Commentary: Rising crude puts Asia PE profitability under pressure

Asia integrated polyethylene (PE) margins have held up remarkably well in 2016 even as the rising oil price has pushed naphtha and ethylene costs higher.

The higher crude price over the past couple of weeks has, however, begun to chip away at margins. A question has to be whether producers now have the pricing power to push through polymer price increases in a rising cost environment.

At the polyethylene plant, and the cracker, margins in 2016 have been underpinned by relatively tight supply due to a heavy maintenance schedule.

The market is, however, expected to lengthen on the supply side later this year as capacity utilisation generally ramps up and as production at the big Sadara Saudi Aramco/Dow Chemical joint venture starts up in Saudi Arabia.

Two new PE lines are due on stream in India. Demand for polyethylene in Asia, China, has been growing despite the economic slowdown, although month to month demand growth for products such as film has been weak, possibly due to de-stocking.

It is thought that China PE demand growth is being underpinned by food packaging because of concerns over food safety. At the same time a boom in the sale of goods over the internet in China is believed to be boosting film packaging growth.

PE in China also is bucking the trend towards overcapacity and near self-sufficiency in polypropylene. PE in northeast Asia has become much better at inventory management as producers and consumers worldwide have been forced to come to terms with business realities post the 2008-2009 crash. That move to reduce working capital exposure in the supply chain has introduced even greater price volatility to the markets, however.

This was borne out in Europe last year, as polymer demand grew faster than expected, and supply tightened quickly because of unplanned outages.

The big questions are likely to be focused on the new capacity additions in the US, as polymer plants associated with the wave of new build crackers come on stream.

Big industry players remain sanguine about the potential impact of the new capacity increases. Producers have been developing export markets. Product differentiation, with some grades targeted at specific applications, is expected to ease the uptake of the capacity increases.

The new ethylene and polyethylene capacities are likely to come on stream from the second half of 2017.