PE overcapacity a concern without solid growth

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IHS Chemical IHS Chemical's Nick Vafiadis speaks at the Global Plastics Summit.

Chicago — Global markets for polyethylene and polypropylene resins are handling growth in different ways.

“This is a new era for polyethylene,” IHS Chemical’s Nick Vafiadis said at Global Plastics Summit 2016, Sept. 28-30 in Chicago. “It’s a much more level playing field now — but we could be looking at a historical overbuild.”

That overbuild consists of almost 70 billion pounds of annual PE capacity that’s set to be added between 2015 and 2021, with about one-third of that amount aimed at North America. Even if some of those projects are delayed for a year or two, that’s a lot of pellets that need to be moved somewhere.

Thankfully, Vafiadis said that global PE demand is expected to grow at a 4.2 percent annual rate in that time frame — a rate equal to 1.35 expected global GDP growth. But overcapacity could reach beyond 15 billion pounds, he added.

U.S. PE demand growth in 2017 should be close to that of GDP growth, which is expected to be in the 2-2.5 percent range.

China now accounts for 47 percent of global PE demand, and with a 6.5 percent annual PE demand growth rate, “is absolutely critical to the world achieving that 4.2 percent,” according to Vafiadis

“If China doesn’t reach its expected growth rate, the overhang [of PE capacity] goes higher,” said Vafiadis, plastics vice president for Houston-based IHS Chemical.

Global PE operating rates should decline from their current levels of almost 87 percent before declining to 83.5 percent in 2017-18. North American PE operating rates also will decline from their current levels of around 90 percent, but should still remain above 85 percent.

“North American polyethylene will continue to have competitive production economics,” Vafiadis said. “But its domestic [price] premium erodes with competition. There will be a narrowing of regional prices.”

In the near term, capacity additions from Braskem Idesa, Ineos Sasol and Nova Chemicals will have added more than 4 billion pounds of PE capacity in North America by the end of the year. In 2017, additions from Dow Chemical, ExxonMobil Chemical and Chevron Phillips Chemical are expected to add another 7 billion pounds of PE capacity in the region.

All of these moves and others that have been announced are being fueled by ample supplies of low-priced natural gas feedstock that have been developed in North America in recent years. But in spite of this wave of new capacity, Vafiadis said he doesn’t expect older PE units in the region to be shut down. That’s because low crude oil prices have made PE plants that use oil-based naphtha feedstock profitable again.

The deluge of new capacity also should create competitive pricing situations for North American PE processors. “2017 [PE] contracts already offering discounts,” Vafiadis said. “Buyers have more leverage and more options.”

More PP in China

On the PP front, large capacity expansions in China could lead to trade shifts and global price pressure, according to IHS polyolefins Americas director Joel Morales.

“Supplies should tighten up by the end of decade, but market conditions will be difficult in the short term,” he explained.

Global PP demand growth rates should be 4.6 percent through 2021, with North American PP growth a bit lower at 2.8 percent. China’s PP growth rate is expected to be 6.3 percent. “Polypropylene remains the fastest growing commodity plastic,” Morales said.

High North American PP prices opened the door for lower-priced foreign PP to enter the region in 2016, which Morales described as “the year of the import.”

As a result, Morales said the pace of capacity debottlenecks will accelerate in North America during 2017.

“Local production is needed to push out imports,” he said. “So [North American PP] will run at full rates in 2017.”

More than 500 million pounds of PP capacity should be added via debottlenecks in North America by the end of 2017. But at the same time, Morales said that reinvestment economics for new PP units are questionable.

“The timing of the Chinese startups will be the single biggest factor [in PP] over the next 18 months,” he said. “But polypropylene remains favored vs. polyethylene on a cost basis in most regions.”

Morales added that the overall PP market would benefit from more stable pricing, with less volatility. “You can’t go up 36 cents [per pound] and then down 36,” he said. “You can’t run a business like that.”