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.