Full resin supplies will be chasing demand in 2020

More polyethylene and polypropylene resin capacity is heading into the North American market in 2020, and that new capacity will have an impact on processors in the region.

Another 1.8 billion pounds of PE capacity is set to come on line next year from Formosa Plastics Corp. USA. That's on top of almost 4.5 billion pounds added from three suppliers this year and a total of more than 8 billion pounds added from four suppliers in 2017-18.

Looking past 2020, additions of more than 2 billion pounds total are slated for 2021-22. And that's not even counting 3.5 billion pounds of capacity from Shell Chemical's massive project outside of Pittsburgh. Company officials have listed "early 2020s" as the start date for commercial production there.

This avalanche of PE is the result of the development of shale oil and gas throughout the region. Those materials can be used to make PE feedstocks. PP markets haven't benefited as much from the boom, but Braskem will bring on more than a billion pounds of new capacity for that material in the second quarter in La Porte, Texas.

North American PE "will be a buyer's market for the next few years," according to Robert Bauman, president of consulting firm Polymer Consulting International Inc. in Ardsley, N.Y.

He added that regional PP "could have a brief period of tightness" until Braskem starts up its new capacity and if other capacity debottlenecks find a home.

Propane dehyrdrogenation (PDH) projects are on tap from at least two suppliers, increasing the region's output of propylene monomer and clearing the way for more PP capacity if needed.

Most of the new PE — with the exception of the Shell project — is slated for overseas markets. But the tariff war between the U.S. and China is creating a challenge for PE exporters. They've weathered the storm so far, but new PE capacity in Asia is making that region more self-sufficient, potentially threatening demand for material from outside of the region.

"The PE and PP markets have been polar opposites on the supply and demand cycle, but PP is turning the corner," market analyst James Ray of Houston-based consulting firm ICIS said in a recent email. "PE is amply supplied and will be even more so in 2020 with new capacity coming on line. But U.S. demand growth has spiked, driving record U.S. consumption, as a result of Chinese tariffs and lower PE prices." 

North American PE makers have become increasingly dependent on exports to help offset new capacity and to replace exports to China that have fallen — particularly for high density PE — as a result of tariff strife between the U.S. and China, said Phil Karig, managing director of consulting firm Mathelin Bay Associates LLC in St. Louis.

He added that during 2019, U.S. PE exports to the European Union have been making a dent in the market share of exports from the Mideast to the EU. 2020 should be much of the same, Karig said, with North American PE makers "extremely dependent" on continued growth in exports as a means of tightening what would otherwise be a much looser market.

And 2020 should have abundant supplies of low and linear low density PE, according to Esteban Sagel, principal of the Chemical & Polymer Market Consultants consulting firm in Houston. Exports could account for as much as 35 percent of North American LDPE production next year and an amazing 48 percent of all LLDPE made in the region, he added.

HDPE "will be a bit more balanced," Sagel said, with exports accounting for about 24 percent of production in 2020. "Domestic spot prices are getting better aligned with international prices, and lower spot prices will continue to pressure contract prices down," he added. "Low ethane costs will soften the pain, but margins also will be pressured down."

On the PP side, Sagel said that improving propylene supplies are helping bring down propylene prices, which "provides some respite" to PP makers. Spot prices have also lined up with international prices, but domestic contract is still enjoying "a nice spread" over spot, he added.

Karig said that North American PP makers in 2019 saw lower propylene costs than in recent years, but marginal increases in PP capacity and substantial PP price reductions "were more than enough" to cancel out any producer benefit from lower costs.

2020 will see continued marginal increases in PP production capacity, which should be more than enough to help keep the market comfortably supplied, he added.

At ICIS, Ray said that North American PP has become marginally balanced after growing tighter for several years and will become "comfortably balanced" in 2020. More importantly, he added, propylene has also become comfortably balanced, combining to give PP buyers some relief from "the past roller coaster PP prices" seen in 2017-18. 

Sustainability initiatives, legislation, recycling cost and infrastructure will have an impact on both PE and PP demand, Ray said. Among other commodity resins, North American processors also should have little difficulty sourcing PVC, PET bottle resin or solid polystyrene in 2020, according to market sources.

PVC makers will add incremental capacity via debottleneckings to handle any supply needs, sources said. North American PVC demand growth has been solid, although perhaps lagging a bit based on the strong growth numbers posted by the U.S. housing market in the second half of 2019.

PET remains in oversupply both in North America and on a global level. Global operating rates are expected to be 70-75 percent in 2019-23, below the high 80s to low 90s that sources said would indicate a healthy market. Carbonated soft drink demand continues to decline in the region, with bottled water demand still growing, but at a slower rate than in years past.

Virgin PET is also facing challenges from sustainability-fueled demand for more recycled PET, IHS Markit analyst Tison Keel said earlier this year. But Keel added that virgin PET will still be 90 percent of the market by 2025.

Keel projected that U.S. recycling rates would need to be more than double their current levels to meet consumer brand objectives and "it's hard to reach that target by 2025." He added that recycled PET currently faces a pricing challenge since it's more expensive than virgin material.

The regional solid PS market continues to slowly erode, although it remains entrenched in some foodservice and food packaging applications. PE and PP have continued to take market share from PS based on lower costs and perceived recyclability, said Karig at Mathelin Bay.

"At this point, PS producers are resigned to lower sales pounds and keeping prices high in relation to competing resins for whatever applications they still have," he added.

In commodity pricing, solid supplies and moderate demand growth sent regional prices for PE, PP and PET bottle resin down in the first 11 months of 2019, according to the Plastics News resin pricing chart. PE and PET prices both were down a net of 6 cents per pound, with PP prices down a net of 9.5 cents per pound.

A recent report from Reuters Events observed that "spot prices for [PE], the plastic mainly driving the petrochemical construction boom, have fallen, and this is cutting into margins." But the report also commented that "the abundant shale resources of North America continue to make it an exceptional place for investment."

Regional prices for PVC were flat vs. Jan. 1, with very minor increases and decreases seen during the year. PS prices were up 3 cents per pound for the period, as resin prices followed those of benzene feedstock, which is used to make styrene monomer.

On the engineering resins front, things had started to look better for nylon 6/6 after two years of tight supplies, but a recent explosion and fire at a butadiene feedstock plant in Texas could impact supplies of some types of nylon 6/6 once again.

Nylon 6/6 has been in short supply for almost two years because of global feedstock issues. IHS Markit analyst Brendan Dooley said earlier this year that the material "is short but pretty balanced" with global operating rates of 80 percent.

In addition, the nylon 6/6 market has been affected by hurricanes, cold weather, droughts and labor strife. All in all, Dooley said the nylon 6/6 chain has experienced 16 disruptions in the last couple of years.

But capacity additions for both nylon 6/6 resin and for adiponitrile (ADN) feedstock should bring relief to the market as soon as 2020, when Dooley said 6/6 will be competitive with nylon 6. Until then, higher prices and tight supplies will be expected for 6/6.

By comparison, nylon 6 "is in global oversupply and will continue to be for quite some time," according to Dooley. Operating rates for the material are a little over 60 percent, a level that he said "is too low for profit."

Polycarbonate resin was in short supply as recently as 2016 but was oversupplied by 2018 as a result of a 30 percent global capacity addition. Most of that new capacity was added in China. PC operating rates in turn have dropped from 80 percent to close to 60. Prices that had been high also have declined, Dooley said.

The global ABS resin market already was experiencing some tightness before the potential butadiene shortage. Dooley said that ABS demand has been growing at a faster rate than capacity growth. The market remains centered in Asia, where 70 percent of global production is located.