The shale gas boom has turned the North American market for polyolefins upside down. And, according to market analyst Nick Vafiadis, it doesn't appear to be flipping back anytime soon.
Vafiadis, polyolefins and PVC business director with IHS Chemical in Houston, spoke at the 2012 Plastics News Executive Forum, held Jan. 30-Feb. 1 in Tampa. He described the impact of newfound discoveries of shale gas on the North American polyethylene market as “wholly unexpected.”
Natural gas can be used as a feedstock to make ethane, which is then used to make plastic feedstock ethylene. “Natural gas has only one-third the cost of crude oil as an energy source,” Vafiadis said. “And this is not a short-term phenomenon.” This price differential is “a significant advantage” for U.S. PE and ethylene producers, though only 33 percent of global ethylene is sourced from ethane, he added. Development of shale gas resources has caused a major increase in U.S. natural gas reserves, which now are estimated at 100-150 years of supply.
That development has been made possible by use of hydraulic fracturing and horizontal drilling. Vafiadis said that environmental concerns about these methods “won't slow production.”
One challenging side effect, however, of increased ethane use is its lower production of propylene and butadiene feedstocks. Prices for these materials — used to make polypropylene, ABS and high-impact polystyrene — could be higher as a result, he said.
Vafiadis added that the view of the North American PE market has changed dramatically from just five years ago, when North America “had no feedstock advantage, domestic demand was shrinking and capacity was moving away from North America.”
“We thought the U.S. would be a net importer of polyethylene, but now we're attracting major new investments in the U.S.,” he said.
Abundant feedstocks will allow North American PE to have strong demand in export markets for the next several years, but that doesn't necessarily mean domestic PE prices will decrease. “Regional supply issues and ethylene outages are driving the [resin] price,” Vafiadis said. “Ethane is no longer linked to natural gas, but [is] more closely linked to competing feedstocks.”
Currently, Vafiadis said PE prices “bottomed out” in November, but may be heading up in the first quarter of 2012, especially since inventories are tightening at the producer level.
Looking ahead, Vafiadis estimates North American PE demand will grow at a sub-gross domestic product level of 2.2 percent annually from 2011-16. During that period, PE use in the pipe and profile market will fare best, with growth of almost 6 percent, he added.
Global PE demand is expected to be stronger, averaging 5 percent during that period. That stretch also will create record profits for North American PE makers at a time that previously was expected to be a trough period.
New capacity in the Middle East and China will be absorbed by demand, Vafiadis said, creating a less-dramatic impact on pricing and margins. Packaging and film markets also will continue to recover at a “moderate pace,” he said.
The PP market will continue to struggle, as the shift to light feedstocks “has taken a tremendous toll in propylene supply,” equaling 6 billion pounds of propylene being taken out of the marketplace.
PP “has become increasingly expensive vs. other resins it competes with, whereas before it had been affordable,” Vafiadis said. Pricing volatility also is expected to continue in the PP market, as evidenced by the 22-cent increase nominated by suppliers for Feb. 1.
“Demand levels [for PP] are decreasing, volatility is increasing and U.S. prices are the highest in world,” Vafiadis said.