US Polyolefins Confront Tough H2


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By John Richardson

THE US poyolefins industry has enjoyed a remarkable recovery since the depths of the financial crisis thanks to major feedstock advantages in polyethylene (PE) and the rebound in the domestic economy.

Booming demand from China also attracted substantial imports of PE and polypropylene (PP) from the States during 2009.

And this year, despite imports being displaced by new Middle East capacity and rising production capabilities in China itself, US PE producers continue to enjoy the advantage of low ethane prices relative to naphtha.

PP has also benefited from continued re-stocking in the automobile and electronic and electrical goods industries, according DeWitt & Co US-based consultant Mike Smith.

“US PP producers are strictly making to order and have decided it’s not worth making much for export,” added David Barry, ICIS pricing’s US polyolefins editor.

“Right now they can get away without exporting much because domestic demand has been surprisingly strong.

“With the exception of some export-dedicated capacity, there will be very little export to Asia.

“When I ask why demand has been so strong, people say they don’t know for sure, but the automotive sector has been doing well. There was also probably some re-stocking off the recent market lows.

There have also been suggestions that because companies have been cutting back on maintenance, PP outages have been more frequent than usual, helping to keep markets tight.

Low-density polyethylene (LDPE) is globally very tight and the US is no exception.

“LDPE is carrying a huge premium to other PE grades in the US, and this could begin driving some volume shift towards linear-low density PE (LLDPE),” said Barry.

“I haven’t heard that this is happening for sure, but it’s something that LDPE producers are watching. I heard from one trader that the US LDPE market wouldn’t be back in balance until the end of November, and it may take a long time after that for prices to come back to historical spreads.”

But the question now is whether producers have seen the best of the year in H1 because of the US economic slowdown.

“My sources in the polyolefins markets are expecting Q3 corporate earnings to disappoint, which will help drive equities and energy futures down,” added Barry.

“People also think crude oil went up too quickly. All this points to a downward correction in US polyolefins during the fourth quarter, but PE and PP producers will have some momentum in September that may or may not carry over into October.”

What might matter most of all from an Asian perspective could be the strength of this year’s hurricane season in the US Gulf.

In late 2006, a year after Hurricane Katrina, the US industry was left with high stocks of polyolefins because production had been ramped-up in anticipation of further severe weather disruptions that didn’t happen.

As a result, large volumes of US product were shipped to Asia in the first quarter of 2007.

“I am told US PP and PE producers may be hoarding some material for the peak of the hurricane season in mid-September,” continued Barry.

“But PE prices would need a drastic correction to work for the Asian markets, and that would be damaging to the US domestic market.

“Traders think US producers could have a lot of material to export by November/December, but whether they are in a position to export to the big Asian market will depend on how well the Middle East capacities are operating.

“Some traders think the recent gains in US export pricing will reverse as early as September, when producers realise the domestic market is not as strong as they had hoped.”

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