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Saudi Arabia and Oil: A Lesson For Polypropylene

Business, China, Company Strategy, Economics, Europe, Oil & Gas, Olefins, Polyolefins, US
By John Richardson on 06-Nov-2015


By John Richardson

POLYPROPYLENE (PP) producers and their customers, the plastic converters, are on the cusp of a great opportunity.

Let’s start with the producers. The potential for low-priced propylene for several years to come will push PP prices down, thus giving PP the chance to gain market share from other polymers such as polystyrene, acrylonitrile butadiene styrene and high-density polyethylene.

“But what about margins?” you might well say if you are a PP producer. You will want to know, “How do I protect my profits?”

The good news is that margins have a long way to fall before they turn negative, as the above chart illustrates. It shows:

  • Standalone variable cost margins, where PP producers have to buy propylene. These have been fantastic so far in 2015 because of cheap propylene
  • Integrated naphtha—based margins, where producers have to buy naphtha.  PP pricing has held-up very well against relatively much-cheaper naphtha. And naphtha is weaker, of course on lower crude. PP supply has itself been long for most of the year because of the big jump in Chinese production.
  • Propane-based PP margins – i.e. via propane dehydrogenation. These have been great in the year to date because of both resilient PP pricing and very cheap propane.

You can make an argument, of course – as I in fact do – that propylene is going to stay very cheap. I also hope that oil prices will at least stay low, and should ideally go even lower in order to support demand. This will obviously keep naphtha prices depressed. And everyone knows that propane will be low cost for at least the next five years.

The thing about future margins, though, is that in a deflationary world there is every chance that profitability will get a lot weaker. If you want to stay in the PP business there is not much you can do about this, other than hoping for the best whilst keeping your costs under control. Don’t assume that production cutbacks will do the trick because we are in this deflationary world, and because of China’s strategy of using PP to create jobs.

So to answer your question, “How do I protect my profits?” a great parallel is what Saudi Arabia is doing in crude oil. Pursue market share, as this is a volume game only because you cannot significantly influence either margins or prices.

In a post-Babyboomer and post-China stimulus world, you have to maintain a razor-like focus on the affordability of all the finished goods made from PP. Here are just two examples:

So make PP in big volumes for very affordable end-use applications. But no new projects, please – there is already too much capacity.

As for the processors, it could well be the right time to make the investments necessary to switch from other resins to PP.

New machinery will be needed – for example, injection moulding machines – because the shrinkage of different plastics in the same mould is different. The machinery needs to be of course specified, ordered and produced by the machinery manufacturer. And once the new moulded parts are produced, they have to be tested internally and externally.

All of this takes several months. So why not get going now?