The Middle East may set polyolefins pricing

This was the warning from Bob Bauman of Nexant ChemSystems at last week’s 25th Annual Petrochemical Conference in Houston, Texas.

Read below for some rather gloomy predictions of where markets could be heading in 2011-12Premonitions of a painful hangover abounded at the 25th Annual Petrochemical Conference* in Houston, Texas, last week as delegates sensed that the party was approaching its end.

But what a spectacular end it’s likely to be as the champagne corks pop in a final crescendo of glorious profits.

Bob Bauman, vice president of polymers for Nexant ChemSystems, predicted that both polyethylene (PE) and polypropylene (PP) global operating rates could hit 91% by the end of this year, even if there are no unplanned shutdowns.

“The next 18-24 months will be a seller’s but market, but this will change to a buyer’s market in 2009,” he told the delegates.

He predicted that the downturn would begin in 2010 and would reach its bottom in 2011-12. PE operating rates would be slightly above their low point during the last cycle trough, which was in 2000-01, but PP capacity utilisation could actually be worse.

The predictions were based on no major economic down turn, meaning even if growth remains resilient there is enough new capacity coming on stream to make life very tough for higher-cost producers.

One senior executive, in the process of building very competitive new capacity, conceded that his older and less efficient plants might have to be mothballed until the end of the trough.

“We have seen 48 months of polyolefins prices at two times naphtha. This has been unprecedented – the longest fly-up in the history of the industry,” he said.

“Pricing could fall to 1.2-1.3 times naphtha during the down cycle. This would compare with 1.1-1.2 times naphtha in 2000-01.”

The industry confronts the perfect storm of 23m tonne/year of ethylene capacity under construction in the Middle East, the large ramp-up in capacity in China, and a surge in output from Latin America.

“More new crackers and expansions are being planned in Latin America than in Asia, Europe and the US combined,” said Bauman. Latin America is planning 5.5m tonne/year of additional PE and 2.5m tonne/year of PP.

And here’s the rub: most of the Latin American capacity and all the Middle East capacity is based on advantage feedstock.

This led to the most terrifying prediction of all, that it will be the Middle East which will set prices during the next downturn rather than the naphtha-based laggards.

The Middle East has always let the South Koreans, the Japanese and the other high cost producers set prices for a very obvious reason: if pricing is based on naphtha, the margins for anybody operating on ethane are fantastic.

But Bauman’s contention, supported by several other delegates, was that the Middle East would face ferocious competition in export markets from new, low cost competitors in Latin America.

This would combine with lower shipments to China – the result of the country’s commitment to import substitution – to result in the Middle East no longer being able to guarantee that all its exports would be absorbed by Asia, Europe and Africa.

As for the other side of the globe, Latin America is forecast to be balanced on PE and surplus on PP by 2015.

Imports into the region will therefore diminish. This is bad news for the South Koreans who often turn to Latin America when Chinese demand weakens.

The imports that do take place could increasingly be the preserve of the Middle East. Bulk shipment to Houston first and then transhipment in smaller lots will probably be more cost effective than direct trade.

Logistics advantages and possible further free trade agreements mean that the Latin Americans are ideally placed to serve growing US deficits.

The US, faced with high feedstock costs and a hollowing out of its manufacturing base, is adding no further PE or PP capacity. As a result, Nexant forecasts that it will have a high-density PE (HDPE) deficit of more than 1.5m tonnes, a low-density PE (LDPE) of above 2.5m tonnes and a PP deficit of over 500,000 tonnes by 2014.

And so how good will pricing be over the next 18-24 months and how bad will it get during the downturn?

The answer to the first question, according to Bauman, is peak pricing of $1,800-1900/tonne in mid-2008. Lack of new capacity and the risk of outages outweighed the economic risks from the sub-prime crisis, he said.

Nobody would hazard a prediction as to where pricing would end up in 2011-12.

But here’s a sobering thought to take the fizz out of your champagne: ethylene cash costs of production in Saudi Arabia are expected to be $200/tonne compared with more than $500 tonne in South Korea and more than $600/tonne in Japan in 2010. This would leave the Saudis with a huge room to discount.

*The conference was organised by Nexant ChemSystems and ICIS.

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