Commentary: US polyethylene supply to surge

While some US polyethylene projects associated with new crackers yet to start construction are at risk, there will still be substantial new capacity starting up through 2018

With US polyethylene (PE) margins the most robust by far among their polymer brethren, it’s no wonder that the vast majority of new capacity expansions will be in the plastic through 2018. Years of robust profitability underpinned by cheap and abundant US shale gas feedstock have spurred a wave of PE projects that will materially change the game in local and global polymers.

Producers are planning a total of 17 new PE units at nine locations in the US that could bring around 8.7m tonnes/year of capacity on line by 2018, representing a massive 56% increase in the existing capacity base.

In North America, including planned projects in Mexico and Canada, the sector is looking at a 10.6m tonne/year gain in PE capacity, or a 54% expansion of the existing base.

But the crash in crude oil prices will likely blunt some of the ambitious plans as PE prices have followed oil prices downward, though not to their full extent. The PE projects most at risk are those associated with new ethane crackers that have been announced but not yet broken ground. Companies are reevaluating their plans for these new crackers, in light of the new oil price reality. Chemical prices tend to follow crude oil prices, even as in the US, much production is based on natural gas.

So stripping out the PE projects at risk, we still have around 6.0m tonnes/year of US PE capacity, or 39% of the existing US base, likely to be added with most of those projects already under construction. For North America, the likely capacity additions come out to 7.5m tonnes/year, or 38% of the total base. That’s still a substantial chunk of new capacity.

While a good deal of the new capacity will be targeted for export, the massive expansion in US PE capacity should be a boon for converters. Converters are already benefiting from lower plastics prices resulting from the oil price decline.

As the stock prices of producers such as LyondellBasell and Westlake Chemical have declined sharply from their highs in recent months, share prices of converters such as Berry Plastics, PolyOne, Sealed Air and Crown Holdings are near multi-year highs.

US-based plastics packaging company Berry Plastics said on its Q4 2014 earnings conference call in late January that it expects lower resins raw material prices to result in higher cash flow, starting in Q1 2015. Expect the combination of low oil prices and significant additional PE capacity to benefit converters for years to come.