US polypropylene imports rise as China aims for self-sufficiency

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US propane Jul16

Difficult times lie ahead for global polymer markets, as I note in a new analysis for ICIS Chemical Business.

In the short-term it is clear that downstream users have, once again, been busy building stock in recent weeks as the oil price rose. But now, finance directors are getting calls from their bankers asking about working capital levels. It would be no surprise if demand soon slackened off again ahead of the seasonal summer slowdown, as this excess inventory is unwound.

Unfortunately, however, this is not the main problem facing us as we head into H2. There are more fundamental reasons for concern in the polymer markets themselves, as China starts to ramp up its own production of polymers, in line with the objectives of its new 5 Year Plan. This calls for 93% self-sufficiency in the propylene chain, and 62% in the ethylene chain, by 2020:

  • Polypropylene (PP) highlights the change underway, as China’s capacity expands and its import needs reduce
  • In turn, this is creating a chain reaction, as displaced export producers in NE Asia and the Middle East seek new markets
  • The US market is one obvious target – and it is also starting to receive large volumes from Latin America, as the region’s economy heads into recession following China’s slowdown
  • Europe has seen an even greater change in its trade patterns.  It has now become a net importer, due to the arrival of displaced product from the Middle East and NE Asia, and a 9-fold increase in Latin American imports

These developments highlight the rapid shift that is taking place in demand drivers for the entire petrochemical and polymer industry:

  • Until recently, the industry has operated on the “build it, and buyers will come” principle of Kevin Costner’s 1989 baseball movie ‘Field of Dreams
  • It profited from a 25-year economic SuperCycle, which caused business models to become supply-driven, based on the strength of BabyBoomer demand
  • Today, however, we are going ‘Back to the Future’
  • Feedstock cost advantage remains necessary, but it is no longer enough to guarantee profit in a world where demand growth is slowing sharply, as we describe in Denand – the New Direction for Profit

Unfortunately, the post-Crisis meddling by central banks has increased the potential surpluses, by destroying price discovery in key markets.  High oil prices were never justified by supply constraints.  But, understandably, producers assumed new supply was needed, and rushed to expand production.

Only now are they starting to realise they were fooled.  A new Study by Rystad Energy highlights the extent of the problem – it shows that the US now has larger oil reserves than either Saudi Arabia or Russia.  And as the charts show, the US is also seeing a vast increase in propane production, as the Wall Street Journal describes:

“In a first, U.S. oil-and-gas companies are on track this year to export more propane than the next four largest exporting countries combined—OPEC members Qatar, Saudi Arabia, Algeria and Nigeria, which have long dominated the trade… U.S. exports already account for more than a third of the overall market for waterborne shipment”.

In essence, a chain reaction has developed, which is expanding in scope all the time:

  • The US is exporting low-cost propane to China
  • This means that China can cheaply expand its own propylene and polypropylene capacity via PDH technology
  • It is now 81% self-sufficient in PP, with H1 output up 37% since 2014, dramatically reducing its import need
  • NEA and the Middle East therefore need to send their newly-surplus production to the US
  • This reduces the need for US domestic PP production, freeing up more cheap propane for export to China

And, of course, cheap PP can often replace polyethylene and other polymers in certain applications.  So in turn, this will further pressure all the new PE capacity now about to come online on the US Gulf Coast, by reducing potential demand for the new product.

Please click here to read the ICB article.  And please do contact me at phodges@iec.eu.com if you haven’t yet ordered the Demand Study, and would like further details.

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