By John Richardson
EVEN if you take a benign view of the future of the US economy (which, separately, we think is the wrong view), the planned increases in US polyethylene (PE) capacity still raise this very important question: Where on earth will all of this stuff go?
The chart above illustrates our assessment of the increases in capacity in just one of the three big commodity PEs – linear low-density PE (LLDPE), which goes predominantly into packaging film.
“The problem with LLDPE and its competitor low-density PE (LDPE) is that they go into what is essentially a mature market in the US,” said an industry source.
“Per capita packaging consumption is already very high in the US and so the potential for further growth is very limited,” he added.
“Plus, the US LLDPE market is almost 100% metallocene and a major advantage of metallocene is down gauging. Processors are constantly learning to do more with less – i.e. produce the same volume of film with smaller quantities of resin in order to save on raw material and energy costs.
“The US is, of course, also a pretty environmentally conscious market and so there is a constant push to not only down gauge, but to also make less use of packaging film in general,” he said.
What about PE export markets, though? Producers in the US are at the moment enjoying fantastic margins. Natural gas prices for September delivery are trading at just below $4/million British thermal units (MTBU). This is historically very cheap.
Most forecasters expect natural gas prices to increase to no more than $6/MTBU in the long term. This would still leave the on-paper investment case for building a new PE plant in the US pretty compelling, as US producers would maintain a strong cost advantage in export markets.
“In theory, yes, that’s right. A lot of other competitors might be forced out of the rapidly growing Latin American market,” added our source.
“China will be another important destination. This means that long-term decisions taken by China’s government will have a major impact on the viability of US PE projects.”
He argued that China might be end up with a growing dependence on imported PE because of:
- The poor economics of naphtha cracking in China versus gas cracking in the US and the Middle East.
- Environmental problems connected with the coal-to-olefins (CTO) process.
“It is also conceivable that higher cost South Korean, Japanese and Taiwanese PE plants will shut down to make way for US exports to China,” said the source.
He concedes, though, that there are problems with this argument, which are:
- The CTO process could be a lot less environmentally damaging, in terms of water use, than many people think.
- Increased gasification of China’s big coal reserves is not just about making more olefins and then polyolefins. Polyolefins are a small part of an integrated coal-based energy solution as China seeks to reduce its dependence on imported oil and gas. So, when you are planning one of these big, integrated coal gasification and derivatives complexes, adding a PE plant to the project is a relatively small commercial decision. And it is a neat and easy way of adding a bit more value to coal – a low-cost and strategically important feedstock.
- People first started talking about major capacity closures in Northeast Asia in the late 1990s and they still haven’t happened.
For arguments sake, however, let us assume that China decides not to go hell-for-leather for CTO and that a significant number of Northeast Asian PE plants finally shut down.
This would leave the US in a comfortable position in China.
But to repeat: Where on earth will all of this stuff go?
As we discussed yesterday, the packaging films market in China’s more developed provinces is already pretty mature. China’s packaging films demand growth is not expected to exceed 6% per year.
The end result of the US winning the PE export war could therefore be as follows:
- China substantially raises its exports of finished packaging film to countries including the US.
- This weakens the processing industry back in the US, leading to a fall in local demand for PE.
- Under pressure US processors successfully push for greater trade protection. Given that the economic outlook for the US is far from benign, we think that increased trade protectionism, across the whole US economy, is a highly likely outcome.
These are difficult questions to even ask, never mind answer, in the present climate of record US PE profitability.
But those who are politically brave enough to take up the challenge will end up ensuring the long-term success of their companies.