Ethane price hikes, China tariffs, hit US PE producers as global market weakens

Chemical companies

Sadly, my July forecast that US-China tariffs could lead to a global polyethylene price war seems to be coming true.

As I have argued since March 2014 (US boom is a dangerous game), it was always going to be difficult for US producers to sell their vastly increased output.  The expansions were of course delayed by last year’s terrible hurricanes, but the major plants are all now in the middle of coming online.  In total, these shale gas-based expansions will increase ethylene (C2) capacity by a third and polyethylene (PE) capacity by 40% (6 million tonnes).

ICIS pricing reports this weekend confirm my concern, following China’s decision to retaliate in response to President Trump’s $200bn of tariffs on US imports from China:

Even worse, as the chart above confirms, is that US ethane feedstock spreads versus ethylene have collapsed during 2018, from around 20c/lb to 5c/lb today.   Ethane averaged 26c/gal as recently as May, but spiked to more than double this level earlier this month (and even higher, momentarily) at 55c/gal.

The issue appears to be that US producers had calculated their ethane supply/demand balances on the basis of the planned US expansions, and never expected large volumes of ethane to be exported.  Yet latest EIA data shows exports doubling from an average 95kbd in 2016 to 178kbd last year. And they are still rising, with Q2 exports 62% higher at 290kbd.

 The second chart from the latest pH Report adds a further concern to those of over-capacity and weak pricing power.

It focuses attention on the weak state of underlying demand. Even the prospect of higher oil prices only led to modest upturns earlier this year in the core olefins, aromatics and polymers value chains as companies built inventory. Polymers’ weak response is a particularly negative indicator for end-user demand.

This concern is supported by recent analysis of the European market by ICIS C2 expert, Nel Weddle.  She notes that PE is used in packaging, the manufacture of household goods, and also in the agricultural industry and adds:

“Demand has been disappointing for many sellers in September, after a fairly weak summer.  “I don’t see a big difference between now and August,” said one, “for both demand and pricing. Customers are very very quiet.”  All PE grades were available, with no shortage of any in evidence.

“The market is generally quieter than many had expected, and the threat of imports from new capacities in the US looms large – particularly with the current trade spat between the US and China meaning that product may have to find a home in Europe sooner than expected.
US producers, as would be expected, remain optimistic.  Thus LyondellBasell CEO Bob Patel has suggested that:

“Trade patterns are shifting as China sources from other regions and [US producers] are shifting to markets that are vacated.  Supply chains are adjusting but there is a bit of inventory volatility as a result. Where product has landed [in China] and has to be redirected, there is price volatility. But we think that is [transitory].”

But the detail of global PE trade suggests a more pessimistic conclusion. Data from Trade Date Monitor shows that China was easily the largest importer last year, taking a net 11.9 million tonnes. Turkey was the second largest importer but took just 1.7 million tonnes, around 14% of China’s volume.  And given Turkey’s economic crisis, it is hard to see even these volumes being sustainable with its interest rates now at 24% and its currency down 60% versus the US$.

As the 3rd chart confirms, the US therefore has relatively few options for exporting its new volumes:

  • Total net exports have increased 29% in January-July versus 2016, but were still only 1.8 million tonnes
  • Latin America remained the largest export market at 939kt, taking 52% of total volume
  • China volume had doubled to 524kt, but was only 29% of the total
  • Europe was the next largest market at 369kt, up 40%, but just 20% of the total
  • Other markets remain relatively small; S Africa took the largest volume in Africa at just 12kt

China’s US imports will now almost certainly reduce as the new tariffs bite.  And the onset of the US trade war is likely to further boost China’s existing aim of increasing its self-sufficiency in key areas such as PE.  Its ethylene capacity is already slated to increase by 73% by 2022, double the rate of expansion in 2012-2017 and from a higher base.  The majority of this new volume will inevitably go into PE, as it is easily the largest derivative product.

Back in May, I used the chart above to highlight how the coming price war would likely create Winners and Losers in olefin and polymer markets.  Unfortunately, developments since then make this conclusion more or less certain.  I fear that complacency based on historical performance will confirm my 2014 warning about the dangers that lie ahead.

 

PREVIOUS POST

Why everyone ignored my warnings ahead of the financial crisis

16/09/2018

Sadly, my July forecast that US-China tariffs could lead to a global polyethylen...

Learn more
NEXT POST

Boomer SuperCycle unique in human history - Deutsche Bank

30/09/2018

Sadly, my July forecast that US-China tariffs could lead to a global polyethylen...

Learn more
More posts
US ethylene prices near all-time lows as over-capacity arrives
13/05/2018

US ethylene spot prices are tumbling as the major new shale gas expansions come on line, as the char...

Read
World Aromatics Conference focuses on key industry challenges
04/11/2017

Our 16th World Aromatics and Derivatives conference takes place on Wednesday/Thursday in Amsterdam. ...

Read
Hurricane Harvey will turbocharge move to the circular economy
25/09/2017

300,000 homes and half a million cars have been destroyed by Hurricane Harvey.  And in terms of bus...

Read
Plastics demand is peaking as circular economy arrives
24/07/2017

The Stone Age didn’t end because we ran out of stones.  Similarly, coal is being left in the ...

Read
Sinopec’s results confirm China’s focus on employment and self-sufficiency, not profit
01/06/2017

China’s strategies for oil, refining and petrochemical production are very different from thos...

Read
China’s increase in chemicals self-sufficiency will hit US shale gas expansions
11/05/2017

Some years ago, when China was well on the way to becoming the world’s largest importer of che...

Read
European petrochemical output still below 2004 – 2007 levels
04/05/2017

The financial crisis began a decade ago, yet production of the key “building block products...

Read
4.5 million tonnes of new US polyethylene exports on front-line as War of Words hits US-China trade
30/03/2017

“There isn’t anybody who knows what is going to happen in the next 12 months. We’ve neve...

Read

Market Intelligence

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

Learn more

Analytics

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