ICIS Webinar: Falling oil prices squeeze polymer margins

Author: Al Greenwood

2020/03/25

HOUSTON (ICIS)--The crash in oil prices is squeezing margins for polymer producers around the world, especially for those in the US.

Polymer prices tend to follow crude oil with a time lag of about six weeks, according to the ICIS Petrochemical Index (IPEX). The index tracks 12 major petrochemicals and polymers

Even before the crash in oil prices, price for polyethylene (PE) in the US were down because of low prices for ethane and ethylene, said Zachary Moore, ICIS deputy managing editor, Americas.

He was among the speakers in a webinar, part of a series being hosted by ICIS.

The US relies overwhelmingly on ethane for a feedstock, and the advent of shale oil and shale gas has increased supplies of this and other natural gas liquids (NGLs).

This has lowered feedstock costs for ethylene producers, which is putting pressure on their prices.

At the same time, US companies built several new ethylene plants, which increased supplies for the main feedstock used for PE production.

Petrochemical producers have started up several new PE plants, putting even more pressure on prices.

"Before all of this happened, PE prices were already at a decade low," Moore said.

Now, the decline in oil prices is putting even more pressure on PE prices. Meanwhile, the coronavirus will likely lead to a severe contraction to the US economy, causing overall demand for PE to fall.

All of these factors, from lower feedstock costs to weaker demand, will pressure PE prices lower, Moore said. The question is when prices could start declining and how far they will decline.

So far, PE producers have rescinded proposals to increase prices for March, he said.

Some producers could take their own individual steps to limit the amount of material in the market.

If ethylene prices become too low, crackers with the flexibility can switch feedstocks from ethane to liquefied petroleum gas (LPG), said James Ray, ICIS vice president of consulting, Americas.

Cracking more LPG produces less ethylene and more propylene.

By switching feedstock, crackers can relieve some of the ethylene glut.

Companies may also choose to conduct maintenance and turnarounds ahead of schedule, he said.

Any maintenance work must take the coronavirus into account, since the work crews could increase the chances of spreading the disease. Some companies have actually delayed maintenance because they do not want construction crews congregating at their sites.

Because ethane and ethylene prices are so low, they may have little room to fall further, and this could limit declines for downstream products, Moore said.

Rock-bottom prices may not immediately elicit a surge in interest in buyers.

Some may expect prices for chemicals will continue falling. These buyers may choose to subsist on inventories until they have to replenish their supplies or until they believe prices had bottomed out.

Other buyers may avoid purchases because they want to manage their cash flow during a downturn in the economy, Ray said.

These buyers will want to balance their cash-flow needs while still ensuring that they have enough material to meet any customer demand, he said.

DEMAND OUTLOOK
Demand for polymers used to make packaging for food, sanitsers and hygienic products is holding up because of the coronavirus.

Plastics demand from food packaging is typically resilient because consumers have to eat, regardless of the strength of the economy, Ray said.

These end markets should provide a boost for PE, polypropylene (PP) and polyethylene terephthalate (PET).

However, PP producers will also contend with the effects of the shutdown of automobile plants, Moore said.

PET is used to make bottles for beverages and sanitsers, so it has seen a surge from consumers panic-buying water, Ray said.

It is unclear if the market will suffer from a subsequent crash in demand or how the economic slowdown will affect the rise in beverage consumption that takes place every summer in the northern hemisphere, said Luly Stephens, ICIS markets editor.

RECESSION AND DEMAND SHOCK
Based on the stock markets, it's clear that the plastics industry is in for a demand shock, said Joseph Chang, global editor for ICIS Chemical Business magazine.

So far in 2020, shares of some plastics producers have fallen by 50%, he said. What's striking about the declines is that they are happening to investment-grade companies.

"This downturn will stress balance sheets," Chang said. Investors are concerned about liquidity and solvency.

Some chemical companies could cut capital expenditures (capex), something that is already happening among midstream companies and oil producers, Chang said.

Polymer producers have been quite conservative with their debt levels, he said. Many have loans that will mature well into the future.

The Federal Reserve is making funds available to investment-grade companies. The central bank is also buying various securities, which should keep interest rates low.

On top of the monetary stimulus provided by the Federal Reserve, Congress has agreed to a $2trn relief package that will provide a boost from the fiscal side.

Such stimulus is critical when the US economy is facing such a large shock to demand, Chang said.

Wednesday's webinar recording is available here.

Sign up here for industry updates on "Making sense of market events: Coronavirus and oil price slumps". Join the other webinars here.

Visit the ICIS coronavirus topic page for analysis of the impact on chemical markets and links to latest news.

Thumbnail of polyethylene (PE) bags by Al Greenwood