INSIGHT: Dow points to factors which can help keep PE tight

Nigel Davis

29-Apr-2016

By Nigel Davis

LONDON (ICIS)–The big producers tend not to agree with consultants and analysts who forecast tough times ahead when new cracker and polyethylene (PE) capacities come onstream in the US.

Their message is that global ethylene and polyethylene (PE) supply demand balances currently are snug.

On a global basis, factoring in the timing of ethylene and PE capacity additions and, when the time arises, planned maintenance turnarounds, balances do not look that bad.

They are suggesting that PE capacity additions in the US will come onstream in a more phased way. That would ease supply into the market and not create the wave of excess polymer capacity that some are suggesting.

There will still be monomer to move to market, of course, but, potentially, other derivatives, such as ethylene dichloride/vinyl chloride monomer (EDC/VCM), and exports, can take up some of the slack.

Then there is the all-important question of demand. And here, rough and ready calculations based on GDP or industrial production growth just will not do. However, also, it seems, PE markets have become so much more granular that it is increasingly difficult to understand what might be driving growth.

Dow Chemical this week, for instance, reported record PE volumes on robust demand in the first quarter for what it calls its “differentiated products”. Chief operating officer, Jim Fitterling, even went so far as to say that he wished he had the output from both of the new PE lines at the giant Sadara joint venture complex in Saudi Arabia to sell now. One of those came on-stream late last year, the other, this April.

Some consultants are looking at a looser market from later this year but Fitterling suggested that supply projections are always higher than those achieved.

He added, though, that Dow generally agrees on demand projections. Ten years ago one fifth of chemicals demand was in China. Now it is one half. Dow’s PE demand is being driven by a sustainable degree of urbanisation in the developing world.

Dow’s ethylene and PE capacity utilisation rates will be at “sustainably high” levels over the next few years, Fitterling said. “The long-term winners are the ones who have whole chain integration. No-one rivals Dow on that front,” he added.

Dow is also positive on PE because of the way it has built its presence in markets in China and elsewhere. This is really about getting the customer interactions right – understanding which markets for which polymer types present the greatest opportunities – and it is about getting the logistics networks in place.

The big companies have been doing this for some time now, the most successful companies for years.

It is also about optimising cracker and polymer supply chains so that feedstock flexibility at crackers globally can feed the monomer to the right plants to make the right grades and then to get those grades successfully to market.

Dow CEO Andrew Livers, on a conference call, on Thursday talked about a “narrower and deeper” market focus for Dow – alongside exceptionally low costs. In a tight supply/demand environment Dow says that every $0.01/lb of margin improvement adds $150 to $200m to PE sales.

In PE, Dow said it saw EBITDA (earnings before interest, tax, depreciation and amortisation) increase in the quarter in the Europe, Middle East, Africa, International (EMEAI) and Asia Pacific regions but margin compression in Latin America and lower equity earnings. The momentum behind price increases improved through the quarter.

In a slow growth and volatile market generally, Dow believes that its earnings growth will continue to be driven by consumer demand across the globe. Supply/demand in the packaging and PE value chains will still be tight.

This balance drives PE margins regardless of the oil and gas price environment. Over the next three years the company sees a levelling off of supply/demand balances (see chart below). They will be different in different years as the new ethane crackers in the US come on-stream from the middle of 2017.

Ethylene balances will be “looser” in the US, it says, but tighter in Europe and in Asia with regional margins reflecting the differences.

On the feedstocks side, liquefied petroleum gas (LPG) and propane cracking flexibility – which is high in Europe for Dow – alongside the US gas advantage, will grow as oil prices rise. The company foresees an oil price of $50-$60/bbl towards the end of this year in in 2017.

Along with other sector companies it believes that gas prices may rise offsetting the gains to be made from higher polymer prices, driven up in a higher oil-price environment.

On the cycle, it believes that analysts are being overly optimistic on the ramp-up of new PE capacity, particularly outside North America.

Between 2014 and 2018, 75% of new PE capacity will be added outside North America, it says. Many of the new plants will take longer than those in North America to build to capacity.

Some of the new PE capability is integrated to coal-to-olefins (CTO) and methanol-to-olefins (MTO) technologies which are believed to be less reliable, according to Dow.

Given these its “narrower and deeper” market penetration on packaging markets should help drive profitability. A lot of new capacity is for commodity grades that are likely to be harder to place particularly for newer producers who are not as far advanced along the ‘experience curve’.

Dow view on global PE
Source: Dow Chemical

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