MOST READ – INTERVIEW: Reopening demand, low inventories to flatten PE, PP cycle – LyondellBasell CEO

NEW YORK (ICIS)–A surge in demand from economies reopening along with lack of major new capacity in the US and Europe in the coming years should result in a flattening of the cycle for polyethylene (PE) and polypropylene (PP), the CEO of LyondellBasell said.

“Longer term, as we go into 2022 and 2023, US prices could moderate as the supply situation improves, but I still think that’s Q4 onwards. Q2 and Q3 will remain very tight,” said Bob Patel, CEO of LyondellBasell, in an interview with ICIS.

The debate today is on whether prices and operating rates will moderate or reset lower, he noted.

“I’m in the moderation camp… because demand is growing at a very good rate. We’re in the early stages of a recovery and there are so many end products that are in backlog today, including cars and furniture. The entire value chain has less inventory today,” said Patel.

The reopening of economies around the world is still to come with Europe and India largely still locked down, along with parts of Asia and Latin America.

“As reopening happens, we’ll see more demand for polyolefins. If you think about those sources of strong demand for the next 12-18 months, I think the cycle set-up for 2022, 2023, 2024 is for a very modest downturn, if any. I think operating rates could actually just go sideways,” said Patel.

“Between 2021 and 2022, it’s very plausible that we end up with average 5% growth for both years. That would be enough to create a much flatter operating rate cycle which means profitability for the industry could be better than mid-cycle over the next 2-3 years for PE and PP,” he added.

SHIPPING CONTAINER IMPACT
And the wide price differential between US and China PE prices – the US being higher – is likely to persist in the next two-to-three months because of the dislocation of shipping containers, the CEO predicted.

“In a way the arbitrage is a bit theoretical. We don’t see a lot of product coming from China to the US because of the container dislocations,” said Patel.

The differential between US high density PE (HDPE) blow moulding spot FOB (free on board) export prices and spot CFR (cost & freight) China prices is around $670/tonne, according to ICIS.

“In the near term – say the next 60-90 days – it wouldn’t surprise me to still see a differential between US and China PE. Because of the container dislocation, I don’t think there’s enough trade flow to narrow the gap – PE and PP flowing from China to the US,” he added.

While China’s economy and consumption appears to be healthy, exports of finished goods have declined somewhat because of the shortage of containers in China. China has also not been receiving the usual level of US PE exports after the US winter storm, he noted.

DIFFICULT TO ADD CAPACITY IN US, EUROPE
Longer term, it will be more difficult to add major new capacity in the US and Europe, said the CEO, who sees no repeat of the wave of new crackers built in the US over the past five years.

“If you think about big oil companies, they’re going to be more focused in the near term on repairing their balance sheets and trying to figure out the new normal in terms of oil production, especially in this ESG world where they have more difficulty attracting capital and [there is] more environmental regulation… All of that suggests that new projects will be delayed for a while,” said Patel.

Yet the US shale gas advantage should prove durable with an oil-to-natural gas price ratio of around 20-25x possible over the long term with some cyclicality, leading to selective but few investments, he noted.

In Europe, environmental regulations requiring CO2 reduction requirements will continue to be a headwind, making it more challenging to build new petrochemical plants.

“If you’re adding more capacity, you’re adding more CO2 emissions even if the intensity is lower. The impact of climate regulation will be the strongest in Europe in terms of curtailing new investment,” said Patel.

Meanwhile, Europe will continue to be a large consumer market.

“Over the longer term, Europe could become more of an import market as it grows at 1-2% a year. But I think new investment will be minimal, if any, in Europe,” said Patel.

CHINA PE IMPORTS TO STILL GROW
In China, even as companies add new PE and PP capacity, growing imports of PE in particular will still be needed, he said.

“In PE, if you assume a 5% demand growth rate, we think in the next five years based on what [new capacity has been] announced, the absolute level of imports will still increase. The PE import needs in China still continue to grow. Self-sufficiency in PE seems to be very long away, if at all,” said Patel.

However, on the PP side, where there is no distinct cost advantage in any one region, China could become closer to being balanced by the end of the decade, he added.

Overall, new project activity may be waning in China after the massive recent capacity additions, he noted.

“We’re very active in polyolefins licensing, especially in China. And compared to 2016-2019, we are seeing a slower pace of activity in new licensing. So that’s an indication of less being built compared to the last four years,” said Patel.

See more from the ICIS interview with LyondellBasell CEO Bob Patel in the 21 May special issue of ICIS Chemical Business, in association with the American Fuel & Petrochemical Manufacturers (AFPM).

Interview article by Joseph Chang