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Polyethylene: Seeing The Wood Along With The Trees

Business, China, Company Strategy, Economics, Olefins, Polyolefins, US
By John Richardson on 15-Oct-2015


By John Richardson

THE Asian polyethylene (PE) business might be tempted to continue to think, “Crisis? What crisis?” (bear with me. When we have dived down into the details, the above chart will make sense to you).

Integrated naphtha-based high-density PE (HDPE) margins in Northeast Asia, for instance, still averaged $553/tonne for 2015 up until 9 October, according to ICIS. This compared with $245/tonne for the whole of 2014 and just $130/tonne for 2013. Margins have been exceptionally strong throughout this year.

And confidence may take a further boost from the possibility that PE prices in general will creep up during the rest of October and into November. Asian spot ethylene is on the way up again and it is Asian spot ethylene prices that essentially drive PE pricing in Asia. This is despite the fact that some 95% of the region’s PE producers have either their own captive supplies of ethylene or buy ethylene domestically via pipeline at costs that are always much lower than prevailing spot prices.

The Middle East and Asia is also entering a mini PE turnaround season. Saudi Arabia’s Petro Rabigh, for example, shut its refining and petrochemicals complex for 50 days from 11 October. A 600,000 tonne/year linear low density polyethylene plant and a 300,000 tonne/year HDPE unit have been closed.

The big wave of new PE capacity, from of course the US, has also yet to hit the market and so you can argue that underlying supply and demand is reasonably balanced right now. It also needs to be pointed out that supply in Asia was very tight in H1 on lots of planned and unplanned shutdowns.

But the macroeconomic background continues to deteriorate.  July to September is supposed to be the peak production season in China when production of finished goods is usually ramped-up in time for the Christmas sales surge in the West.  China’s exports fell 3.7% in September from a year earlier in US dollar terms following a 5.5% drop in August. Imports in September were 20.4% from a year earlier compared with a 13.8% decrease in August. China is of course a major importer of raw materials that are then re-exported a finished goods.

“We didn’t see much of a peak season at all this year. Demand for PE stretch film for computers, TVs and refrigerators etc. was weaker than we expected,” said a source with a global PE producer.

“I have also noticed a dip in demand for the PE blow-moulded drums used by the semi-conductor industry. The semi-conductor industry in Taiwan is struggling and Taiwan exports lots of its semi-conductors to China. This indicates that stretch film demand will again be weak in January and February next year, when we normally see a surge in sales of electronics in China itself ahead of the Lunar New Year,” he added.

The struggling Chinese real estate sector is another source of concern as, of course, PE is again used to wrap building materials – along with being injection-moulded into lots of kitchenware applications when people kit out their new homes.

Anecdotally, the positive story remains the food packaging business, both in volume terms and sophistication. As food safety concerns rise, people in China are buying more packaged food, which is being more frequently wrapped in multi-layer films.

Another strong end-use application has been pipe grade HDPE, used to make high pressure gas pipes. Chinese government infrastructure spending on these pipes is said to be a major factor behind the 7.5% year-on—year rise in China’s overall HDPE imports during H1 of this year.

For those on the ground in the Asian PE business who have to sell PE resins, this is the kind of detail really matters. If you know that one market is struggling you can move to another – whether it be different end-use applications or different geographies. Overall PE sales to Vietnam have, for instance, been described as very strong this year.

But the  senior planners need to step back from all this. If they fail to do this they will end up being unable to see the wood for the trees, and the wood is represented by the above chart. It shows that:

  • Global chemicals capacity utilisation slipped again to just 81.7%, an all-time record low for August.
  • The only time it has been close to this level before was the 81.9% of August 2009.
  • The chemicals utilisation percentage average since 2009 is just 83.4%, nearly 10 percentage points below the 1987 – 2008 average.

Senior PE industry planners looking ahead to 2016 and beyond need to ask themselves these three questions, in light of this chart:

  1. Will growth in food packaging applications in China, and elsewhere, be good enough to compensate for what seems likely to be continued weakness in demand for packaging of TVs and refrigerators etc.? It is hard to see why this weakness won’t continue because of China’s prolonged and difficult rebalancing away from investment-led growth.
  2. On balance, therefore, will demand be strong enough to absorb all the new supplies due on-stream from H2 2017 – and  more immediately when new Middle East capacity arrives in the market in early 2016?
  3. Can we, as a result, realistically expect margins to continue at 2015 levels?

Contact me for the answers.