about 20 percent of the region’s demand for the material.

South American PE demand is growing, Vafiadis said, but production of the material in that region hasn’t been growing, meaning it will become increasingly dependent on imported resin.

Increased exports of polypropylene expected

In PP, new supplies of propylene monomer from PDH technology will change that market’s dynamics, Morales said. “North American prices will become more competitive for the North American converter,” he added.

And although only one PP expansion project has been announced for the region, IHS expects that about 3 billion pounds of new capacity eventually will be added in the next several years.

This change also will lead to increased PP exports from North America. The region’s PP trade surplus was only about 600 million pounds in 2013, but that total is expected to be near 2 billion pounds by 2018.

Global PP demand for 2013 checked in at 123 billion pounds, with 33 percent of that total coming from China, and North America and Europe each holding a 14 percent share. By 2018, 33 billion pounds of new PP capacity will be added, and, according to Morales, China’s
demand share will increase to 36 percent, while shares held by North America and Europe will decline to 12 percent each.

Among end markets, injection molding has the highest share of PP demand at 34 percent, with film and sheet at No. 2 with 24 percent. PP “is still a tremendously versatile material,” Morales said.

PP consumption per capita was near 17 pounds worldwide in 2013, rising to 33-44 pounds in the U.S., Western Europe and Japan. South Korea led the world in per capita PP use at about 70 pounds. By 2018, Morales said that number should climb to about 20 pounds globally, with China’s total surpassing that of the U.S.

But where global PP capacity additions are concerned, Morales said the market has overbuilt by almost 9 billion pounds in the last six years. More overbuilding is expected from 2014-18, mostly in China and Northeast Asia.

Even North America should receive new PP capacity. That region had rationalized capacity in 2008-12. The last new PP capacity in the region was added in Mexico in 2008 and in the U.S. in 2003.

On a global basis, operating rates are expected to be in the low-to-mid 80s from 2014-18. Rates in North America should be tighter, in the high 80s and moving above 90 in 2015-16. PP operating rates should remain under 80 percent in Southeast Asia, according to Morales. But at the same time, China is expected to move closer to being self-sufficient for the material.

New North American capacity will be based on new supplies of propylene monomer feedstock made via PDH technology. This new propylene will be based on propane extracted from shale gas. Rextaac LLC has announced the addition of 600 million pounds of new PP in Odessa, Texas, for 2016, and Morales said he expects other producers to follow suit. North American PP prices had bottomed out in 2009, but then rose to the point where they’re now more expensive than prices in China.

The end result, Morales said, will make PP more competitive with HDPE in North America. PP had been cheap in that comparison from 2003-06, before becoming relatively competitive in 2007-09 and expensive in 2009-12. It’s also expected to be competitive vs. HDPE in Europe and China.