Global polyethylene (PE) markets are starting to show the first signs of what could potentially develop into a price war, as new US capacity comes onstream amid lacklustre global demand growth and the ongoing US-China trade war.
Evidence for this is particularly strong in linear low density PE (LLDPE) where, since mid-2018, US prices detached from Europe and Asia and fell as producers tried to gain market share for new shale-gas based volumes. US PE exports to all destinations totalled 3.3m tonnes in 2018 – 50% higher than in 2017 – and are expected to reach 3.8m tonnes in 2019 and 4.3m tonnes in 2020, according to ICIS forecasts.
Meanwhile the US-China trade war has already made China – by far the world’s largest PE import market – less attractive to US exporters. China slapped a 25% tariff on all imports of US HPDE and 93% of LLDPE in August 2018. Export figures show a sharp decrease in US exports of LLDPE and HDPE to China in September and October 2018 (the latest figures available). Chinese exporters of finished plastic goods, meanwhile, face a 10% tariff which will rise to 25% in March unless the two countries can agree a deal in talks which restarted on Wednesday.
US exporters are already diverting from China to other markets. These other, much smaller, Asian markets such as Indonesia, Malaysia, Vietnam, and the Singapore hub, may not be able to absorb much more. In order to gain a foothold and market share in Asia, US suppliers have been inclined to offer competitive prices, particularly for LLDPE, with the most volume added in 2017 to 2018 and more due online in 2019.
In a podcast interview this week, ICIS consultant John Richardson said: “Hurricane Harvey delayed production in late 2017 so we’ll expect to see a big increase in production in 2019 and the only market that can absorb all this is China. The 25% China tariffs are very clever because they target the two biggest areas of US expansion – HDPE and LLDPE.”
Richardson pointed out that if US producers try to pass the tariffs on to customers in China they will refuse to buy. The US producers could absorb the 25% tariffs themselves. That looks profitable on a variable cost basis because they have access to very cheap shale gas and ethane.
“But not on a full cost basis: because of all the debt they have to pay back for the new crackers they cannot absorb the 25% and also return money to investors. If the tariffs stay in place and the trade war continues, it will get worse for US producers.”
They are managing to balance exports out for now by targeting other southeast Asian markets and Turkey. But for 2019 these smaller markets will not be able to absorb the PE because of the volume of product coming onstream, he said.
“It’s no exaggeration to say you can see southeast Asia being swamped with US LLDPE this year. We are seeing signs of a price war already with prices and margins declining a lot. Mathematically, if you take China completely out of the equation, then the extra US material doesn’t fit without major oversupply in Europe.”
Europe is also now a target for more, competitively-priced US PE. ICIS reported in late January that US exporters are expanding their offerings to Europe from LLDPE and LDPE to now include HDPE.
US LLDPE free on board (FOB) prices have been falling steadily since around March 2018, accelerating towards the end of the year. Imports from there to Europe were first seen in March/April, but more arrived towards the end of 2018.
If the 25% tariffs persist and China continues to be an unattractive market for US PE, ICIS forecasts show that the US would need to double its market share of the remaining global import market. These figures assume China is effectively closed to US PE.
Global markets might be able to handle all this new material if demand was robust. But there is lots of evidence that key end-use markets are not currently in a good state. Automotive is a great example, with production forecast to fall in 2019 across many key geographies including China and the US. Fourth quarter 2018 auto production collapsed by 16% in China.
Dow, the Materials Science business of DowDuPont to be spun off on 1 April, warned on Thursday of a major decline in first-quarter earnings, led by PE and polyurethanes margin compression linked to overcapacity.
The trade war is having a major impact on consumption in China because export markets account for around 180m jobs there. US tariffs on Chinese finished products are affecting manufacturing in China. The tariff is 10% on Chinese plastic products but should rise to 25% in March unless they strike a deal.