INSIGHT: Can demand absorb the last big wave of global PE capacity?

Author: Joseph Chang


NEW YORK (ICIS)--Dissecting the comments from major polyethylene (PE) producers Dow and LyondellBasell on their recent Q4 earnings conference calls, it is clear they are gearing up for more exports from the US, pinning hopes on a surge in demand from China following the Lunar New Year.

China demand coming out of Lunar New Year will be critical in absorbing major global PE capacity to the tune of 8-9m tonnes/year expected to start up in 2022. China overall chemicals demand in H2 2021 was constrained by disruptions from China’s zero-COVID-19 policy as well as its dual control policy to curb greenhouse gas (GHG) emissions.

“As markets recover from the pandemic, and especially the largest market in China, and the supply chain constraints are worked through, we do expect that the market growth is going to be able to absorb a lot of the new capacity that’s coming online,” said LyondellBasell interim CEO Ken Lane, who sees PE effective operating rates above 90% for 2022.

He sees pent-up demand in China after weakening in H2 2021 as authorities worked to keep coronavirus outbreaks under control under China’s zero-COVID-19 policy, and reduce pollution in preparation for the Winter Olympics.

“There is a lot of demand that I believe is still yet to come back, and we’re going to see that some time in the middle of the year in the spring,” said Lane.

Dow CEO Jim Fitterling is also watching Asia closely, as the company is looking to ramp up PE exports in 2022.

“We’ve seen some rate reductions at some Asian producers that are higher cost… As we come out of [Lunar] New Year, we’ll watch closely on both PE as well as ethylene glycol (EG),” said Fitterling.

“It’s good for us obviously with our footprint and our advantaged cost positions here. We just have to continue to improve on these marine packed cargo shipments to take advantage of that arbitrage with Asia,” he added.

The focus on PE exports makes sense in light of big capacity additions in the US and Canada on the order of around 3m tonnes/year in 2022 from 2021, representing an expansion of more than 10%, according to the ICIS Supply and Demand Database.

Counting PE expansions in Q4 2021, this big wave amounts to about 4m tonnes/year in North America.

Source: ICIS Supply and Demand Database

And China is the number one destination, as the country accounted for about 60% of global net PE imports in 2021.

“Producers have to ramp up exports and they are praying the demand and logistics to do so are there. Right now, they need to be closer to 45% of total sales being exported instead of the 34% the industry averaged last year,” said Brian Pruett, senior vice president of PE and PP at Chemical Data (CDI), part of ICIS.

“If not, operating rates will be closer to 80% instead of 90%+, and they will be dumping material into the domestic market,” he added.

US high density polyethylene (HDPE) exports could surge over 50% in 2022 to 4.5m tonnes from a supply constrained 2021 (Texas freeze, hurricanes), if exports reach 43% of capacity as they did in 2020, noted John Richardson, ICIS Senior Consultant in Asia. This would also be about 15% above 2020 levels.

The US is set to see two major PE start-ups later this year – from Shell in Monaca, Pennsylvania and Bayport Polymers (TotalEnergies/Borealis) in Bayport, Texas. Plus, Gulf Coast Growth Ventures (ExxonMobil/SABIC), which started up in late 2021, should fully ramp up PE capacity in 2022.

In Canada, NOVA Chemicals is expected to start up its linear low density PE (LLDPE) unit in St Clair, Ontario in Q4 2022.

On a global basis, PE capacity is set to expand by around 9m tonnes/year in 2022 from 2021, a gain of about 7%, with the majority coming from China, according to the ICIS Supply and Demand Database.

Source: ICIS Supply and Demand Database

“China will still need PE imports, but with a massive local capacity build, it will not be as much as North America needs to move. Thus, North American producers will have to focus on other destinations,” said Pruett.

These destinations would include Europe, Mexico, South America, Vietnam and Malaysia, he added.

After a boom in 2020 that saw China PE demand rise around 9%, fuelled by stimulus and surging exports, demand actually fell in 2021, with HDPE down 5%, low density PE (LDPE) off 6% and LLDPE up just 1%, Richardson said.

“There is likely to be a post-Lunar New Year pick-up as there always is, and we might see additional easing measures and stimulus ahead of the big political meeting in October or November when President Xi is due to be confirmed for a third term,” said Richardson.

“But the zero-COVID policy appears to be around for most of the year,” he added, noting the resulting disruptions could dampen demand.

Taking China LLDPE imports as an example, there are a wide range of outcomes based on demand growth and local operating rates.

*Demand growth 5%, operating rate 83% ** Demand growth 2%, operating rate 87% *** Demand growth 0%, operating rate 92%

Source: ICIS Supply and Demand Database and John Richardson's assumptions

In the base case scenario with China demand growth of 5% and operating rates of 83%, net LLDPE imports are projected at 7.0m tonnes in 2022. However, if demand is flat and local operating rates are 92%, net LLDPE imports could be as low as 4.7m tonnes, according to Richardson.

Look for crude oil prices to tilt operating rates as most China capacity is based on naphtha feedstock and PE margins are negative. High oil prices would keep rates constrained, while a break in oil could spur more production.

Meanwhile, manufacturing activity in China remains less than inspiring with the Caixin China General Manufacturing Purchasing Managers’ Index (PMI) falling to 49.1 in January from 50.9 in December, indicating contraction (below 50).

There is no question there is a massive wave of global PE capacity gearing up to start in 2022. It is just a matter of whether demand growth, a heavier-than-usual cracker turnaround schedule in the US and Europe, operating rate cutbacks in Asia and Europe from high naphtha-based feedstock and energy costs, potential delays in PE start-ups and weather-related outages will be enough to absorb the new capacity without a major breakdown in price. High crude oil prices are also providing support, for now.

At least early in 2022, PE demand appears to be robust, and producers are relatively optimistic on the 2022 outlook.

“We see strong demand across all sectors for plastic products… Most of [the new projects] are going to start coming on in the second quarter to mid-year… and so I think market growth is going to help moderate some of that [impact],” said Fitterling from Dow.

“[We see] some combination of a slower ramp-up of the capacity coming on and stronger demand. I certainly don’t see a [pricing] cliff in the second half of the year – I see it completely the opposite to that right now,” said Lane from LyondellBasell.

US PE contracts for January have just settled flat. Fitterling noted earlier on Dow's conference call that two 4 cents/lb hikes look to be lining up for February and March.

“Demand has picked up because many customers who destocked for year-end inventory need to buy. The price increase letters also make buyers come back and buy again, just in case there is an increase. And after 4-5 months of converters working off their own built-up inventories, buyers are back buying again,” said Pruett from CDI.

A heavy maintenance schedule in H1 2022 could cushion the brunt of the upcoming capacity, executives said.

In Q1 2022, downtime from planned maintenance in the US is expected to be three times higher than the historical average with around 15% of upstream ethylene capacity offline. In Europe, about 10% of ethylene capacity will be down in H1, noted LyondellBasell CFO Michael McMurray.

However, as new capacity ramps up, look for greater price volatility with obvious risks to the downside. 2022 is setting up to be a choppy market.

CDI is projecting a drop in US PE prices of 15-20 cents/lb from March to August 2022 as new US capacities hitting the market more than offset demand growth.

“Producers are likely overestimating demand and the impact on the supply/demand balance with around 9bn lb/year (4m tonnes/year) in North America hitting the market in a 14-month period (October 2021-November 2022) with new entrants having to buy market share,” said Pruett.

The additional capacity is actually closer to over 11bn lb/year considering these new plants easily run above nameplate and Formosa Plastics’ October 2021 restart after an extended, nearly two-year outage, he added.

And the market is far from tight. While North American inventories measured by Days of Supply (DOS) have come down from peak levels in October, and may drop further in early 2022, they are still expected to be elevated, Pruett pointed out.

Source: Chemical Data (CDI)

Looking further ahead, once we get beyond this big wave of capacity, there should be less and less coming on in 2023 and beyond. Minimal capacity is set to come on in the US and Canada from 2023 onwards, while the pace of global capacity additions slows markedly.

The decarbonisation drive to a target of net zero carbon emissions by 2050 will be a major factor in pumping the brakes on the pace of new projects.

In North America and Europe, any new crackers will have to incorporate major carbon mitigation technologies and assets which do not come cheap.

“Conventional, conventional crackers – we won’t see another one built [in North America]. It will be more expensive and involved,” said Luis Sierra, CEO of NOVA Chemicals, in an interview with ICIS at the American Chemistry Council (ACC) annual meeting in November.

“The pathway to carbon neutrality is not easy and it’s not free,” said Dow’s Fitterling at the ACC meeting.

Dow plans to build the world’s first net-zero carbon emissions cracker in Fort Saskatchewan, Canada with construction potentially by late 2023 and start-up in 2027. The project will include around 1.65m tonnes/year of PE capacity in Phase 1 of the project.

The net-zero carbon cracker would capture off-gases and run them through an Auto-Thermal Reformer (ATR) to produce hydrogen and CO2. The hydrogen would be used to fuel the cracker furnaces and the CO2 captured and stored in the Alberta Carbon Trunk Line (ACTL).

Then Dow plans to retrofit the existing Fort Saskatchewan cracker with an ATR to fuel the furnaces with hydrogen. In these two phases, Dow would slash Scope 1 and 2 emissions at the site by 95%.

In the meantime, Dow and other companies such as BASF, Shell, SABIC and Linde are pouring R&D dollars into developing new technologies to decarbonise cracker operations, including electric cracking (e-cracking), the production and use of clean hydrogen (BASF’s methane pyrolysis) and ethane dehydrogenation (EDH).

Dow plans to allocate around $1bn/year in capital expenditures (capex) – about a third of its total capex budget - to decarbonisation through 2050.

Other companies are likely to follow, devoting larger percentages of capex to decarbonisation. That will naturally mean less capex for capacity expansion, or more capex per tonne of new capacity.

“We believe the capacity response to higher prices has more of a lag this cycle, as uncertainty over demand, cost inflation, feedstock volatility, regulatory policy, and downstream sustainability goals make projects harder to authorise, tightening operating rates in 2023-2027,” said Laurence Alexander, analyst at Jefferies, in a research note.

“We estimate decarbonised olefins capacity will cost 30-50% more in capital/tonne, leading to a steeper cost curve unless governments aggressively subsidise the new projects. Cutting fossil fuel subsidies would further steepen the curve,” he added.

Insight article by Joseph Chang

Thumbnail shows a red lid made of PE.