By John Richardson
THE above chart indicates just how good margins have been in the global polyethylene (PE) business so far this year.
Taking just our assessments of integrated high-density PE (HDPE) margins as an example, you can see that:
- US ethane-based HDPE producers were still way ahead of Europe and Asia up until 18 September 2015 as their margins averaged $1,197/tonne. This compared with $1,371/tonne for the whole of 2014. And between 2000 and 2014 US margins averaged $588/tonne, which once again underlines the transformative effect that the shale-gas revolution has had on the US petrochemicals industry. Ethane remains very cheap in the US.
- But Northwest Europe has clearly gained some ground, as until 18 September of this year margins averaged €866/tonne. This compared with €550/tonne for 2014 and $575/tonne for 2000-2014.
- The Northeast Asian 2015 average margin, again up until 18 September, was $568/tonne over $245/tonne for 2014. And between 2000 and 2014, NEA margins averaged $370/tonne.
So what of the future? Here is my outlook for each of these three regions divided in to the short term, which I have defined as up until H2 2017 – with the long term obviously after that date.
The US
The immediate challenge for US producers is a rapidly decelerating global economy as local PE production increases. Exports are thus struggling as domestic inventories grow.
US producers might be able to ease their way out of this problem by cutting export prices in order to win a few more overseas sales.
The downside, though, is that this could put downward pressure on domestic prices – and thus margins. But as you can see from the above chart, the “comfort zone” on margins is huge. They would have to fall an awful long way before they were back to anywhere near to their historic average, and so this seems very unlikely over the short term.
But what about from H2 2017 onwards, when the big new wave of US capacity starts to come on-stream? Even if some projects end up being delayed, there is enough capacity already under construction to cause major disruptions in global PE markets.
Sure, the US shale gas advantage isn’t going to go away in a hurry, but in a deflationary world you can make an argument that margins in the US will decline quite significantly.
If this view is wrong, though, and margins on paper remain OK, what about volumes? Will US producers really be able to shift all of their extra volumes, or will they instead have to push operating rates lower at existing, older plants in order to achieve dollar-per-tonne returns acceptable to their investors?
The answer to the volumes question is, I think, a definitive “No”. How producers then respond to this challenge might then obviously vary company by company.
Europe
As for Europe, you can make a strong argument for the continuation of “Fortress Europe” over the short term. A weak Euro, frequent production problems because of the age of many European crackers, and careful management of PE production against local demand could well maintain the industry’s profitability for the next year or so – even if at less than today’s very elevated levels.
The longer term issue then becomes whether the European industry wants to, essentially, roll over and accept a flood of low-cost imports from the US.
I just don’t see this happening because of a.) The factors already detailed above and b.) The political and social drive for a “local for local” petrochemicals industry that helps maintain downstream employment, whilst perhaps even creating new jobs. This drive might even lead to modest reinvestment in the industry – through, for instance, taking advantage of opportunities to source more low-cost feedstock from Europe’s struggling refinery sector.
All the above could clearly help support profitability over the longer term. And whatever the actual level of margins in H2 2017 and beyond here is what you will need to bear in mind: Margins will be largely set by local conditions – and not by what’s happening in the US.
Northeast Asia
Asian margins in general will, of course, be driven by China, both in the short and long term.
Over the next year and a half, I believe that Northeast Asian margins are likely to revert back towards their historic long-term average of $370/tonne – perhaps even lower. The only caveat here is if we see a lot more lost production – on the scale of H1 2015, which is one of the main reasons why Northeast Asian margins have done so well of late.
Beyond the second half of 2017, I can see China moving ever-closer to self-sufficiency in PE.
This will be a major challenge for the three Northeast Asian countries which comprise our analysis of the region’s margins – Taiwan, South Korea and Japan – as they are all heavily dependent on China for their export trade.
But these three countries are again not going to roll over and accept defeat, and so will battle hard for market share in developing countries other than China. This could again rebound unfavourably on US producers, given the relatively small size of these markets.