Global Polyethylene: The Bubble Continues To Burst

Business, China, Company Strategy, Economics, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US

USethylene7Aug2015

By John Richardson

THERE are further reasons to believe that the bubble continues to burst for much of the global polyethylene (PE) industry, after what has been a misleadingly strong first half of the year.

US ethylene capacity and production are on the increase  as production issues lessen and as the US prepares to also hugely increase its polyethylene (PE) capacity over the next few years, as you  can see from the chart above. This helps to explain why US ethylene contract prices for July fell to 32.75 cents/lb ($720.50/tonne), their lowest level since August 2009.

This is likely to dampen domestic demand for ethylene, and, of course, PE, particularly given that we are also in a bear market in crude oil. So the US will have extra volumes of PE to export because of a weaker local market.

An assumption in the US is that because Asian PE prices are still a little higher in some cases than those in the States – and because Asia, despite the slowdown in China, is still booming – selling these extra volumes will be quite east.

But what I instead see unfolding in Asia is this:

  • PE prices have a lot further to fall in Asia because oil is so firmly in a bear market. I continue to see no reason, barring geopolitics, why crude has not now resumed its journey back to its historic average price of $30 a barrel.
  • Crucially also in Asia, you have to think about the role of spot ethylene prices. Spot ethylene prices combined with stronger crude to drive PE prices higher in Asia from late February to the end of June. But CFR Northeast Asian spot ethylene prices were at $1020-1040/tonne on 7 August, according to ICIS. This compares with $1,199-1,250/tonne four weeks ago.
  • Ethylene and PE are down not just down because of oil, but also because we are past the peak of the Asian cracker turnaround season. This occurred in May with lost production amounting to 15% of total capacity. But lost production fell to 10% in June and was just 6% in July, according to ICIS Consulting.
  • There is another reason why both Asian ethylene and PE have further to fall and it is this: Demand. As Chinese economic reforms continue, producer prices in July fell to their lowest level in six years.

The US is therefore going to struggle to find a home for its increased exports, almost perhaps no matter what the price, because there won’t be enough demand in China over the rest of this year and into 2016.

And the same difficult in placing volumes will obviously apply to Middle East and Asian PE producers who export to the key China market.

When I say “demand” I actually mean two things here:

  1. You will have lower consumption growth in some PE applications in particular because of the slowdown in the Chinese economy.
  2. But even in grades that have done very well so far this year, such as pipe-grade HDPE because of all the infrastructure spending still taking place in China, there might be a problem. Across all grades of PE it traditionally takes an estimated 4-6 months for inventory chains to fill-up in China when prices a rising. Now they are the decline an important question is: “Will it now take as long as 4-6 months to deplete stocks with producers, traders, distributors and converters?” I think there is a risk that the answer is “Yes”.

A weaker China economy means weaker Asian economy in general because it is China that is the biggest-single growth driver  for the region also a whole. It also by far the biggest consumer of PE in Asia.

PE companies everywhere will be fine if they have prepared for this next phase in the New Normal by re-investing their profits from the last few months of fantastic “windfall margins” in the right ways.

But those who don’t already have the right plans in place are going to face severe difficulties.

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