Market outlook: US polyolefins – opposite directions

The US polyolefin market is in a unique position. There is an abundant supply of polyethylene (PE) with more coming on line every year, polypropylene (PP) is tight with demand growing 5.5% annually (since 2013) and no significant increase in supply expected until 2020.

Over time, markets cycle between tight, balanced and abundant supply (Fig 1). This occurs because demand grows steadily while capacity grows in steps (Fig 2).

Tighter supply suggests higher margins and prices for PP, while abundant supply exceeding demand suggests lower margins and prices for PE. However, oil prices could affect them both, and compound or offset any movement in margins.

From a selling perspective, longer-term PE contracts to protect margins and shorter-term PP contracts are more attractive; buyers favour the opposite.

Supply and demand are key drivers of the market price, and understanding them is essential as a seller or buyer to get the best possible price. This is because supply and demand drive margins, and margins are what we have the most control over (Fig 3).

Holt/Daily Mail/REX/Shutterstock
US polymer markets are like the mythical “Push-Me-Pull-You”

When oil and feedstock prices (costs) move, we have little control, if any, over this. However, when supply is tight (sellers’ market), sellers can optimise margins by negotiating higher prices. When supply is abundant (buyers’ market), prices are pushed down in a competitive market.

PP FORECAST

The cost of oil typically drives the cost of PE and PP. However, PP is experiencing outages – both unplanned and planned – as well as surging export demand. Export volumes from the US have risen by over 900% since December 2015. Previously US PP inventories were at a multi-year high. As a result, PP is more closely tracking its feedstock propylene’s deviation from crude.

The January 2017 US PP contract price settled 10 cents/lb higher than the previous month. This settlement reflects the first price increase since September 2016 when it reached 64 cents/gal.

ICIS expects the Q2 homopolymer injection grade PP index price to drop 3 cents/lb, +/- 2 cents/lb when feedstock producers return on line. Prices will remain higher through the third quarter as monomer demand in Mexico and Colombia strain US supply.

Demand for PP feedstock propylene is forecast to grow at an annual rate of 2% to 2020 as the shale gas boom has doubled the availability of propane. New propane dehydrogenation (PDH) developments in the US are expected to supply propylene requirements over the short- to mid-term.

Propylene production growth will be supported by derivative developments. There are firm plans for a new 450,000 tonne/year propylene oxide (PO) plant by 2020.

Additionally, Formosa Plastics is bringing on line new PP downstream from its new PDH plant in Point Comfort, Texas.

While there are no other major PP expansion projects announced, new capacity may follow new propylene capacity from PDH developments. Braskem is considering a debottlenecking project and a new worldscale plant, while REXtac is looking to restart two idled PP plants.

PE FORECAST

Despite a high level of compliance from OPEC members regarding their production cuts, Brent prices were relatively flat throughout February, remaining between $54-56/bbl. A rising US drilling rig count coupled with higher production and increased stock levels have weighed on prices.

ICIS expects prices to rise in March ahead of the spring refinery maintenance season and from the impact of further production cuts. The developments in Libya and Nigeria and the future strength of the dollar will add uncertainty around crude price trends in 2017.

Globally, PE follows naphtha, which follows Brent. Higher crude is expected to drive ethylene costs higher. However, significant capacity coming on line in the US is likely to drive margins lower. There is a chance that this margin erosion could offset feedstock-based cost increases.

With PE prices in China at 50 cents/lb and the delivered price from China to the US being about 60.5 cents/lb, the US PE market ceiling should be about 62 cents for buyers with strong purchasing strategies.

ICIS’s February survey shows the average price paid by 70% of respondents was 62.5 cents/lb, +/- 3 cents/lb. The ICIS index price was 70 cents/lb. The survey, therefore, suggests a price arrangement of the ICIS index minus 7.5 cents/lb. ICIS expects the PE index price to remain steady, +/- 3 cents/lb, in March and April, which is typical for the past seven out of 10 years. At the time of writing, and with an index discount of 7.5 cents/lb, the actual price paid would be 67.5 cents/lb.

THE TRUMP FACTOR

However, things could change quickly if the Trump administration were to impose duties, which the US president has the power to do without congressional approval.

There continues to be concern in Mexico and the rest of Latin America about a Border Adjustment Tax (BAT) being discussed by the Trump administration, and now with the lower peso value, inflation and higher interest rates are being realised.

Many other countries have similar taxes, including China, which is most at risk from an action like this. As detailed in the February US PE Forecast report, the BAT as proposed would eliminate some tax deductions for companies importing products and add a tax deduction for those exporting.

This would improve the competitive position of US companies through lower corporate taxes for companies that buy domestic goods or export US products.

At the same time, it would eliminate deductions and result in higher taxes on companies that import goods in to the US.

However, change does not come easy and there are always unexpected bumps in the road, so it is uncertain if a BAT will ever happen. If not, it is possible we will see a simple import tariff, which Trump can implement without congress approval.

James Ray is a senior consultant for ICIS focused on purchasing. He has worked in the plastics Industry for private equity firms in manufacturing, converting and recycling polymers for blow molding, extrusion and injection molding as well as textiles. You can meet James in the ICIS suite at AFPM. Stephanie Kirby is a senior petrochemicals analyst at ICIS with experience in analysis, reporting, and market research in benzene, styrene and polypropylene.

If you are interested in subscribing to ICIS price forecast reports, please email Jason.Bean@icis.com. The reports, which are produced by ICIS consultants, are currently available for PP and PE in the US, Europe and Asia. Price forecast reports are also available covering the global benzene market and the European styrenics market.