US Dow expects strong PE demand to continue in ’22

HOUSTON (ICIS)–Dow expects demand for polyethylene (PE) will remain strong in 2022 because the global economy will continue expanding at levels not seen in more than a decade, the CFO of the US-based producer said on Wednesday.

The global economy should expand by 5% in 2022, a level that the world last saw in 2005, said Howard Ungerleider, Dow CFO. He made his comments at the Citi Basic Materials Conference.

Other signs point to continued growth in demand for PE. The manufacturing purchasing managers’ index (PMI) of the Institute for Supply Management (ISM) remained well above its 10-year average.

“Demand had been robust around the world,” Ungerleider said.

Resilient PE demand has been a hallmark of the post-pandemic economy.

Demand typically falls by 3-5% during a recession, Ungerleider said. Instead, it rose by 3-5% during the pandemic due to changes in consumer habits.

It should rise by 5% in 2021, he said. The 2022 forecasts for GDP point to an additional need for supply.

As a rule of thumb, every 1-point rise in GDP growth requires two to three world-scale PE plants, Ungerleider said.

Dow did acknowledge some hiccups in its forecast for continued growth.

Earlier on Wednesday, the company said that its Q4 earnings before interest, tax, depreciation and amortisation (EBITDA) will be $150m-200m below the current consensus because of higher costs in raw materials and lower prices for PE and co-products. The rise in costs and decline in prices have caused a decline in margins for Dow’s packaging and specialty plastics segment, Ungerleider said.

Nonetheless, a decline in demand does not factor into Dow’s Q4 expectations and the company expects it will remain strong in the upcoming months.

Order backlogs remain robust, Ungerleider said. Inventory-to-sales ratios are well below 20-year averages.

Global demand in November was up by double digits over October, Ungerleider said.

Order loading in Dow’s books for December is above November, Ungerleider said. Such a development is contrary to trends, since Dow typically sees a slowdown from the middle of November to the end of the year.

OIL AND GAS OUTLOOK
Dow expects higher crude prices will encourage companies to drill more wells, which should increase supplies for oil as well as for natural gas.

Natural gas is important to Dow and other North American petrochemical producers because its price sets a floor for ethane, the predominant feedstock for the region.

When oil prices are high and natural gas prices are low, Dow and other North American producers have a cost advantage against much of the world, which relies predominantly on oil-based naphtha for a feedstock.

He estimates that two-thirds of the world’s crackers are based on naphtha.

As far as natural gas, Ungerleider said Dow’s medium-term forecast is for natural gas prices to be $2.50-3.50/MMBtu.

Ungerleider did not specify a timeframe for the forecast. However, it is well below the forward months Henry Hub contracts, which show gas prices remaining above $3.50/MMBtu through March 2023.

The effects of the Omicron variant could cause energy prices to be volatile because of restrictions on travel, which could lower demand for fuel.

The Omicron variant was named less than a week ago and Ungerleider said it could take an additional three to four weeks until more is known about how the disease could affect the economy.

That said, margins in 2022 should decline slightly but sales volumes should rise, he said.

Since Dow expects demand will remain strong, companies will have an incentive to run their plants harder. That could stress their plants and cause outages.

Thumbnail shows PE pellets. Image by Al Greenwood