Difficult times ahead for US polyethylene exports as business models change

Economic growth

SHARE THIS STORY

This wasn’t the chart that companies and investors expected to see when they were busy finalising $bns of investment in new US ethylene and polyethylene (PE) capacity back in 2013-4.  They were working on 3 core assumptions, which they were sure would make these investments vastly profitable:

  • Oil prices would always be above $100/bbl and provide US gas-based producers with long-term cost advantage
  • Global growth would return to BabyBoomer-led SuperCycle levels; China would always need vast import volumes
  • Globalisation would continue for decades and plants could be sited half-way across the world from their markets

The result is that US ethylene capacity is now expanding by 34% through 2019, adding 9.2m tonnes/year of new ethylene supply, alongside a 1.1m tonnes/year expansion of existing crackers. In turn, PE capacity is expanding by 40%, with supply expanding by 6.5m tonnes/year through 2019.

It was always known that most of this new product would have to be exported, as then ExxonMobil President, Stephen Pryor, explained in January 2014:

“The reality is that the US from a chemical standpoint is a very mature market. We have some demand growth domestically in the US but it’s a percentage or two – it’s not strong demand growth,” Pryor said, adding that PE hardly grew in the US in a decade. “That is not going to change…The [US] domestic market is what is it and therefore, part of these products, I would argue, most of these products, will have to be exported,” Pryor said.”

But now the plants are starting up, and sadly it is clear that none of these assumptions have proved to be correct:

  • Oil prices have fallen well below $100/bbl, despite the OPEC/Russia cutback deal, and US output is soaring
  • Companies were badly misled by the IMF; its forecasts of 4.5% global GDP growth proved hopelessly optimistic
  • Protectionism is rising around the world, with President Trump withdrawing from the Trans-Pacific Partnership and threatening to leave NAFTA

As a result, US PE exports are falling, just as all the new capacity starts to come online, as the chart shows:

  • US net exports were down 15% in the January – September period, confirming the major decline seen this year
  • Net exports to Latin America were down 29%, whilst volume to the Middle East was down 31%
  • Volume has risen by 40% to China, but still amounts to just 440kt – enough to fill just one new reactor

And, of course, PE use is coming under sustained pressure on environmental grounds, with the UK government suggesting last week it might tax or even ban all single-use plastic in an effort to tackle ocean pollution.

The same assumptions also drove expansion in US PVC capacity, with 750kt coming online this year.  US housing starts remain more than 40% below their peak in the subprime period, and so it was always known that much of this new capacity would also have to be exported.  Yet as the second chart confirms:

  • US net exports were down 6% in the January – September period, confirming the decline seen through 2017
  • Exports to Latin America were down 9%: volumes to NAFTA, the Middle East and China were at 2016 levels

PRODUCERS NEED TO DEVELOP NEW BUSINESS MODELS
These developments are also unlikely to prove just a short-term dip.  China is now accelerating its plans to become self-sufficient in the ethylene chain, with ICIS China reporting that current capacity could expand by 84%.  And the pressures from pollution concerns are growing, not reducing.

The key issue is that a paradigm shift is underway as the info-graphic explains:

  • Previously successful business models, based on the supply-driven principle, no longer work
  • Companies now need to adopt demand-led strategies if they want to maintain revenue and profit growth

We explored these issues in depth in the recent IeC-ICIS Study, ‘Demand- the New Direction for Profit‘.  It is the product of 5 years of ground-breaking forecasting work, since the publication of our jointly-authored book, ‘Boom, Gloom and the New Normal: how the Western BabyBoomers are Changing Demand Patterns, Again‘.

As we highlighted at the Study’s launch, companies and investors have a clear choice ahead:

  • They can either hope that somehow stimulus policies will finally succeed despite past failure
  • Or, they can join the Winners who are developing new revenue and profit growth via demand-led strategies

US export data doesn’t lie.  It confirms that the expected export demand for all the planned new capacity has not appeared, and probably never will appear.  But this does not mean the investments are doomed to failure.  It just means that the urgency for adopting new demand-led strategies is ramping up.

 

PREVIOUS POST

China's central bank governor warns of 'Minsky Moment' risk

13/11/2017

The world is coming to the end of probably the greatest financial bubble ever se...

Learn more
NEXT POST

Central banks' reliance on defunct economic theory makes people worry their children will be worse off than themselves

27/11/2017

“Average UK wages in 2022 could still be lower than in 2008”  UK Of...

Learn more
More posts
No Deal Brexit still a likely option if opposition parties fail to support a new referendum
15/09/2019

Canada’s normally pro-UK ‘Globe and Mail’ summed up the prevailing external view of Brexit las...

Read
UK, EU27 and EEA businesses need to start planning for a No Deal Brexit on 31 October
28/07/2019

New UK premier, Boris Johnson, said last week that the UK must leave the EU by 31 October, “do or ...

Read
London house prices edge closer to a tumble
21/07/2019

After the excitement of Wimbledon tennis and a cricket World Cup final, Londoners were back to their...

Read
G7 births hit new record low, below Depression level in 1933
14/07/2019

If a country doesn’t have any babies, then in time it won’t have an economy. But that...

Read
From subprime to stimulus…and now social division
06/07/2019

The blog has now been running for 12 years since the first post was written from Thailand at the end...

Read
Resilience amidst headwinds is key for H2
30/06/2019

Resilience is set to become the key issue as we look forward to H2, as I note in a new analysis for ...

Read
Perennials set to defeat Fed’s attempt to maintain the stock market rally as deflation looms
23/06/2019

Never let reality get in the way of a good theory. That’s been the policy of western central b...

Read
Europe’s auto sector suffers as Dieselgate and China’s downturn hit sales
16/06/2019

Trade wars, Dieselgate and recession risk are having a major impact on the European auto industry, a...

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