The North American avalanche of polyethylene heard rumbling in the distance in recent years will become reality in 2017.
The question now becomes how much of this material will need to be exported outside of the low-growth domestic market — and what impact this deluge of material will have on selling prices.
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 mid-2017. Additions from Dow Chemical, ExxonMobil Chemical and Chevron Phillips Chemical are expected to add another 7 billion pounds by the end of the year.
Low 2016 demand growth in the U.S. and Canada will need to be supercharged in 2017. Through October, regional high density PE sales were up less than 2 percent, According to the American Chemistry Council, with low density PE sales down almost 3 percent and sales of linear low density PE down 0.5 percent.
Exports accounted for 20 to 25 percent of sales of each of these types of PE in the 10-month period. Market watchers have suggested that number will have to hit 30 percent or more to handle the oncoming PE.
Dow and ExxonMobil each are bringing on more than 3 billion pounds of new capacity in Texas. Dow’s growth project is in Freeport, while ExxonMobil is adding two new PE production lines in Mont Belvieu.
“The old Dow would have looked at new plants as growth from a volume standpoint,” longtime Dow executive Jim Fitterling said in an interview at the K 2016 trade show in October. “But now, no one is doing as much with new product innovations as we are.
“We know where this material is going before we start the plant,” added Fitterling, who serves as president and chief operating officer for Midland, Mich.-based Dow. “We’re working with large multinationals that are driving the packaging market. We’re making our decisions based on what they’re doing and building flexible assets.”
ExxonMobil global PE marketing manager Thomas Deman said at Global Plastics Summit 2016 that his firm expects to export “quite a bit [of the new PE], but we’re still going to participate in growth in this region.” North America “is one of the most innovative regions in the world, and we want to continue to supply it with performance products,” he added.
Deman said that the two new lines that Houston-based ExxonMobil is building in Mont Belvieu — with total annual production capacities of almost 3 billion pounds — “are set up for export, but we can redirect some of that.
“We’re reinvesting in logistics to supply [North America] with the products it needs,” he said, adding that building large scale facilities such as the Mont Belvieu lines “takes a long term view — just to get skilled labor to build plants is a huge challenge.”
Dow’s Fitterling added that although some new PE will be sold outside of North America, Dow’s Mexican customers “are looking for more product, and the U.S. is starting to come back.” He described 2016 as “a good year in the automotive space, and we’re seeing good things in packaging, consumer goods and hygiene.”
Regional PE expansions have been fueled by newfound supplies of low-priced natural gas feedstock. Fitterling said that Dow expects that advantage to continue. “Energy is competitive, and America is competitive again,” he explained. “The region is still going to be a long-term, low-cost supplier.”
The North American PE field “will continue to be an oil-driven market for price,” according to Mike Burns, a market analyst with Resin Technology Inc. in Fort Worth, Texas. And new material from the region should be able to find a home around the world as long as it remains competitive with PE from China, he added.
“The new [PE] capacity might lead to some more products being made here,” Burns said. “But the market share battle among producers also will accelerate, and buyers will be in a better position.”
Exports, exports and more exports
Market analyst Phil Karig also was beating the export drum. “The PE story for 2017 will center around exports, exports and more exports,” said Karig, managing director of the Mathelin Bay Associates LLC consulting firm in St. Louis. “With all of the new capacity coming online, producers will be looking to move as much volume as possible offshore and foreign buyers will be positioning themselves to take advantage of U.S. sources of supply.
“Absent exports, there is just not enough total domestic demand growth to keep PE sales growth even at the rate of overall GDP growth in 2017,” he added.
As long as export markets remain strong in 2017, Karig explained, PE capacity utilization will remain high enough to keep margins from falling as sharply as they might otherwise. At the same time, he said, new capacity will continue coming online past 2017, and PE producers “will have to accept some margin compression as they fight for export share in 2017 and beyond.”
At GPS 2016, IHS Chemical’s Nick Vafiadis described the coming wave as “a new era for polyethylene.” He added that “it’s a much more level playing field now — but we could be looking at a historical overbuild.”
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 spite of this wave of new capacity, Vafiadis doesn’t expect older PE units in the region to 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.”
Longtime market watcher Robert Bauman is more blunt in his assessment of how North American PE prices will be affected by the new capacity. “It’s going to be a bloodbath,” said Bauman, president of Polymer Consulting International of Spring, Texas.
Bauman explained that while domestic PE makers “have a cozy advantage” in the export market, there’s already enough existing supply to handle domestic growth. “I don’t see any big new [PE] applications on the horizon, unless there’s some kind of artificial stimulus like a tariff on PE bags that would help production of products here,” he added. “It’s going to be a horrific time for producers in the short-term.”
But Bauman added that he’s not surprised by big capacity moves by market leaders Dow and ExxonMobil. Those two firms “think 20 years into the future,” he said. “They look at sustainable growth of market share over years.”
Potential delays on launch times for new PE capacity might not be a bad thing, according to David Barry, a market analyst with the PetroChem Wire consulting firm in Houston. “Delay is going to be the key word,” he said. 2016 was “a good year in terms of margins, with historic low cash costs, so producers have room to reduce prices and still have healthy margins,” he added.
Exports of PE from North America increased as 2016 went on, Barry said, leading to hope that the material could find a home in new markets in Asia and Africa.
But whether the PE market is adding one pound or a billion, basic things still matter. RTI’s Burns said one regional PE maker just lost an account that bought 30 million pounds of material every year. Buyer and seller had clashed over selling prices for PE in 2016.
“You still have to provide good customer relations and be able to reach an agreement with your customer,” Burns added.