Prices for LDPE, LLDPE, some HDPE grades drop 3 cents in August

A chaotic month of North American resin pricing ended with 3-cent per-pound reductions for most grades of low and linear low density polyethylene and for film and other flexible grades of high density PE.

The drops ended a stretch in which prices for all grades of HDPE and LDPE had been flat for four consecutive months. LLDPE prices had been flat for two straight months after sliding 3 cents in May.

There were exceptions to the 3-cent decreases in some applications. Some buyers reported no price drops for injection molding and rotational molding grades of LLDPE. Some grades of HDPE used in medium molecular-weight film also didn't see the decrease.

No price drops for August on injection molding and rotational molding LLDPE and on MMW film HDPE are being shown on this week's Plastics News resin pricing chart. Decreases on those materials could be shown at a later date pending the outcome of negotiations.

Market analyst Mike Burns said that the August drops were supplier-driven.

“July had one of the highest PE production months of all time,” added Burns, who is with Resin Technology Inc. in Fort Worth, Texas. “Demand is good for all [PE] resins, but supply is outpacing demand.”

“All of the Hurricane Harvey hiccups [from 2017] have been resolved and new capacity is beginning to show. Exports were very high in July and inventories grew, which is not a good thing for producers.”

Other market sources said that U.S. PE exports were down in August, especially for material being shipped from the Houston Ship Channel. Massive PE capacity expansions are hitting the market as a result of abundant North American supplies of shale gas feedstock.

In 2017, more than 7 billion pounds of PE capacity was added in North America through projects from DowDuPont, ExxonMobil, Chevon Phillips and Ineos Sasol. Around 3 billion more pounds from DowDuPont, Sasol and Formosa Plastics is set to be added by the end of 2018. For 2019, another 2 billion pounds is expected from Sasol and LyondellBasell.

Although domestic market demand growth has been solid, a good portion of this capacity had been earmarked for foreign markets. That situation became complicated in August when China retaliated against U.S. tariffs on a wide range of Chinese products by placing tariffs on many U.S.-made grades of PE.

New Chinese tariffs of 25 percent on U.S. HDPE and LLDPE went into effect on Aug. 23, according to consulting form MTS Logistics of New York. These tariffs “have shook the shipping industry,” MTS executive M. Can Fidan wrote in a Sept. 10 blog post on the firm's website.

Despite higher PE volumes being exported at the beginning of 2018, the ongoing trade war between the U.S. and China has started reducing demand for U.S. PE exports, he added. U.S. tariffs of 25 percent on more than $16.5 billion worth of plastics goods imported into the U.S. from China also will negatively affect demand for U.S. PE in China, Fidan wrote.

“Unfortunately for the U.S., alternative [PE] markets are mostly much smaller than China,” he added. “Those markets also don't have as many sophisticated buyers as China, so U.S.-grade product may not be a good fit for them.”

According to Fidan, if U.S. producers don't reduce PE prices — and the U.S.-China trade war continues — the Asian market “may further slow down without China's huge capacity fueling demand.”

As much as 20 billion pounds of new U.S. PE capacity could be affected by the tariffs, according to a recent report from market data firm S&P Global Inc. of New York. HDPE and LLDPE account for almost 80 percent of all new U.S. PE capacity, the report said.

The first wave of Chinese tariffs, put in place earlier this year, targeted only LDPE, which makes up a smaller amount of the new capacity.

The report added that “at least some U.S. [PE] producers are likely to feel the pinch, after building plants that saw Asia's largest countries as their main export targets.”

Another recent report from market data firm ICIS of London said that the introduction of trade tariffs by China and the U.S. “is the first step in a trade war that could turn into a global [PE] price war as the wave of new U.S. production is sent to new markets, likely Europe.”

China 'impossible to ignore'

Market analyst Phil Karig said that “it's impossible to ignore the importance of China to the North American PE market.”

“In the short-term, the tariff quarrel is going to cause China to source PE in other parts of the world such as the Mideast,” said Karig, who's managing director of Mathelin Bay Associates LLC in St. Louis. “What China doesn't buy from North America is going to have to go somewhere, but there are not a lot of other market choices for resin producers.”

Europe is already a strong market for Mideast PE, either shipped directly or from Mideastern producer owned plants in Europe, he explained. South and Central America are and will continue to be important PE export markets, Karig added, but there's only so much they can consume and they'll never replace the bulk of lost Chinese demand.

Longer-term, according to Karig, if the tariff spat becomes a continuing and full-fledged tariff war, questions will start to arise about the continued expansion of North American capacity. “Unfortunately for those resin producers well along the way to starting up plants in the next few years, stopping construction midstream is much like trying to stop an ocean liner on a dime,” he said.

Paul Bjacek, chemicals research lead for consulting firm Accenture in Houston, said that PE “is a commodity that flows globally, with price direction set by the global balance, so any time new capacity comes online, there will be trade flow adjustments with short-term price impacts."

"Trading global commodities is like Chinese checkers," he added. "If one avenue is blocked, another is open."

For instance, Bjacek explained that Europe is a large PE importer largely being served by the Middle East, importing 1.8 billion pounds of HDPE from there in 2017. So, he added, in that example, U.S. product may be diverted to Europe and the Middle East then could divert product to China.

Major U.S. plastics and chemicals trade groups have been critical of the trade war.

“These tariffs will close off China's market to U.S. exports just when our industry was ready to supply China's large and growing demand for chemicals,” Ed Brzytwa, ACC's director of international trade, said Aug. 20 at a U.S. Congressional hearing. “Trade flows between the U.S. and China will contract as tariffs are imposed on each side.”

In July, Plastics Industry Association CEO Bill Carteaux said that tariffs would raise prices in the U.S. manufacturing supply chain and be a “net negative” for U.S. industry.

“Small- and medium-sized companies in the plastics industry will be subjected to a profit squeeze due to higher costs of inputs of production,” he said, noting that plastics companies supply a broad range of end-markets such as medical, automotive, building and construction, electronics, consumer products and packaging.

“We urge [the U.S. Trade Representative] to pursue other strategies that would instead lead to greater market access of plastics materials and products in China,” Carteaux added.

Backed by new production capacity, export sales of PE had fueled U.S./Canadian PE growth in the first seven months of 2018, according to the American Chemistry Council. Exports of LLDPE in particular had exploded, growing 80 percent vs. the same period in 2017.

LLDPE exports, combined with domestic demand growth of 4 percent, lifted total regional LLDPE market growth to almost 21 percent for the period.

HDPE exports from the region were up an impressive 25 percent for the seven months. Those levels and 7 percent domestic growth created seven-month HDPE growth of more than 10 percent. Growth in LDPE exports was far more modest at almost 2.5 percent. That combined with domestic sales growth of just over 1 percent produced seven-month LDPE growth of 1.5 percent.

Exports accounted for almost 33 percent of U.S./Canadian LLDPE sales for the first seven months of the year, up from about 22 percent in the same period in 2017. HDPE's export market share grew from 18 percent to almost 21 percent in the same comparison, while LDPE's export market share remained steady at around 26 percent.