Difficult times ahead for US polyethylene exports as business models change

Economic growth

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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.

 

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