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Polyethylene: A World Turned Upside Down

Business, China, Company Strategy, Economics, Environment, Europe, European economy, European petrochemicals, Middle East, Naphtha & other feedstocks, Oil & Gas, Olefins, Polyolefins, US
By John Richardson on 21-Sep-2016


By John Richardson

THE recent history of polyethylene (PE) shows a global competitive landscape very different from that which most people expected two years ago.

Two years ago, we were told that the natural price for oil was $100/bbl because of limited supply and robust demand growth.

The consensus view was also that whilst costly oil meant that the global economy and so PE demand were in good shape, this was long-term awful news for the naphtha-based PE producers in Asia and Europe.

Expensive oil meant expensive naphtha feedstock, with the ethane-based PE players in the US and the Middle East in a fantastic position.

During the run-up in crude and so naphtha prices, ethane in these two regions remained comparatively very, very cheap because ethane prices are not linked to the price of oil. And in the case of the US, of course, the news was even better because of the surge in local ethane availability due to the shale-gas revolution.

Today looks very different as the above two charts illustrate. They show the spread, or differential, between what Asian and European PE producers have had to pay for their naphtha versus the prices they have been getting for their PE.

Here, in detail, are just a couple of examples of this extraordinary change:

  • Naphtha-HDPE spreads in China averaged $465/tonne in 2000-2014. In January 2015-August 2016 this jumped to $652/tonne.
  • Naphtha-LDPE spreads in Northwest Europe (NWE) were at Euros479/tonne in 2000-2014. In January 2015-August 2016 they reached Euros893/tonne.

But spreads don’t always equal good margins as they don’t take into account raw material and other production costs – and in the case of naphtha crackers the co-product credits they get back from selling propylene, butadiene and other C4 chemicals, and aromatics.

Today, however, the surge in spreads has been so marked that it is reflected in margins, with both Asian and European margins moving closer to those in the US.

Why has this happened? European and Asian PE producers have been able to maintain PE prices relatively well compared with the fall in their naphtha costs because of temporarily tight markets.

What does it tell us about the future? That there is certainly no need for European and Asian PE capacity to be rationalised, which again contrasts with the view of many forecasters before the collapse in oil prices. In contrast, producers may well be tempted to run plants very hard over the 12-18 months, whilst also even seeking incremental capacity additions.

But any sensible analysis would have told you that even in a weaker margins environment, social and political reasons would have kept many of these naphtha crackers running. Now they have good margins to further convince governments of their value.

This is also “money in the bank” that the Asian and European industries can use to defend their market share in the key China market, when all the new North American supply starts to arrive from late 2017 onwards (this includes new production in Canada and Mexico, as well as the US).

(From that point onwards, though, please not that Asian and European naphtha spreads and margins are likely to start to return to their historic long-term averages).

And it also tells us that North American producers will face a harder-than-anticipated struggle to place their big new export volumes.

Taking just LLDPE as an example, North American production surplus to domestic demand will rise from 1.4m tonnes to 1.7m tonnes in 2018. By 2020, this will have risen to 2m tonnes and 2026 to 3.5m tonnes.

These numbers are, however, predicated on tomorrow’s global economy being pretty much the same as it is – meaning weak growth in the West with China and the rest of the emerging world still growing at very fast rates.

But my own personal base-case scenario is very different. I see a new global recession accompanied by a global trade war. This would make it difficult for all exporters of PE to place their volumes.

North American producers might be successful, of course. But in today’s New Normal world they need to accept that that financial returns are likely to be a lot lower than they had promised their shareholders.

The good news, though, is that there is a way of approaching markets that will enable any producer with excess capacity in PE, or any other petrochemicals, to be successful.

This will be the theme of our seminar on 2 October – Survival and Profit in Today’s Chaotic Petrochemicals Markets – which takes place ahead of this year’s EPCA petrochemicals conference in Budapest.