Feature: US PE and PP markets will be poles apart: ICIS Consulting

The tidal wave of new polymer production in the US will be heavily oriented towards polyethylene (PE) as it is based on shale gas-derived ethane feedstocks. Propylene capacities, meanwhile, will not increase significantly. While oversupply will leave North American PE looking for new export markets, PP is expected to tighten further, buoying margins for producers.

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US PP PRICES TO RISE ON TIGHT SUPPLY

The US polypropylene (PP) market is the polar opposite of the US PE market. PP is tight and growing tighter and expected to continue this way for several years to come.

Exports are declining and imports are increasing to meet domestic demand. All this is leading to higher prices for PP buyers and higher margins for sellers, which are necessary to justify the investments 
required to increase US PP capacity.

STRATEGIC PURCHASING

This has been coming for several years. Buyers who saw this have a long-term strategic purchasing plan in place and are ramping up their import suppliers to ensure a reliable supply at the lowest cost. This, along with some multi-year contract price protection, is leading to a wide range of prices being paid in the US for PP. In many cases, these prices are far higher than import alternatives. This wide disparity in pricing will return to normal over the next two years.

While there is more propylene supply coming on line, the next immediate bottleneck is polymerisation capacity. There are some plans to increase PP capacity, however. REXtac is restarting two PP lines, with a total capacity of 200,000 tonnes/year in Odessa, Texas, by 2017, while Braskem is evaluating a new 400-500,000 tonne/year world-scale PP plant in La Porte, Texas, by the end of the decade. Formosa has approved a new 380,000 tonne/year PP plant at Point Comfort, Texas, but it is still speculative as to when that might occur. In Alberta, Canada, meanwhile, Goradia Capital is looking to build a 450,000 tonne/year PP unit next to Williams’ planned propane dehydrogenation facility by end 2019.

In summary, the PP market will be challenging for buyers, especially those competing globally against products produced from PP that is 30 cents/lb lower than the US price. Supplies will be tight and having an import strategy may be necessary. Sellers will improve profits, but must be cautious to remain competitive against global imports or risk losing substantial business volume. Over the next three to five years, prices will move higher as supply continues to tighten and import alternatives become tight for late entrants into the PP import market.

WHERE WILL NORTH AMERICAN PE EXPORTS GO?

The upcoming explosion in US petrochemical production initiated by the availability of competitively-priced natural gas from shale in the US makes us wonder where all these products will go, especially considering that the US PE market is mature and will not grow fast enough to balance this new production.

Throughout 2014, the main destinations for North American PE have been South and Central America – regions that combined, received nearly 1.29m tonnes of North American PE (all grades).

North American PE exports to South and Central America are projected to increase by 43% by 2020. Domestic PE production in those countries is not expected to increase significantly. But total PE imports for that region are projected to increase by only 22%, suggesting that the share of North American PE into the region is likely to grow (Mexico is considered part of North America in this analysis).

However, the largest growth in demand for North American PE will come from the Asia and Pacific region, with a 518% increase in 2020 over 2014 volumes. North American PE volumes into this region are projected to be 1.14m tonnes by 2020, according to data from the ICIS Supply & Demand database.

MIDDLE EAST SUPPLY

The lion’s share of PE volumes will still be provided by the Middle East. Its PE sales will rise from 2.4m tonnes in 2014 to 2.6m tonnes in 2020, an 8.3% increase. Total Asia and Pacific PE imports by 2020 are estimated to reach 4.8m tonnes.

PE exports from North America into northeast Asia will increase by 509% in 2020. This region is the largest consumer in the world and will digest 13m tonnes of PE material by 2020, with 53.1% of that volume sourced from the Middle East. North American PE producers are projected to supply 23% of those needs, gaining 17% market share in this region. The Middle East’s portion is projected to shrink by 9% in northeast Asia.

North American producers are expected to increase exports to Africa by 121% in 2020, but total volumes will be rather small at 175,000 tonnes. Total demand from this region is expected to grow by 125% by 2020, and there the Middle East will have nearly 72% of the pie, followed by Europe with 8.8%, the US with 6.4%, Asia and Pacific and northeast Asia with 5.2% and 4.9% respectively. The remaining 2.7% will be shared by South and Central America and the former USSR.

European import demand is expected to grow by slightly more than 29% by 2020 and its main supplier will continue to be the Middle East, which will provide 77.8% of the volume. Currently, the Middle East supplies 75.4% of the PE volumes that Europe imports. North America comes second with 8.8%. None of the other PE-supplying regions has more than a 5.4% share in Europe. North American PE does not hold a significant share (1.7%) in the former USSR region and this is projected to increase to only 3.5% by 2020. The former USSR region does not receive significant volumes of PE from other regions and its import needs will decline by 2020.

The ICIS Supply & Demand projections predict that the major market for North American PE exports in 2020 will be northeast Asia (45%), followed by South and Central America (27%), Asia and Pacific (16.7%) and Europe (7.3%). Africa, the Middle East and former USSR will comprise 4%.

Low crude oil prices have done much to level the field, flattening cost curves while improving competitiveness for naphtha-based PE producers (mostly located in Europe and Asia). The supply explosion starting in 
2017 and beyond is expected to pressure disadvantaged, high-cost producers.

Expect a new wave of rationalisation, mergers and acquisitions and much cost-cutting ahead, as happened during the 2008 crisis. The so-called second wave of cracker capacity additions could turn out to be much weaker than anticipated in a global scenario of economic fragility and persistently low crude oil prices.