Thirty Reasons Why Ethylene Will Not Be Tight Until 2019

Business, China, Company Strategy, Economics, Europe, Oil & Gas, Olefins, Polyolefins, US

PE3

By John Richardson

THERE is a very common view out there that the ethylene cycle will tighten from next year until around 2019, when the big flood of new US capacity is expected to hit the market.

This is supported by the thinking that:

  • The global economy will get stronger, rather than weaker, next year.
  • There isn’t that much new capacity due on-stream between now and 2019.
  • Add all this together and  global ethylene operating rates will increase next year, and will continue to rise until  2019.

In a later post, we will look at the ethylene cycle after 2019.

But here are our 30 reasons why we think that this consensus view will prove to be very wrong:

  1. Global growth will decelerate, rather than accelerate, next year.
  2.  The Eurozone, which in 2013 accounted for 20.34% of global GDP, is in the midst of a secular and very long term economic decline with no signs of an policy initiatives that will reverse that decline.
  3. China, which in 2013 accounted for 14.90% of the world’s economy, is undergoing its biggest programme of economic reforms  for at least 20 years. Success is  not guaranteed, and, during this process, there is every chance that the country’s “real growth” may, once again, dip into negative territory.
  4. The rest of the world cannot prosper when 35.24%  of the world economy faces such major difficulties.
  5. And in the case of China, of course, 14.90% greatly understates the support it provided to the global economy during 2008-2013. Now that support has largely been removed because of its economic reforms.
  6. Yes, the decline in oil prices is good news for major importers such as China, India and Indonesia.  But oil prices have fallen because of what the International Energy Agency recently says is a “remarkable decline” in demand.
  7. Oil prices were only kept stable and in the region of $100 a barrel because of temporary demand created by China’s massive stimulus programme, and the flood of low-cost money from other central banks.
  8. Throughout this period, however, until, in fact, as recently as July this year, oil prices were equivalent to around 5% of global GDP. At this level, they have always caused recessions in the past.
  9. Damage to the disposable incomes of the vast majority of people was masked by the “false calm” in oil markets created by all this central bank stimulus.
  10. Now that the false calm has ended, as stimulus is withdrawn, we cannot assume that this means we are in an era of constantly low oil prices.
  11. The suspension on the car has gone and so we will feel every bump in the road as real price discovery returns to oil markets. Prices might, thus, swing between $50 a barrel on demand fundamentals and $150 a barrel on geopolitics.
  12. Nobody really knows  the future of oil prices, of course, but we must prepare for an extended period of great volatility in oil prices.
  13. And the higher that prices go, however temporarily, the greater the tax on global growth.
  14. We think it is important not to only look at the amount of absolute olefins capacity being added between now and 2019, but to also look at how all of the world’s olefins capacity will be run, especially in China.
  15. China will run its new coal-to-olefins (CTO) complexes very hard in order to protect jobs as its economy slows down.
  16. Domestic polyethylene (PE) production increased by China rose by 9.5% to 9.5m tonnes in January-September 2014 compared with the same period last year, according to ICIS estimates. This has, literally, astonished many people, given the strength of demand in China (see our above chart).
  17. Estimates of  PE and polypropylene production in China in 2016 and beyond must, as a result, be revised upwards.
  18. Low cost commodity grade resin from these facilities will also be used to boost exports of cheap finished plastic goods – again as a means of protecting jobs.
  19. Thus, the more resin that people manage to export to China, the more it will ultimately come back to bite their local industries, in the form of a flood of low-cost plastic finished goods re-exports. This will, of course, damage local conversion industries – and so demand for domestically-made olefins derivatives.
  20. It has been long assumed that a fairly sizeable percentage of Europe olefins capacity will have to be shut  down, but please don’t bet on this.
  21. Graham van’t Hoff, the CEO of Shell Chemicals, said at the European Petrochemical Association’s meeting earlier this month in Vienna: “European chemicals are a $558bn industry providing over 1 million direct and nearly 5 million indirect jobs,… based on a vast, differentiated product portfolio”.
  22. He talked about the need to build better chemicals clusters, through improving integration, feedstock flexibility and government partnerships
  23. Here is the thing, also, on Europe: PE exports to Asia from Europe have reportedly increased this year, as European naphtha crackers are said to have a cost advantage of some $100-200/tonne over their Asian competitors.
  24. This is said to be the result of  greater discipline in managing inventories and better management of costs in general in Europe compared with Asia. The recent weakness of the Euro has also helped. Why shouldn’t this trend continue?
  25. There are some 20 PE plants alone in Asia, which are said to be highly uncompetitive.
  26. But why do you think they will run at low operating rates over the next five years, let alone shut down?
  27. Protecting jobs in Asia ex-China will also be a priority, and so, just as happened in 1998 during the Asian Financial Crisis, governments will get involved.
  28. The priority, in fact, everywhere will be government intervention to protect local jobs.
  29. A global increase in trade protectionism seems highly likely, therefore.
  30. A rise in protectionism is another reason to think that  global “effective capacity” will be a lot higher in olefins and its major derivatives than many people have forecast.

We acknowledge, of course, that we have given very little space to the arguments about why the ethylene cycle will tighten up until 2019.

Obviously, those who back this argument have spent a lot of time thinking this through and can make a very convincing case.

And so we say to these people: Please come to the debating table and discuss. We will publish your views in detail, as this debate is crucial for the industry.

PREVIOUS POST

Want To Keep Your Job? What To Tell Your Boss

22/10/2014

By John Richardson THE economic data on China was very useful yesterday if you h...

Learn more
NEXT POST

China's "Vast Pit Of Debt"

24/10/2014

By John Richardson THE consensus has further shifted in our direction, as this e...

Learn more
More posts
China moves closer to Iran as tensions with the US build: Implications for petrochemicals
02/08/2020

By John Richardson Opinions and emotions and can shape how we interpret data, but, as we all know, o...

Read
China polyolefins market H1 review: so far so good, but beware of the risks ahead
30/07/2020

By John Richardson ALL looks fine in the polyolefins world. The Old Normal appears to have reasserte...

Read
Polyethylene market recovery could be threatened by slower China crude buying, weaker economic growth
28/07/2020

By John Richardson EVEN by China’s standards, where just about every number is eye-wateringly larg...

Read
Why the polypropylene industry must switch from volumes to value
26/07/2020

By John Richardson EVERYONE knows about the oversupply in the polyethylene (PE) market as it has bee...

Read
China consulate closure underlines long-term split with US, potential big shift in petchems trade flows
23/07/2020

The views in this blog post are, as always, my personal views and do not reflect the views of ICIS. ...

Read
China’s real GDP could have been negative in Q2: What this may mean for PP
22/07/2020

By John Richardson CHINA’S official GDP growth of 3.2% for Q2, which was announced last week, may ...

Read
Iran and China new deal could hasten Belt & Road Initiative petrochemicals self-sufficiency
19/07/2020

By John Richardson ONCE AGAIN, please don’t say I didn’t tell you. A proposed new investment and...

Read
China paraxylene imports head for bigger declines as excess industrial production appears to boost GDP
17/07/2020

By John Richardson SOME PEOPLE see the 9.9% year-on-year rise in China’s crude oil imports in Janu...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more