US polyethylene and PVC exporters focus on margin, not volume

Chemical companies

D'turn 30Nov13

2013 has seen 3 types of markets develop for the blog’s IeC Downturn Monitor portfolio as the chart above shows:

  • Financial assets such as the S&P 500 (purple) have soared, as did the US$ against the yen (orange)
  • Crude oil (blue) and naphtha (black) tried to follow, but found it difficult to pass though the higher prices
  • Benzene (green) and PTA (red) have struggled with weak demand and high feedstock prices

The anomaly has been US polyethylene (yellow), where prices have stayed relatively strong as producers chose to focus on margin rather than volume.

US PE, PVC Dec13aThis might seem a strange decision, given they enjoy a major feedstock cost advantage on ethylene due to shale gas.  But it makes perfect sense when seen against the limited potential for selling additional export volumes.  As the charts above show, based on trade data from Global Trade Information Services, there is really little scope for selling more PE or PVC (the main derivatives):

  • Total PE net volumes are up 16% (blue column) versus 2011 (red) this year due mainly to a 26% increase to Latin America
  • This region now takes three quarters of US net exports, as the percentage of sales to Asia has halved
  • Total PVC net sales are up just 7% this year versus 2011, and flat versus 2012 (green)
  • Exports are focused on Turkey, Mexico, Russia and Egypt: Asian volumes have also dropped versus 2011-12

This message does not yet seem to have got home to investors.  They look at the raw data, and see just rising volumes and high margins.  So they imagine that the world, and Asia in particular, are just waiting for additional volumes to appear.

What they miss is that Asian and LatAm countries are busy expanding their own production as fast as possible, so as to create jobs.  They also forget that China’s slowdown is also now impacting Latin America’s demand.  Equally, they overlook the fact that Brazil’s vast increase in PVC imports (double 2011 levels) and in PE (up 34%), is mostly a one-off bonus due to preparations for the soccer World Cup and the Olympics.

The operating managers with whom the blog talks understand all this very well.  Some have special grades of PE that currently cannot be supplied by domestic competition in the importing countries.  But most appreciate there is little point trying to sell additional volume, as this would merely lead to a price war and lower margins.  They also know, unlike investors, that exporting additional volumes – if major new capacity is built – will be very hard indeed.

The chart shows latest portfolio price movements since January 2013 with ICIS pricing comments below:

PTA China, red, down 17%. “Downbeat market outlook for the downstream polyethylene terephthalate (PET) and polyester fibre demand”
Benzene Europe, green, down 14%. “Players are generally in the midst of running down inventories ahead of year-end rather than building stock.”
Brent crude oil, blue, down 1%
Naphtha Europe, black, up 3%.  “European arbitrage window to Asia is well and truly shut, but domestic petrochemical demand will continue to prop up prices as crackers minimise the use of the more expensive alternative feedstock propane”
HDPE USA export, yellow, up 13%. “Limited trade in the week shortened by the US Thanksgiving holiday.
US$: yen, orange, up 16%
S&P 500 stock market index, purple, up 23%

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