INSIGHT: Fundamentals point the way

07 September 2009 17:46  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--It’s going to be tough, of that there’s little doubt.

Polyolefins producers globally face a period of over-supply and nothing sparkling in the way of polymer demand.

Consumption dropped markedly with the credit crunch and the recession. Recovering 2007 levels of demand will take time.

Consultants’ forecasts make miserable reading and suggest a period of plant closures and producer losses.

Townsend Solutions, for instance, calls the results of its just published 2009 global polypropylene (PP) study “breath-taking”.

It calculates that global PP consumption dropped 3.1% last year (or 1.4m tonnes) from 45.5m tonnes in 2007 and will only grow by 1% in 2009.

Under that scenario consumption reaches 2007 usage levels some time in 2010.

Not so long ago polypropylene was the plastics star.

The projected low rate of consumption growth couldn’t come at a worse time. Demand growth will average 3.7% a year for the next five years, Townsend says.

But over this period an additional 10m tonnes of PP production capacity is expected on stream. It projects demand growth from 44.1m tonnes in 2008 to 52.8m tonnes in 2013. 

Global average capacity utilisations will fall below 80% from 2012 it suggests – more than 17m tonnes of new capacity additions are planned between 2009 and 2013.

Rates at that level, historically, have been associated with operating losses for high cost producers. They have prompted plant closures and project delays.

It is that balance between supply and potentially only achingly slow global demand growth that will characterise business in the polymer over the coming quarters.

Under these circumstances regional differences will become more acute. High costs facilities in lower growth regions will suffer the most.

Currently markets in Europe and the Middle East are tight with reduced propylene supply and low PP operating rates. Polymer prices are being pushed higher.

In the US, higher (polymer) prices are being challenged given relatively weak demand.

And the driving force behind demand from China continues to be questioned.

Signs that China polymer markets are coming off the boil only serve to increase uncertainty.

The fundamentals, however, point the way.

The large Yansab project in Saudi Arabia is currently being brought on stream.

The 400,000 tonne/year Yansab PP unit started up at the end of August with the project’s cracker running at about one-third capacity. PP exports are expected to begin around the end of this month.

Linear low density (LLD) and high density (HD) polyethylene (PE) are likely to be exported from the Yanbu-based facilities from between the end of September and the end of October.

Under current market conditions both established producers and the operators of new facilities might be expected to edge ahead cautiously. No one wants to see prices collapse. Markets are weak and, if current studies are correct, likely to remain so for some time.

Four of the big new PP capacity additions have been due on stream this year. So players in this market are likely to have an early picture of the ultimate impact of the combination of increased volumes and weak demand.

The massive capacity additions are being made at a particularly difficult time and will help change the face of the industry. Uncompetitive capacity, particularly in the big, established producing regions of the US, Europe and Japan, is under a heavier threat.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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