AFPM 2013: Where will the new output go?

22 March 2013 13:41  [Source: ICB]

US olefins and polymers markets are facing pressures from uncertain end-use markets, rather than high feedstock prices

The US olefins market seems to have its feedstock issues largely sorted out, leaving the evolution of end-market demand as its biggest concern.


 Exports of polyolefins from the US are set to rise sharply

Copyright: Borouge

With a spate of ethane crackers scheduled for construction in the coming years, using cheap shale gas as feedstock, market players expect ethylene costs to go down and margins to increase. Propylene supply is expected to be bolstered by construction of several propane dehydrogenation (PDH) units, creating a cheap supply of on-purpose material. However, cheap feedstocks are no guarantee of strong future sales.

"At the end of the day, 6bn lb (2.7m tonnes) of propylene derivatives have to be exported," says Dan Lippe, president of Petral Consulting Company. "It's the same thing for ethylene, only more so."

Announcements by market players have projected that an additional 10m tonnes/year of ethylene capacity will be started up in the US by 2017.

Lippe argues that the US ethylene cost structure must change in order for downstream derivatives such as polyethylene (PE) and polyvinyl chloride (PVC) to flourish on the export market. "The industry is basing its costs on the very highest-cost basis of production, using naphtha," Lippe says. "That has to change."

Another consultant notes that the key issue remains what US PE and PVC prices are relative to overseas prices, rather than ethylene. "Right now, the ethylene guys are making all the margins because supply is tight," the consultant says. "Once we get all this new ethylene, the margins will shift downstream."

For 2012, export sales of PE accounted for roughly 17-22% of total sales for the year, according to the American Chemistry Council (ACC). By the end of the decade, the share of US PE production going into exports could rise to as high as 42%, according to Laurence Alexander, an analyst with the banking group Jefferies.

That potential growth in the US export market is what is fuelling capacity expansion talk in North America. While much of the talk has centred on the ethylene market, there have been a few announcements in the PE arena. ExxonMobil, Chevron Phillips Chemical, Dow Chemical, Formosa Plastics and Shell Chemicals have each announced at least tentative plans to build PE units downstream of proposed crackers or cracker expansions.

There is even talk of a start-up company - Appalachian Resins - which has announced plans to build a 500m lb/year PE plant at an undisclosed location south of Wheeling, West Virginia. Details about investors for the proposed plant have not been released.

"There are some of those that are pretty well going to happen," says one market participant, referring to projects such as Chevron Phillips' and ExxonMobil's, which are further along in the planning process. "The other ones are a little more tenuous."

One producer adds that the increase in export demand will lead to more stable pricing in the future, with fewer swings up and down. The producer says that dynamic would also take away some of the power of North American buyers. "It will be a seller's market," the producer warned.

However, another producer is more sceptical of the improved export market for the US, adding that even as the US adds capacity, other countries are adding capacity as well. There is no guarantee that the global market will buy the excess US material, says the producer.

Another risk is the possibility of exports of liquefied natural gas, adds the producer. "That has kind of reared its ugly head," the producer says, adding that it could have a negative effect on feedstock pricing in the US and on "that advantage that everybody is betting on over here."


Stretch and shrink wrap film are two prime areas for domestic growth for PE

Copyright: Rex Features

A similar trend will be key for propylene and its derivatives, mostly in the polypropylene (PP) market. Thanks to the expected cost advantages of PDH technology, at least seven new units have been announced with start-up dates between 2015 and 2018. At least 3m tonnes/year of new propylene capacity is expected, and most of the projections have an additional 6m tonnes/year coming out of the US market.

Most of that new capacity will have to be sold as PP or acrylonitrile (ACN). Exports of cumene derivatives will likely be driven more by the US benzene market rather than the propylene market.

"We have three years to gear up to sell 6bn lb/year that we aren't selling," Lippe says.

The future health of the PP industry remains in question, with market participants split on the effect that the announced PDH units will have on the PP market. Jim Gallogly, CEO of LyondellBasell, said during a company conference call that he is sceptical that everything that has been announced will be built. "We'll see if all of those projects happen," Gallogly said. "I'm a bit more sceptical, the most on this propane advantage. It's very, very strong right now, but as you know, propane, unlike ethylene, can be put on a boat. And over time, there will be more propane export here in the United States."

Other producers are convinced that PDH units will change the market, creating more propylene which will result in capacity expansion in the PP market. "PP will begin to be like PE - you will approach the lower producer cost structure, and then you will begin to see PP decouple from propylene," the producer argues. "You will have globally competitive pricing."

Domestically, ethylene margins remain strong, owing to continued cheap ethane costs and high spot prices. Through the end of February, US spot ethylene trades were averaging 62.80 cents/lb in 2013, up from an average of 61.07 cents/lb through the same period a year ago.

The higher ethylene spot prices pushed margins on ethane-based spot material to a near-record high of 60.03 cents/lb for the week ended 28 January 2013. Since then, margins have dipped to 54.95 cents/lb at the start of March on improved supply from several cracker restarts.

Downstream, PE prices are following a similar trend as in 2012, with increases in the first half of the year and expectations for prices to retreat in the second half, following the completion of several cracker turnarounds.

With a similar pricing pattern, market participants are also expecting a similar rate of growth in the market for 2013 as was seen in 2012.

For the full year of 2012, high density polyethylene (HDPE) saw sales growth of about 2.2%, low density polyethylene (LDPE) saw sales growth of less than 1%, while linear low density polyethylene (LLDPE) saw a sales decline of around 1.7%, according to resin statistics from the American Chemistry Council (ACC).

The 2012 growth rates are close to the US GDP growth of 1.5% for 2012. One producer says it expects a similar alignment in 2013, with possible improvement as the US economy improves. "Domestic demand hasn't grown a whole lot in the last 10 years, but the domestic market should be better this year, I think, because the economy is marginally better than it was last year."

The automotive sector, which is not currently a huge demand pull for the PE market, may become more of a factor in 2013, according to one producer. Another area of growth for the industry could be shrink and stretch film, for which demand will improve as the construction market improves, the producer says.

However, the real future growth for the US PE market is expected to come from export demand, particularly as low cost feedstocks continue to give US producers a cost advantage, sources say. Domestic propylene contract prices appear to be falling gradually after hitting a 20-month high in February 2013 on tight supply.

Several cracker outages and an unplanned 23-day turnaround at PetroLogistics' PDH unit tightened supply considerably, pushing February PGP contracts to settle at 79 cents/lb.

Contracts were expected to fall in March by 5-6 cents/lb, as demand weakened because of high inventories downstream. Supply is expected to be balanced to tight for the rest of the first half of the year, as cracker production is limited by lighter feeds and US refineries keep operating rates below 90%.

The low operating rates and tight propylene inventories have also kept RGP spot prices high and at a narrower premium to PGP.

PGP premiums over RGP have fallen to an average of 2.97 cents/lb for the first nine weeks of 2013, compared with premiums of 7.31 cents/lb for the same time period a year ago.

In the polypropylene (PP) market, feedstock pricing volatility has resulted in weak demand in the first quarter, with prices rising by 21 cents/lb, or nearly 31%, in the first two months of the year.

In addition to the feedstock increases, PP producers were able to add a penny margin so far in 2013, with at least one producer switching many of its contracts away from monomer-based pricing to an index-based pricing.

While market participants had expected PP pricing to be more stable in 2013, the pricing trend so far for the year is following a very similar pattern to 2012, when prices rose by 38% in the first three months of the year.

In 2012, the PP market saw a sales growth of less than 1%, according to data from the ACC. Domestic sales improved by more than 1%, while exports fell by 11% for the year, according to the ACC.

At least one producer says it expects slightly better sales growth in 2013, adding that it expects to see around 2-3% growth for the year. Growth has been strong in injection moulding applications, as well as in compounding and the automotive sector.

"Automotive sales are booming and manufacturing is beginning to swing back to the US, so you will have a huge increase on the demand side," one producer says. "But right now, prices are too high."

US butadiene market facing weaker demand and tighter supply


Replacement tyre sales have been weak in the US, impacting SBR demand

Copyright: Rex Features

The US butadiene (BD) market is facing demand issues, which are outweighing supply concerns. US BD contract prices have fallen to 84 cents/lb ($1,852/tonne) in March, down from year-ago levels of $1.45/lb.

The 42% drop in contract values has been largely driven by weak demand from the key styrene butadiene rubber (SBR) market. Although most SBR goes into automotive tyres, and US automotive sales have been strong in 2013, sales of replacement tyres have fallen drastically.

Replacement tyre sales are the key driver of SBR, rather than new automotive sales. Sources say the fall in replacement tyres can be attributed to strong sales of new cars replacing older ones that would need new tyres, as well as weak economic conditions.

US 2013 sales of light vehicles and trucks are at 2,235,352 units through February, up by 8.4% year on year from 2,062,722 units.

The weakness in the US domestic market has pushed players' eyes toward Asian rubber and tyre markets. "The price increase in March was not unexpected," says one market source. But given the high BD inventories following the layoff for the Chinese Lunar New Year, "it's hard to get ultra bullish about any further increases in BD prices going forward".

Another market participant says that the key for BD prices in Asia going forward will be how derivatives such as butadiene rubber SBR respond.

"Unless we see some demand pull, it's probably going to be difficult for BD to get a whole lot higher," the market participant says.

Another source adds: "We're watching the Asian market very carefully to see if there's real demand from the rubber producers."

There's also concern that Asian producers could cut production even further if BD prices rise further.

In the downstream market for acrylonitrile butadiene styrene (ABS) copolymer, demand has been steady to strong to start 2013, sources say.

Most of the strength has come from an expected rebound in the US construction market, as consumer electronics demand has been steady at best.

However, the increase in demand from the ABS market is not expected to be able to overcome its smaller sales volumes compared with SBR, keeping US BD demand soft for the first half of 2013.

On the supply side, market sources say the continuing switch at US crackers to lighter feeds is a long-term issue, but short-term supply is balanced because of the weak demand.

According to consulting firm Jacobs Consulting, January BD production was 256m lb (116,000 tonnes), up by 2% year on year from 251m lb.

However, imports of BD into the US fell by 20% year on year, according to the US International Trade Commission (ITC).

Imports in 2012 totalled 590,036 tonnes, down from 734,788 tonnes a year ago. Most of the fall came from dropping imports from Colombia, Iraq, Algeria and from Canada.

Author: Michelle Klump and John Dietrich

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