Trade tensions, lengthening supply maintain downward pressure on US PE exports

Author: Zachary Moore

2019/08/05

HOUSTON (ICIS)--US polyethylene (PE) export markets continue to face downward pressure as supply lengthens while trade tensions between the US and China deepen.

China is by far the world’s largest importer of PE, and US PE producers are in the midst of a massive investment wave, driven by abundant low-cost natural gas liquids (NGLs) feedstocks.

The US PE market is mature, and traditional export markets such as Latin America are not growing fast enough to absorb the large new capacities being built in the US Gulf, so most producers had intended to ship much of the new material to China.

But China has placed additional tariffs of 25% on imports of US linear low density polyethylene (LLDPE) and high density polyethylene (HDPE), as part of the ongoing trade tensions between the two countries.

The US traditionally exported around 20% of its total PE production, but this percentage is rising and will continue to increase as new export-focused capacities continue to come online.

According to the ICIS Supply and Demand Database, the US exported more than 50% of its total LLDPE production in 2018 and 30% of HDPE production.

Source: ICIS Supply and Demand Database

On Thursday, US President Donald Trump announced plans to impose an additional 10% tariff on $300bn worth of Chinese goods, bringing almost all products imported to the US from China under tariff threat.

The tariff announcement generated a sharp sell-off in the energy complex while lessening Chinese demand for US PE cargoes.  Chinese buyers had been purchasing more US PE in recent weeks on expectations that no additional tariffs would be announced and that the two sides would ultimately reach an agreement.

Persistent supply length is maintaining downward pressure on prices while slower-than-expected GDP growth from a number of key emerging markets has limited demand.

The US capacity build-up is ongoing, with over 2.8m tonnes/year of new US PE capacity slated to be added during 2019.

ExxonMobil started up a new 650,000 tonnes/year PE unit in Beaumont, Texas in late July. Sasol also started up a new 1.5m tonnes/year ethylene cracker at its Lake Charles, Louisiana site.

Saosl’s new 470,000 tonnes/year LLDPE plant came online earlier this year, and the company expects to bring on its new 420,000 tonnes/year low density polyethylene (LDPE) unit later in the quarter. The LDPE unit was previously slated to start-up in August but has been delayed for four-to-six weeks.

During its Q2 call, LyondellBasell said it expects to start up its new 500,000 tonne/year Hyperzone PE plant in La Porte, Texas during the fourth quarter.

Formosa Plastics also expects to bring online two new PE units with a combined capacity of 800,000 tonnes/year.

Export HDPE prices trended lower last week. HDPE high molecular weight (HMW) prices on Friday were assessed 2 cents/lb ($44/tonne) lower to 37-39 cents/lb free on board (FOB) US Gulf. Blow moulding and injection grades were assessed 1 cent/lb lower at 36-38 cents/lb for blow moulding and 35-37 cents/lb for injection.

HMW grades are currently trading close to par relative to other HDPE grades after carrying a premium over other grades for most of the year. HMW grades are used in film applications, demand for which is being pressured by environmental concerns surrounding single-use plastics.

HDPE injection continues to trade at a discount to other HDPE grades on sufficient supply. Injection grade is among the easiest HDPE grades to produce and new plants typically produce injection grade before branching out into other grades of HDPE.

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In the LLDPE market, premiums for hexene (C6) and metallocene grades over butene (C4) grade have narrowed as supply length has pressured all grades lower.  US producers have been building out LLDPE capacity at a faster rate than capacity for other PE products, with the result that LLDPE has traded at a discount to HDPE and LDPE for much of the past year.

ICIS assessed hexene LLDPE at a 1 cent/lb premium over butene and metallocene LLDPE (MLLDPE) at a 3 cent/lb premium over butene.

“Hexene is unlikely to maintain a premium over butene over the longer term as buyers have gotten used to purchasing hexene at par with butene,” a trader said.

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LDPE prices were assessed unchanged from the prior week.

Price pressure on LDPE has been relatively less severe than pressure on HDPE and LLDPE. US producers have been adding new LDPE capacity at a slower pace than new capacity for LLDPE and HDPE. Additionally, US LDPE has been exempted from additional tariffs in the Chinese market.

A 31 July fire at ExxonMobil's Baytown complex in Texas resulted in some upward movement in spot prices for ethylene but has yet to have a similar effect on PE prices.

ExxonMobil's Baytown site contains three crackers with a combined ethylene capacity of 3.64m tonnes/year. The crackers supply ethylene to ExxonMobil's PE complex at Mont Belvieu, Texas, which has a combined capacity of 2.64m tonnes/year.

PE is the most widely used plastic in the world, primarily found in packaging including plastic bags, plastic films and geomembranes.

Major US producers of PE include Chevron Phillips Chemical (CP Chem), DowDuPont, LyondellBasell, ExxonMobil, Formosa, INEOS, Total Petrochemicals and Westlake.

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

Focus article by Zachary Moore