The Risk Of Exhausted Optimism
Source of picture: http://www.thedigeratilife.com/blog/double-dip-recession/
By John Richardson
Global polyethylene (PE) oversupply will be "challenging but manageable" over the next year-and-a-half provided there is no double-dip economic downturn, said Joe Duffy, consultant with DeWitt & Co.
"My analysis suggests that if economic growth continues into 2011 at the same rate as 2010, 2009/2010 expansions should be absorbed by the market with only 300,000 tonne/year of overhang," he added.
"However, more expansions are planned for 2011 which will maintain the overhang into 2012.
"On paper, conditions should start picking up in 2013/14 - but I would expect this to begin in mid-2012, as buyers seek to restock in anticipation."
He estimated that Asian demand growth would be 2.4m tonne this year versus 3.2m tonne/year of new production in Asia and 2m tonne/year in the Middle East.
This would leave oversupply on paper at 2.8m tonnes this year - but Duffy said that this would be reduced by lower European, Japanese and US operating rates as their exports decline.
"These three big industries enjoyed strong exports in 2009, mainly to China. They took advantage of a window of opportunity provided by the strong economic rebound and delays to Middle East start-ups," added a Singapore-based source with a global polyolefin producer on Tuesday.
"Last year was a big relief to all us. Even the marginal-cost producers in Japan and elsewhere could make money."
The US doubled its exports to China last year, but its export volumes could dip very sharply from the second half of 2010, continued Duffy.
And so when you take away what he characterised as the "low hanging fruit" of exports being easily displaced by higher production in the Middle East - and also Asia - this reduces the 2010 surplus by 1m tonnes to 1.8m tonnes.
On the upside more production problems in the Middle East - which has been beset with difficulties in starting-up and stabilising production at new plants - seem very possible.
Linear low-density PE (LLDPE) production might also remain constrained by the shortage of butene-1 co-monomer, the result of lower liquids cracking operating rates on cheaper ethane feedstock in the US.
Higher cost liquids cracker production is also under pressure from the new Middle East capacity, he said.
"Delays to start-ups of alpha olefins facilities (which produce butene-1) have also contributed to the shortage," he said
"Around 1.8m tonne/year of swing LLDPE/high density PE (HDPE) is being commissioned this year, but LLDPE is tight because of the butene-1 shortage.
"It is also more difficult technically to produce LLDPE and so while the commercial guys might want the right mix of grades, from a production perspective - i.e. achieving close to 100 per cent operating rates - it is easier to only produce HDPE."