INSIGHT: Looking for more PE growth in 2014

02 January 2014 17:04 Source:ICIS News

By Nigel Davis

LONDON (ICIS)--Industry-wide margin data show that 2013 was not a hugely profitable year for any polyethylene producers saddled with high naphtha cracker feedstock prices and high energy costs.

Towards the end of the year it was very much a case of looking to the future and hoping for some respite in terms of stronger demand growth.

Europe continued to struggle with a disadvantageous cost position and only slowly growing demand.

For what seems like years now it has been a case in Europe of trying to balance output with demand. Inventories have played an increasingly important role in price setting.

China’s polyethylene demand growth, production plus imports, in 2013 was again high, driven, it is believed, by easy credit rather than anything more fundamental.

Polyethylene growth in the US has been lacklustre and tied to a gradually improving US economy but producers have increasingly tapped the export market.

At the start of 2014 it looks as though cracker turnaround schedules in Asia and in the US, as well as capacity additions, will play a major role in polyethylene.

The US market expects growth to match GDP this year but there have been suggestions that prices might move up because of an increasing tightness in ethylene and polyethylene supply.

Such a situation is likely to change quite quickly, however, as new ethane cracking and PE capacities come on-stream driven by advantaged shale gas ethane economics. PE capacity could increase by as much as 29% if all announced projects come on line.

In the meantime, domestic demand growth of about 1% to the end of October in 2013, and a growth in exports over the same period of between 8% and 10%, has tightened the supply/demand balance.

“The market is getting to be where producers are sold out when we are looking at 2014 and 2015,” one producer told ICIS at the end of last month.

Growth is tightening supply and a cracker maintenance schedule with a peak of outages in April is expected to keep ethylene tight in the first part of the year.

PE demand growth in China this year is expected to slow to between 5% and 10% but much depends on what government incentives are available to small to medium sized enterprises in the plastics processing sector.

Generally, the market is in a bearish mood given the expected slowdown in demand growth and an increase in local supply from plants which came on stream last year.

The lunar new year holiday begins on 31 January in 2014 so a quiet period is approaching with many processors expected to reduce operating rates during the festivities. Re-stocking is expected to slow down between about two weeks before the holiday and for two weeks afterwards.

Producers, on the other hand, are expected to maintain output and push their inventories higher.

Imports from Iran could rise, some traders believe, but that all depends on cracker and polymer plant operating rates and on how strongly domestic demand grows as international sanctions are lifted.

Elsewhere in the Middle East, the commissioning this year of phase three of the Borouge project in Abu Dhabi will be a major event.

The project includes two PE plants with a combined capacity of 1.08m tonnes/year so a lot of material will have to find a home.

Producers in the Middle East are expected to keep more material at home because of capacity additions in China and the possible increase in exports from Iran.

Meanwhile, the raising of tariffs in the EU could have some impact on Middle East supply to the European market with product possibly being diverted eastward to Asia.

Demand growth for PE in Europe has not been strong and regional players’ generally weak cost position has forced some rationalisation of supply.

Twenty thirteen has been described as fairly flat and high ethylene costs have resulted in tighter inventory control.

Not a great deal is expected to change in 2014, particularly given the prospect of so much new capacity in the US. In many respects, 2014 is expected to be a re-run of 2013.

The positive aspect, however, is that margins, even in cost-challenged Europe and Asia have improved in 2013 compared with 2012 and are possibly indicative of an upward trend.

Integrated low density polyethylene (LDPE) margins in Europe were about 7% higher in 2013 (until 20 December) compared with full-year 2012 although well down on 2011, according to ICIS.

Integrated LDPE producer margins in Asia (for producers processing naphtha feedstock) were much stronger in 2013 compared with a very poor 2012, but again well down on 2011.

Ethane feed integrated PE margins in the US were up 20% in 2013 having risen 31% in 2012.

Additional reporting by Michelle Klump, Linda Naylor, Chow Bee Lin, Angie Li and Muhamed Fadhil

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By Nigel Davis