By John Richardson
I HAVE spent the last two weeks travelling in the Middle East, Southeast Asia and Northeast Asia and during that time, I didn’t meet one senior petrochemicals industry executive who talked in detail about demand. Instead, the focus of just about everything they wanted to discuss was supply.
The big question on the supply side, which everyone debated time and time again was: “How easily will the new US polyethylene (PE) supply be absorbed by global markets?”
One school of thought worried that the answer would be a definitive “No”, but not because of the global economy. Their concerns rested on the idea that we are going through another round of overbuilding that has happened on many occasions in the past. But they told me that a few years after 2020, when the big wave of US capacity is expected to be fully on-stream, global markets would be snug again.
Another other school of thought argued that because attempts would be made to bring so much capacity on-stream in a short timeframe, substantial start-up delays were inevitable. This would mean that volumes would be introduced in such a staggered fashion that there would no difficulties whatsoever.
“But hold on” came a reply from the naysayers, “What if low oil prices persist?” They contended that this would make it possible for Europe’s naphtha-based producers to aggressively reduce PE prices to the point where they might even be able to keep some US imports out. The above chart illustrates how the relative competitiveness of US margins over European margins – and to a lesser extent Northeast Asian margins – has declined over the last 11 months.
Lower crude would further boost the competitiveness of the European naphtha-based players over US ethane-based producers, especially if the Euro remains weak against the US dollar. European margins would expand on cheaper naphtha feedstock because of cheaper oil, whereas US ethane prices would continue to trade independently of crude.
Better margins would give European producers more room to discount PE prices. And of as naphtha sets global PE prices, PE prices would in general anyway fall in a lower oil price environment.
These naysayers were also with me when they added that it should be not assumed that China will remain in major deficit on PE. The conventional view is that the country’s imports will total around 9.5 million tonnes this year, rising to 12 million to 13.5 million tonnes by 2020. “But what if China much more aggressively expands capacity than most people expect?” was another question that the doubters asked. “Shave say a million tonnes, or even more, off the lower end of these estimates for imports and the global industry is in trouble”.
If you talked to the traders, the people who will have to shift much of this extra US PE production, the picture was different. They talked of the major problems facing the Chinese economy, how Latin America was probably even worse – and how senior industry figures were being way over-optimistic about that other big emerging market, Africa.
“You have very shaky growth in Africa, lots of credit issues, lots of customs regulations, lots of corruption, very bad infrastructure and a low total volume of demand – in fact, absolutely tiny when you measure Africa against China,” said one trader.
Supply issues still matter, of course, but we need to stop bluffing and comforting each other by pretending that demand patterns haven’t fundamentally shifted as a result of the New Normal. Here are just two areas of critical change:
- Has anyone done a detailed study into how recycling and downgauging will dent Chinese PE demand growth over the next 5-10 years? Let’s assume that recycling and downgauging will only have a marginal impact on demand growth across the whole of China. What about regional differences, though? The more developed provinces of China are sure to give greater priority to reducing plastic waste than the less-developed provinces.
- Too many people seem to assume that because PE is heavily used in the food packaging business, it is more or less immune from China’s economic slowdown. But what about the PE that goes into wrapping electronic and white goods? Provinces that are over-reliant on manufacturing for their growth are being most- affected by economic reforms. It will take these provinces at least five years to fully rebalance their economies.
Returning to the issue of supply, how you need to view supply growth in China is also tied to economics. China’s new economic growth model involves great self-sufficiency in higher-value manufacturing in its eastern provinces – hence, we will see a strong push for production of metallocene and other premium grades in provinces in the east. Meanwhile, out west it will be all about monetising coal reserves to create jobs in basic manufacturing.
On the former objective, by the way, I heard last week that two Chinese companies have bought licences to make metallocene-grade PE for the first time in China by 2018-2019.
Let’s widen this out to the West. We of course know that there has been virtually no growth in US PE demand since the early 2000s, as this is a mature market. Europe, too, is a mature market.
The answer? A much more granular, closer look at changing global demand patterns for PE. There are still great opportunities out there but if the US wants to fully cash in on these opportunities, instead of just handing most of their profits over to the traders, they will need to invest much more in on-the-ground sales and marketing teams.