Global PE faces perfect storm in H2 as supply grows amid slowing demand

BARCELONA (ICIS)–Polyethylene (PE) markets around the world face challenging conditions in the second half of 2019 as new capacities come onstream amid a slowdown in demand in many key markets.

Around 4.6m tonnes of new supply is due to come onstream this year, adding 3.8% to global capacity, according to the ICIS Supply & Demand database.

This includes four US shale-based start-ups plus worldscale projects in India, Malaysia, Indonesia, and Russia.

The largest of these is SIBUR’s vast ZapSibNeftekhim site at Tobolsk in Russia, which will add 1.5m tonnes/year of PE to the market.

Although an official start-up date has not yet been announced, a company spokesperson said on 19 June that commissioning is underway with test batches of polypropylene (PP) and PE having been already produced.

Owners of the US projects – which will add 2.84m tonnes/year of PE capacity this year – have been quite open about the fact that they will rely mainly on export markets for the new production.

But these plans were made before the US-China trade war kicked off, which has already curtailed exports to China.

At the same time, China is pushing ahead with its plans to increase self-sufficiency in chemicals, adding 900,000 tonnes of new PE capacity, mostly in the second half of 2019.

Instead, the US is targeting other markets, including southeast Asia, Latin America and Europe.

Unfortunately, fears about the impact of the trade war is hitting sentiment and slowing economic growth and, therefore, demand.

H1 IS BAD ENOUGH
The net result of start-ups is oversupply, already reflected in PE pricing which has fallen to decade-low levels for some grades.

In China, where industrial growth in May slowed to 5.0%, the lowest level since 2002, major producers with high inventories have resorted to cutting offers in order to offload stocks.

China PE prices have hit lows not recorded since the 2008 financial crisis.

US tariffs of 25% on exports of many Chinese finished goods, as well as chemicals, has dampened activity for downstream export-oriented companies.

At the same time, China’s economy is slowing down, with a knock-on effect on demand.

China’s problems are being felt elsewhere in Asia, where weak sentiment has hurt India’s linear low density polyethylene (LLDPE) markets.

Indian producers are lowering offers amid ample supply and subdued demand.

The situation in India is exacerbated by the start-up this month of GAIL’s 400,000 tonne/year Unipol metallocene LLDPE reactor in Pata, Uttar Pradesh.

LATAM, AFRICA OVERSUPPLY
Meanwhile, Latin America has been suffering an oversupply of PE during the first half of the year.

Mexico, Brazil, Argentina and Colombia – which all have their own production – will experience even more competition later in the year as the new US facilities come onstream.

There is a similar story in Africa, where PE prices are collapsing, with US sellers offering steep discounts as they search for alternative markets to China.

By 20 June, LLDPE offers had been quoted as low as $900/tonne, although this had not been widely confirmed in the market.

Some buyers expect prices for other PE grades to fall by triple-digit amounts as well.

“[It’s] going to be a massacre. [There is] a lot of product nobody knows what to do with,” said a source.

In Europe, LDPE prices have fallen to near parity with feedstock ethylene, reducing margins for producers.

It is not clear how much buyers would take advantage of new lower offers for US material, as they expect July to be lower from European sellers, given the sharp reduction in upstream naphtha prices.

ETHYLENE GLUT
The 2019 cracker start-ups have also led to a glut of ethylene in Asia and the US.

Since March, ethylene prices have collapsed in Asia to levels not recorded since the 2008 financial crisis.

Supply will remain ample in the second half of the year. New regional capacities, weak downstream conditions, and the start-up of a new export terminal in the US will likely outweigh output losses resulting from a heavy turnaround schedule in southeast Asia.

US exports are set to increase toward the end of the year if Enterprise Products Partners and Navigator Holdings’ new export terminal, with a capacity of 1m tonnes/year, starts up in the fourth quarter.

With US ethane supply soaring and prices continuing their downward trajectory, cracker operators in the country are likely to continue running their new plants hard.

Among the lowest cost producers in the world, US operators are likely to still make money at the expense of naphtha-based producers elsewhere.

Top picture source: Design Pics Inc/Shutterstock

Focus article by Will Beacham

Additional reporting by Lane Kelley, Ben Lake, Linda Naylor, Yeow Pei Lin, and Felita Widjaja

Click here to view related stories and content on the US-China trade war topic page