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Global Polyethylene: A Painful Balancing Act

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By John Richardson on 09-Nov-2014


By John Richardson

HERE are a few important facts about polyethylene (PE):

  • China accounted for 30%, or 2.35m tonnes , of global imports of linear low-density PE (LLDPE) in 2013 (see the above chart).
  • It accounted for 43% of high-density (HDPE) imports. This represented 4.73m tonnes of shipments to China.
  • And in the case of low-density PE (LDPE), China’s imports totalled 1.57m tonnes out of an above total of 3.85m tonnes – 40%.
  • Europe was the second biggest importer behind China. It imported  2.12m tonnes of LLDPE (27% of the total) and 1.82m tonnes of HDPE (16%). However, its LDPE imports were only 637,000 tonnes.
  • If you discount China’s and Europe’s imports of all the three grades of PE,  you are left with not many imports at all by the other regions listed above (note I haven’t  included South Korea, Taiwan and Japan to keep the data a little more simple – and because they are negligible importers).
  • This underlines the fact that despite all the talk about booming economies in developing markets other than China, growth in the developing world has all been about China when it comes to PE and other petrochemicals.
  • To give you some numbers to emphasise this point,  Latin America imported just 805,000 tonnes of LLDPE and 919,000 tonnes of HDPE in 2013.  Asia and Pacific’s import requirements were  1.26m tonnes of LLDPE and 1.5m tonnes of HDPE.
  • The world economy isn’t about to be turned  on its head  – i.e. Latin America, Africa and Asia and Pacific etc. will not replace China and Europe as the main importers of PE anytime soon.  If anything, the whole of the global economy is entering a prolonged period of lower growth with developing markets likely to suffer the most.
  • There is also the not inconsequential matter of Middle East capacity expansions. They, too, will have to find a home, along with supply additions in Southeast Asia.

What does this all of this tell us about the next ten years?

It tells us that the US, which could raise its PE capacity as much as 53% – 8.1m tonnes/year –  must try to target Europe and China for exports.

Jim Ratcliffe, CEO of INEOS, was on the money last week when he said that he “simply didn’t believe” that China would be able to absorb most of the surplus PE being exported from the US.

I agree, as I think that China will build lots more of its own PE capacity, for job creation reasons, to the point where its future import needs will be drastically reduced.

And whatever imports that do take place might well come back to hurt US producers through increased re-exports of very competitively priced finished plastic products to the States.

China has to raise its global market share of exports in general – both low and high value exports – in order to compensate for slower growth at home.

Quite obviously, also, a slowing economy is bad news for PE exporters to China. It would be be very risky to discount the possibility of low single digit, or even negative, real growth in China over the next few years.

This leaves Europe as perhaps the only realistic major target for US exports.

But demand growth by itself in Europe certainly isn’t going to provide enough room for US exports, given the very weak state of the Eurozone economy. Growth in PE demand looks set to be anaemic for years to come because of deflation.

This leaves capacity closures, which could, in theory be as much as 1.5m to 2m tonnes/year of PE,  said  Graham van Hoff, executive vice president of Shell Chemicals, in a speech he gave to last month’s EPCA meeting in Vienna.

The argument for large scale closures has been around for years. Everyone knows that European costs per tonne of production are, for the time being, much higher than those in the US.

But van Hoff pointed out in the same speech that the European chemicals industry in general generates 1m  direct and 5m indirect jobs.

Politicians might, as a result, be eventually persuaded to do something about Europe’s very high energy costs.

And if feedstock flexibility and integration can be further improved, perhaps with financial support from governments, why shut down as much as 1.5m-2m tonnes/year of PE capacity?

I also believe that we have entered an era of energy abundance – in oil as well as gas. Lower oil prices will reduce the competitiveness gap between naphtha cracking in Europe and ethane cracking in the US.

Nobody knows, of course, what the final balance will be between cancelled PE projects in the US and the scrapping of capacity in Europe.

A balance, though, will have to be found and it is going to be a painful process, given the big gap between demand and potential supply of PE.