PE, PP ‘highly challenged’ by Europe, new capacity while US exports a positive – LyondellBasell

NEW YORK (ICIS)–Global polyethylene (PE) and polypropylene (PP) markets will continue to see headwinds from weak European demand and new capacity through at least H1 2024, but positive signs include strong US PE exports and some improvement in China, executives from LyondellBasell said.

“[US] PE exports have gone up during the past quarter, and that of course is a positive sign. But one also needs to look at additional capacity that has come into the market or that has not really hit the market because of… some technical difficulties,” said Peter Vanacker, CEO of LyondellBasell, on the company’s Q3 earnings call.

He expects the European market overall to remain “highly challenged” on weak demand coupled with rising feedstock and energy costs which will compress margins.

US exports are being supported by a high oil/gas ratio that is expected to continue, especially with volatility around oil markets and gas production being relatively robust, said Ken Lane, executive vice president, Olefins and Polyolefins (O&P) at LyondellBasell.

“We do feel good about what’s happening in the North American market,” said Lane.

“Europe is going to continue to be very challenged in terms of demand. That is still significantly down, mainly because of the inflation impact, but also the margins are challenged with the higher naphtha pricing,” he added.

New capacity will be the key factor to watch in 2024, he pointed out.

“We’re still going to see more capacity coming online next year and that’s why we’re going to be kind of bouncing along the bottom overall as an industry in H1 of next year,” said Lane.

“The hope is that at the back end of next year we start to see some recovery as market growth comes back to absorb the additional capacity. But there’s going to continue to be pressure from new capacity coming in, and that’s going to be the biggest ‘watch-out’ for us,” he added.

CHINA SLOWLY IMPROVING
In China, overall markets appear to be slowly improving as targeted stimulus measures provide some benefit.

“We don’t see the construction market picking up yet but automotive has seen a 10% year on year increase and EVs (electric vehicles) has been closer to 40%,” said Vanacker.

“But on the other hand, we see that consumers continue to save a lot of money. With more and more of these incentives, one would expect confidence will grow in the population which then would influence their spending on durable goods as well,” he added.

BORA RUNNING AT MINIMUM RATES
LyondellBasell’s Bora petrochemicals joint venture in China with downstream PE and PP continues to run at minimum operating rates.

“We did have a turnaround that impacted the asset in Q3 but what we are seeing is signs of some domestic growth in the market which is encouraging. However, the growth rate is still not where we need it to be to absorb all of the new capacity,” said Lane.

“That asset is approaching breakeven levels of EBITDA (earnings before interest, tax, depreciation and amortisation) which is great to see, but it’s still a very challenging market in China,” he added.

For PP, “a tremendous amount of capacity” has come online in the past 12-18 months, especially in China, he pointed out.

However, demand is starting to come back with growth seen in Q3 versus Q2, driven largely by the automotive sector, he said.

Q4 OUTLOOK
In the short term, Q4 should see typical seasonal weakness related to the holidays and year-end inventory management, said Vanacker.

End market demand in consumer packaging is “slow but steady” while customers continue to keep inventory levels low.

Building and construction markets are also slow, but the company is monitoring potential benefits in the US enabled by three major stimulus programmes – the Inflation Reduction Act (IRA), the CHIPS and Science Act and the Infrastructure Investment and Jobs Act.

And demand from automotive production is expected to continue to gaining momentum.

“The UAW strike has not yet materially affected our results,” said Vanacker.

Focus article by Joseph Chang