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By John Richardson
IT was great whilst it lasted, but the strength of global polyethylene (PE) markets from late February until the end of June always felt as if it was a built on very shaky foundations.
But margins have been fantastic, which is great news, and they have a long way to fall before they return to historic averages. So you can comfort yourself with the possibility that this decline might take a long while.
And even if marginswere to all of a sudden crash, some producers had already hit their profit targets for the full year by as early as May. So they have enough “money in the bank” to not worry about market conditions for the rest of this year.
Let me give some statistical weight to these comments: Northeast Asian high-density PE variable cost naphtha-based integrated margins were $555/tonne in 2015, up until 7 August. This compares with $245/tonne for the full year 2014 and $130/tonne for the whole of 2013.
And taking this further back, average margins from 2009 until 2014 were only $371/tonne. It is the similar story across many of the other grades of PE.
So you are feeling good about 2015? This should only be the case if you the right business plans in place, which involve reinvesting these “windfall profits” so you can prosper in the New Normal. I have never been more convinced of anything else in my business life that the New Normal is, indeed, a reality – and is now, without doubt, here. This is a once-in-many generations shift in the global economy, which will completely change both short and long-term growth prospects – and so profitability.
The signs are there for all of us to see in current market conditions, which I have summarised below. It is worth clicking through to all these links as it will provide you with the background you need:
- US C2 markets are falling due to over-supply as force majeures are over and new supply is online.
- The US expects to be able to export to Asia to get rid of its surplus PE production.
- But the China market is probably chock-full of inventory, which will take months to clear.
- Oil prices have come down a long way in recent weeks and have further to fall.
- Trade data confirm that China is entering a major slowdown, and so 2016 will be worse.
- The devaluation of the yuan is another concern that has emerged this week. China could end up exporting a lot more deflation in manufactured goods to the rest of the world.
Returning to the subject of the US, an expert on that country’s ethylene and PE markets told me this week:
The US is swimming in ethylene, and the prospects to export more PE to China are pie in the sky. But domestic PE demand is expected to be steady.
Normally, the US exports on average about 20% of its production, the rest stays at home. Producers want to export more to keep inventories from growing too much, so they can keep domestic prices up. This will be practically impossible in August. Exports have been growing, but not fast enough to make a dent on inventories.
Just over the horizon, in 2016, we also have the start-up of lots of new PE capacity, which I shall detail in a post next week. This includes new plants in Mexico, the Middle East and China.
From the second half of 2017 we, of course, then have a huge wave of new US capacity that we will need to try and absorb.