MARKET OUTLOOK: Europe and Asia polymer outlook

The next few years are expected to see an explosion of polymer capacity added globally, especially for polyethylene (PE). This is within a context of lower oil prices, a shaky global economy and a new player on the block, in the form of Iran. As a result, the market is asking where will all the product go and what will this mean in terms of pricing and margins?

NAPHTHA RESURGENCE

The Asian naphtha cracker business was supposed to be pretty much dead on its feet a few years ago, as the consensus view was that oil prices in the region of $100/bbl were here to stay.

This, of course, put downward pressure on margins as a result of high naphtha costs. The situation became even worse when co-product credits declined, following the collapse of butadiene prices.

On the horizon was also the start-up of huge amounts of new US ethane-based PE capacity. For instance, in the case of high-density PE (HDPE):

■ US capacity will rise from 7.2m tonne/year in 2016 to 10.4m tonnes/year in 2025, according to ICIS Consulting.

■ This will result in exports rising from around 700,000 tonnes in 2016 to 2.3m tonnes in 2025, based on our estimates of local consumption and operating rates.

Increases in low-density and linear-low density capacities will also take place from 2017.

Ethane costs in the US are not tied to oil prices. And so when oil prices were at recent historic highs, this greatly widened the advantages of cracking US ethane over cracking ethane anywhere in the world.

But how times have changed, which we have monitored very closely in our Asian, European and US PE price forecast reports www.icis.com/chemicals/channel-info-about/price-forecast-reports.

In the case of northeast Asia, for instance, the charts show the tremendous improvement in naphtha-based margins since 2014:

In Asia – in both our PE and also PP monthly forecast reports – we have made the right calls on the retreat in oil prices and the slowdown in the Chinese economy. We are among the few companies to predict both of these events, and to explain how they were linked. We believe that pricing will have to fall on weaker crude – and that margins will also weaken. But PE margins will not collapse in Asia. They will instead remain above their historic averages.

Our argument for weaker margins over the next 12 months is demand, rather than supply, driven. The macroeconomic environment is going to remain incredibly challenging as the global economy struggles to deal with major debt and deflation challenges. We have helped lead the way in flagging up these risks.

But from H2 2017 – when all that new US PE capacity hits the global market – extra supply will of course also become a major issue.

Along with the surge in new US capacity, there is one other important supply trend that we closely monitor in our Asian reports: how much more PE and PP capacity China decides to add during its 13th Five-Year-Plan, which runs from 2016 until 2020.

It would be wrong to see this as purely a commercial decision by China, as the country has never built petrochemicals plants for the purpose of only making money. China’s reason for becoming more self-sufficient up and down many of the petrochemicals value chains has instead been heavily tied to creating employment in downstream manufacturing facilities.

Now, of course, manufacturing jobs are under threat as a result of the economic slowdown and so why shouldn’t China build even more petrochemicals plants? Many of these new plants could be coal based, as this is where China has a feedstock advantage.

European polyolefins to tighten on supply outages

European polyethylene (PE) and polypropylene (PP) buyers may have to prepare for another difficult period, reminiscent of the exceptional supply issues seen last year.

There are already a number of factors pointing to a reduction in product availability over the next few months, the most obvious and worrying perhaps being the temporary shutdown of an important number of plants.

In March, LyondellBasell will 
undergo a 45-day maintenance turnaround that will affect a 350,000 tonne/year PP unit and a 320,000 tonne/year low density PE (LDPE) unit in France. Similarly, INEOS may shutdown capacity in Belgium, including 440,000 tonnes/year of high density PE (HDPE) and 400,000 tonnes/year of PP for four to six weeks from May, although this has not yet been confirmed. Total has a planned maintenance outage at its Antwerp cracker, which may affect PE and PP capacity as well.

There are also some unexpected problems. Versalis’ LDPE units in Italy have been under force majeure (FM) restrictions; its Ragusa plant since mid-January and its Ferrara plant since early February. In central Europe, Unipetrol’s PE and PP plants at Litvinov, in the Czech Republic, will run below 60-65% of capacity until July at least.

MIDDLE EAST SWITCH

At the same time, market participants foresee a possible reduction of deliveries from the Middle East as producers start moving larger volumes to China, where demand is expected to pick up in March after the Lunar New Year holiday break.

When balancing supply and demand, tightness looks like a real possibility in Europe from March and during the second quarter, with PP and LDPE being the most exposed. Nonetheless, projections by ICIS Consulting head towards a relief in supply conditions by mid-year.

The reasons are quite simple: global supply will grow stronger than demand, especially in the case of PE, and Europe will continue to offer substantial netbacks to polyolefin producers for some months yet, which will attract imports.

The scale-up of new plants in the Middle East, including the 1.43m tonne/year PE capacity of Borouge 3 at Ruwais, Abu Dhabi, and the 1.32m tonne/year plant recently launched by Sadara at Jubail, Saudi Arabia, will have a huge impact on global PE markets. Supply will also increase from North America, with the start-up of Braskem-IDESA’s Ethylene XXI project in Coatzacoalcos, Mexico, adding 1.05m tonnes/year of PE capacity.

Other projects scheduled to start-up this year include Nova Chemicals’ 454,000 tonne/year linear low density (LLDPE) plant at Joffre, Canada, and in India, BPCL’s 220,000 tonne/year HDPE/LLDPE unit in Assam and OPal’s second 360,000 tonne/year LLDPE line at Dahej.

PP production will also increase, with the ramp-up of Borouge 3, and from the start-up of a number of units in China totalling at least 1.15m tonnes/year of new capacity. It is worth noting that most of the Chinese units planned to start up this year were originally scheduled to commence operations in 2015.

Yet, the global PP market may prove to be tighter than PE’s, especially if demand in China and southeast Asia reaches reasonable growth, and if any projects are postponed again.

The other significant factor affecting markets this year is the end of UN-imposed sanctions on Iran. Petrochemical suppliers in the country are already moving to re-establish business connections with Europe, so they can divert cargoes away from China if the country’s demand prospects remain weak.

IRAN FACTOR

The lifting of sanctions will speed-up polymer investments in Iran, where new PE capacity was already scheduled to go on-stream this year. Mahabad Petrochemical’s 300,000 tonne/year HDPE/LLDPE swing capacity was close to completion by the end of 2015, and a 300,000 tonne/year LDPE project by Kordestan Petrochemical at Sanandaj could enter production during the second half of 2016.

High prices and good margins will attract imports into Europe, and it is reasonable to expect that producers’ margins will reduce, pressured by competition in the PE market in particular.

Does it mean that prices will inevitably soften? Not necessarily. That depends on raw material costs, which we believe could push PE and PP prices up gradually during the year.

It is also unlikely that the profitability of the polyolefins business in western Europe will be disrupted. Far from it, suppliers will probably retain a significant portion of the PE and PP price spreads over their respective monomers, at least in the short-term, unless unpredictable events shake the oil market.

International sellers will continue to target large-volume buyers in southeast Asia and China, and in other destinations such as Turkey, Africa, and south and central America.

In addition, ‘technical barriers’ to some markets exist in western Europe, where product specifi-cation and quality remain a ‘must’ for many PE and PP buyers, thereby reducing the feasibility of using imports in some instances.