Global PE market to remain long despite Saudi cutbacks caused by drone attack

Business, China, Company Strategy, Economics, Singapore, Thailand, US

By John Richardson

TRADERS lucky enough to be holding long positions in PE ahead of the 14 September drone attack on Saudi oil and gas facilities want everyone to believe that this has changed everything.

They will tell you over and over again, if you’re prepared to listen, that the resulting reduction in ethane supply to Saudi Arabian PE plants, leading to cutbacks in Saudi PE output, will turn a globally long PE market into a tight market. Producers will also be anxious to talk-up tighter supply after months of tepid pricing.

Inevitably, therefore, PE prices will rise over the next few days, and possibly weeks, as the full extent of the damage to the Saudi facilities becomes clear. Saudi Aramco claimed late on Tuesday that the damaged processing plant is running at 2m bbl/day, and should recover from recent drone attacks by the end of September.”

Even assuming that the repairs are not completed until the end of this year and Saudi PE operating rates are only half of what we had expected in September-December, the global impact would only be as follows, based on calculations using our ICIS Supply & Demand Database:

  • Saudi HDPE production would fall by around 825,000 tonnes versus what we had for the full-year 2019. The loss of Saudi output would amount to a 2% reduction of our forecast for full-year global production.
  • The Kingdom’s LDPE production would be down by 212,000 tonnes versus what we had expected. This would lower global production by around 1%.
  • LLDPE output would be down by 642,000 tonnes, 2% of global output.

These seemingly minor percentage reductions would, however, make a difference in a tight market. But you would need to have spent the last nine months on Mars, out of communication with earth, to believe that the global PE market was tight ahead of the drone attacks. Supply has instead been long as a result of the biggest-ever build-up in US capacity and the slowdown in the global economy. The economy has been slowing because of the trade war and a decline in Chinese economic growth as it deals with debt major issues.

China short of PE? I don’t think so

I am sure the story amongst traders and producers will be that the Saudi cutbacks will leave Chinese buyers scrambling to get hold of PE cargoes from other countries. But my latest estimate of Chinese stock levels, using China Customs department import and export data and our forecasts for local production, suggests otherwise.

In January-July 2019 compared with the same seven months of 2018, China’s apparent demand growth for the three grades of PE were as follows: HDPE at 17%, LDPE at 10% and LLDPE at 13% (apparent demand is net imports plus local production). Despite the economic slowdown, this will be another good year for PE demand growth in China, but nothing like the average of 14% growth across the three grades during January-July.

Instead, in the best-case scenario, our base case, actual demand across the three grades will average 7.7% for the full-year 2019. In my downside, and I see this as more likely, growth will be 6.7%. Growth at 7.7% indicates January-July overstocking of 942,530 tonnes. If growth ends up being 6.7%, this indicates overstocking at slightly above 1.1m tonnes. In either outcome, it is obvious that the Saudi production cutbacks have occurred during a period of very long Chinese supply.

Filling the gap would be easy

Let’s assume, though, that the loss of Saudi output creates temporary shortages. These can easily be filled by higher operating rates amongst other advantaged feedstock, or ethane-based, PE producers. Raise our forecast average operating rates at crackers in the US, Kuwait, Qatar, Kuwait, Abu Dhabi, Thailand and Malaysia  by just two percentage points for 2019 and this is more than enough to fill the projected Saudi supply gap.

Liquids crackers could also step into the breach. Crackers linked to refineries dependent on Saudi crude would likely find this difficult as of course Saudi crude is in tight supply following the drone attack. But crackers linked to refineries in locations such as Singapore, where ExxonMobil and Shell can supply more of their own oil production, are obviously in a different position. On the other hand, though, expensive oil resulting from the attack will undermine the economics of the less integrated and smaller scale liquids crackers that lack liquids feedstock flexibility.

A bigger issue for me is not bridging a supply gap, but rather the dampening effect on PE demand that could result from a sustained rise in oil prices.

The good news is that we seem to be in a lot better place than during previous major disruptions in oil production. The global economy is, for instance, worth $84.4 trillion versus $37.9 trillion during the first Gulf War in 1990, making expensive crude more affordable. The rise of US shale oil production has also reduced the dependency on Saudi Arabia.

But DataTrek Research notes that every US economic downturn since 1970 has been preceded by a doubling of oil prices in the previous 12 months. Crude would need to reach $80/bbl for that to happen, which is very conceivable in the current geopolitical climate.

For a while now, I’ve been pondering whether the next global recession will be a long and gradual event or something more sudden and more systemic. A sudden downturn that exposes long-standing fault-lines needs a catalyst and a rally in oil prices could provide the catalyst.

The fault-lines include the huge build-up in global debt since 2008, especially in China which has been responsible for around half of total global economic stimulus since that year. China has in effect been sub-prime on steroids. The world’s other central banks have hardly shied away from lending, either.

How much longer can stimulus and the global debt build-up continue? In China’s case it is running out of room to further stimulate its economy. The European Central Bank also seems to have run out of space to reverse declining EU growth through stimulus alone. Instead, long term structural reforms are needed, including raising productivity.

The underlying No1 problem is that as the extraordinary build-up in global debt since 2008 has occurred, demand has been weakening due to ageing populations in the West and, crucially, also, in China. Too much manufacturing capacity, including in petrochemicals, is chasing too little demand.

Expensive crude might therefore, as I said, be the catalyst that exposes these issues as we enter a period of stagflation – higher inflation and lower growth. Very few people would then be talking about tight PE markets.


Risk of stagflation and recession from drone attack on Saudi oil facilities


By John Richardson ANY major change in US government foreign policy always carri...

Learn more

European petrochemical markets keeping calm and carrying on in light of Saudi attacks


Here is a guest post from my very good ICIS colleague, Matt Tudball, our head of...

Learn more
More posts
Plastics rubbish and the developing world: Lost petrochemicals demand and the new service-led approach

By John Richardson IT WAS billed as a liberating product, something that brought a little luxury to ...

Little prospects of genuine US and China deal leave US petrochemicals exports very vulnerable

As always, this blog post expresses my own personal views and these are not the views of ICIS. Thank...

The new China and the rise of the Millennials transform the petrochemicals business model

By John Richardson ANYONE who has anything to do with the petrochemicals industry or anything to do ...

Global manufacturing slowdown: Turn to China’s polypropylene market for your explanation

By John Richardson THEY SADLY still don’t get it. All the clamour yesterday was about declinin...

China PE overstocking rises to more than 1m tonnes as exporters continue to flood the market

By John Richardson CHINA is heading for another good year of PE demand growth with estimates from se...

If Strait of Hormuz closed down: Effect on petrochemicals exports

By John Richardson NEITHER SIDE seems to want a war but at febrile times like this miscalculations c...

US petrochemicals export exposure grows at the wrong time in history

As always, the views in this blog post are my own and do not reflect the views of ICIS. Thank you By...

Further collapse in China auto sales underlines radical change in petrochemicals business model

By John Richardson HAVE FEEDSTOCK will build has been the route to success for many years in the pet...


Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more


Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more