Dow Inc., one of the world's largest polyethylene resin makers, is temporarily reducing global nameplate capacity for that material by approximately 15 percent.
A spokesman for Dow in Midland, Mich., confirmed the move in an Aug. 25 email to Plastics News. He added that the move isn't based on current capacity utilization rates.
In an Aug. 24 letter to customers obtained by PN, Dow Packaging and Specialty Plastics President Diego Donoso said that the cutback was tied to "continued global logistics constraints," including port and rail congestions in the U.S. Gulf Coast and "dynamic conditions" in Europe.
"Dow remains committed to meeting your demand and fulfilling your order list and will continue to do so while managing production in line with supply chain and logistics constraints," he added. "The duration of these measures will be determined as market dynamics in Europe and pressure on constrained logistics normalize."
Donoso also said that Dow "expects these actions to help balance elevated inventories in warehouses and at key ports around the world and its logistics resiliency, particularly in the [U.S. Gulf Coast region] ahead of the most active part of the annual hurricane season in the U.S."
Dow operates about 17 billion pounds of global PE capacity, including about 7 billion pounds in the U.S. Taking out 15 percent of capacity would remove about 2.6 billion pounds from production, roughly the equivalent of one world-scale PE unit.
The Dow production cuts come at a time when Shell Polymers plans to add more than 3 billion pounds of PE capacity at a new petrochemical complex near Pittsburgh by the end of the year. Earlier this year, ExxonMobil's Gulf Coast Growth Ventures joint venture started production at two new PE units with almost 3 billion pounds of capacity in Corpus Christi, Texas. GCGV is a 50-50 joint venture between ExxonMobil and Saudi Basic Industries Corp. of Riyadh, Saudi Arabia.
"With the flood of new PE capacity starting to come online, it's not surprising that there will be some attempts to proactively dial back inventories and operating rates," market analyst Phil Karig said in an email to PN. Karig is managing director of Mathelin Bay Associates in St. Louis.
"Unfortunately for resin suppliers, the chances of enough companies following Dow's lead to make a real difference are small — not because other suppliers don't want to see the market tighten in the face of declining prices and rising supply, but because ethylene costs are still low enough to tempt at least some suppliers to continue pumping out pounds even if it means smaller margins," he added.
Karig also said that, at best, the Dow cuts are "a very short-term solution to a much bigger PE overcapacity situation that may be compounded by decreasing PE demand in a slowing global economy."
In an email to PN, Esteban Sagel, principal of Chemical & Polymer Market Consultants in Houston, said that he was not surprised by the Dow move since PE prices are "continuing to slide."
"Throttling down production is an attempt to bring tightness to a market that has finally started to move into an oversupply situation," he added. "The impact of the COVID pandemic on logistics and packaging demand, as well as [Gulf Coast] extreme weather in the last two years, helped delay what was expected, [that] production increasing beyond demand growth and prices moving lower."
COVID continues to be a factor in the polyethylene market, according to Sagel.
"China's zero tolerance policy means demand in the country is not as healthy as it could be," he said. "It also results in logistics delays and continuation of the high freight costs. Domestic logistical issues in North America are also impacting producers' ability to export as they should."
The Dow action is "an understandable move in the current marketplace, and I wouldn't be shocked to see other producers act similarly," said Jeremy Pafford, North America head at data firm ICIS in Houston.
"Just in North America, PE inventories are near record levels at a time when additional production capacity is set to come online," he added. "Demand at home and abroad is increasingly challenged. Pulling back on production is a logical economic decision in the short term until the market can soak up some of these inventories."
In the second quarter, Dow's P&SP unit — including PE — saw sales grow 15 percent to $8.2 billion, although operating earnings before interest and taxes slid 30 percent to $1.4 billion. The unit's sales volume was up 5 percent for the quarter, primarily from gains in energy, infrastructure and packaging.
North American PE prices fell 3 cents in July and more decreases are expected this month as demand levels off and supplies increase. Prices for the material had surged since early 2020 because of the COVID-19 pandemic and the ice storm that hit Texas in early 2021.
Dow employs almost 36,000 worldwide. The firm is one of the world's largest producers of PE and other specialty plastics and chemicals.