INSIGHT: ICIS margins data point to potential tipping point for PE producers

Author: Nigel Davis


LONDON (ICIS)--Petrochemical and plastics producers are heading for a tough few quarters as the cycle downturn combines with the weakened economic outlook.

Market sentiment at the European Petrochemical Association (EPCA) annual meeting in Berlin last week was clearly negative.

In Europe, the slump in cars sales and the downturn in construction is hitting hard.

The weaker China economy has impacted demand for most products.

Manufacturing globally has shown signs of weakness, if not deceleration, while consumer spending has underpinned US economic growth, with the 2009-to-date upturn the longest in duration since the late 1940s.

The track for petrochemicals has been headed downwards for the past 18 months or so, and further decline can be expected in this highly cyclical industry.

Cycles, of course, are driven by different factors; most, although not all, outside the control of producers in the market.

Sector margin data are illustrating the strain on profitability with recent shifts downward possibly indicating that things can get a great deal worse.

Most striking has been the collapse in integrated polyethylene (PE) margins in Asia as the market has lengthened on product availability and the recent Chinese National Day holidays.

This is another global supply driven problem for the sector.

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There is growing anxiety about the flood of US PE hitting the market.

US producers had expected to be selling large volumes directly to the still fast-growing China PE market, but the US-China trade war has put paid to that.

And when a new cracker and its associated PE units are up and running, they are under pressure to run fast.

Trade data are showing a remarkable increase in US PE exports in August, and a surge in exports to markets in southeast Asia such as Malaysia and Vietnam.

At close to 50,000 tonnes, they are equivalent to a local 600,000 tonne/year plant disrupting the regional market.

US exports to China have fallen because of the trade war tariffs on high density polyethylene (HDPE) and linear low density polyethylene (LLDPE).

US exports to Europe, Malaysia, Turkey and most notably Vietnam have however increased. US is selling more of the polymer to those destinations than it is to China.

“China’s PE market is likely to grow by some 8% this year, which would be very good,” says ICIS Section Head in Australia, John Richardson.

“But, on the basis of apparent demand, which is local production plus net imports, ICIS and China Customs department data show a 14% increase for January-August. This points to overstocking of some 1m tonnes," he adds.

Richardson went on to say that PE demand growth in China is, to some extent, divorced from GDP, so the weaker economy has not had a major impact on demand, as yet.

“But it is clear on a global basis that there is too much supply chasing too little demand. This has created more competition in non-China markets for producers from other countries, such as Saudi Arabia. The producers have responded by raising exports to China in order to take advantage of the missing US material," he says.

“In the perfect world, US capacity might just about fit. But we are not in a perfect world. ICIS margins point to a potential tipping point, where the re-balancing described above will no longer compensate for a weaker global economy.”

Lengthened supply and slowing demand growth create difficult market conditions for all.

And the ICIS margin data suggest that it could be getting painful for some.

“Looking at cracker margins in northeast Asia, they have been having a really tough period since August and this week was the worst yet,” says Ciaran Healy, Senior Predictive Analyst at ICIS.

“Naphtha cracking margins have fallen to [well] below zero on a variable basis. This implies that 100% cracker operations might be losing up to about $150/tonne of ethylene on a total cost basis. Even LPG [liquefied petroleum gas] producers are probably close to break even."

The story is essentially the same, perhaps even worse, if we assume integration to derivatives.

“Unless oil and naphtha drop off considerably, either downstream prices will need to rise or operations will be affected," adds Healy.

"The looming threat of derivative imports from other regions and a balanced-to-long local market makes any large increase in prices difficult to imagine.”

By Nigel Davis