By John Richardson
THE chat below provides some very instructive reading as it shows that:
- Since 2000, overall real consumption in US polyethylene (PE) has fallen from around 12.5m tonnes to 12.3m tonnes (real consumption is domestic production plus imports, and then minus exports, with end-year adjustments made for any inventory distortions).
- Low-density PE demand (LDPE) is down quite substantially, with high-density PE slightly lower.
- Of the three major grades of PE, consumption of linear-low density PE is the only one which has grown. This has probably been largely at the expense of LDPE, as it has replaced LDPE in some end-use applications.
This reflects my second chart below, showing GDP growth since 2000. As you can see, the economy has yet to return to its 5% rate of expansion in 2000.
A lot of this poor growth has, of course, been the result of the Great Recession in 2008-2010 when the economy almost collapsed.
Many people argue that the impact of the Great Recession is now waning, thanks to the Fed’s “successful” quantitative easing (QE) programme. Very strong employment growth in November, the best since 1999, is being used as evidence to support this view.
America’s economic malaise is also attributed to the period before the shale gas and oil revolutions. Up until then, the US was very heavily dependent on expensive imported hydrocarbons.
Now, though, the fracking revolution is driving a broader manufacturing renaissance, says the US Congressional Budget Office.
The US petrochemicals industry buys into all the above. Hence, it is planning to build as many as 17 new PE plants in the States, which could add as much as 8.1m tonnes/year to existing capacity.
I worry, though, that the Fed’s policies have done nothing to help “middle America”. I will return to this topic next week when I will look at how big companies are wrongly incentivised to care more about their share price than investing in the real economy.
You can also make the argument that, as oil prices continue to fall, the shale revolution might end up being a net drag on the US economy as shale and oil gas operators go bust.
Even if I am wrong on the US economy and the local PE market returns to growth, the US will obviously remain a mature market. Most people already consume all the plastics that they will ever need to consume.
Down gauging and recycling are also eating into domestic demand growth prospects.
It is therefore really hard to make a case that local PE demand is going to boom, even if you buy the view that this is once again “Morning in America”.
This means that as much as 75% of US PE capacity expansions will have to find a home in export markets. Regular readers of my blog will know that I have long thought that this simply cannot happen.
And the export environment for US petrochemicals companies is now becoming even more challenging because:
- We are, in all likelihood, at the starting point of a new global financial crisis.
- This will, of course, weaken demand for petrochemicals globally.
- The “blame game” will soon be in full swing. The US is going to carry much of the blame for this new crisis because of the damage to other economies that has been caused by the Fed’s QE programme.
- This will result in trade barriers that will make it impossible for the US to find a home for its huge volume of potential PE exports – and, of course, its exports in general.
The good news is that I think that by the end of Q1 next year, we will have seen postponements of some of the 17 new PE projects.
The US petrochemicals industry can then start thinking about where it goes next. I will provide, again, more thoughts on this topic next week – and over the next few months.