Global PE trade data shows little room for major US expansion

Global PE Feb13.pngThe blog is constantly astonished by the lack of interest in many companies in the vital field of trade data. No business today, no matter how large and well-connected, can possibly hope to understand market developments without constant analysis of this data. Ironically, the lack of interest comes at a time when the quality and accessibility of the data has never been higher.

The chart above, prepared by the blog’s colleague Bob Townsend, illustrates the value of such analysis. It maps the changing trade balance on polyethylene (PE) between the major global regions between 2009-12, based on Global Trade Information Services data and highlights:

• The growth in Middle East (ME) exports at a time when China’s import requirements have stabilised. Effectively the ME has taken market share from other suppliers such as NEA, NAFTA and the EU since 2009
• NAFTA exports were supported in 2010-11 by the ability to shift sales from China to Latin America. But the data also shows that Latin America’s import volume reduced during 2012. This trend is likely to continue as its growth rates slow and local production increases

This analysis has critically important strategic implications for producers:

• It is highly likely that China’s import volumes will decrease in coming years, as it expands domestic capacity. This is not based on economic incentives (China is amongst the highest-cost producers in the world), but on the need to create local jobs to avoid social unrest
• In turn, this raises major question marks over planned expansion projects in the US and elsewhere. These are based on the belief that favourable shale gas economics will provide competitive advantage. But in a low-growth environment, new low-cost production will have to force closure of existing capacity, if it is to find a home

This may happen on a small scale. But China will not cancel current coal-based and refinery-linked expansion projects in order to increase import volume. Sinopec, China’s major producer, is 76% owned by the government, and has never focused on profitability. Thus it invested Rmb 181bn in chemicals capital expenditure between 1998-2011, but earned total chemicals EBIT (Earnings Before Interest & Taxes) of just Rmb 110bn over the same period.

Europe is also unlikely to shut capacity easily, as these are mostly linked with refineries. Recent developments with the bankrupt Petroplus refineries shows governments are understandably worried that any closures may jeopardise energy security and cause job losses.

The obvious conclusion is therefore that planned new capacity in the US and elsewhere will have to fight very hard to gain market share from incumbent suppliers.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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