Consultants sound overcapacity warning for polyethylene

Another consultant is warning that the new polyethylene (PE) plants coming online in the US and the rest of the world will exceed demand growth, leading to some difficult years until the market balances out.

Three years ago, Bob Bauman, president of Polymer Consulting International gave a similar warning, saying that the new capacity coming online would overwhelm the market, leading to what he called a bloodbath. The problem is that the US is not the only country building new PE plants. Other regions are also adding capacity.

Dan Lippe, owner of Petral Consulting, said the US alone is adding a tremendous amount of new capacity.

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There is concern as the wave of PE capacity draws nearer

ICIS shows that nine crackers will be built through 2019 in the US, adding 9.2m tonnes/year of ethylene capacity. The expansion of existing crackers will be another 1.1m tonnes/year. In total, this makes up 34% of US capacity.

Much of that new ethylene capacity will be converted into PE. The US is adding 6.5m tonnes/year of new capacity through 2019, or 40% of the nation’s total, according to ICIS. This in itself would be plenty, Lippe said. But he estimates that the rest of the world is adding an equal amount of new PE capacity.

Had this new capacity been staged over a decade, it would not have been so problematic, he said. However, these new PE plants are starting up over a relatively short period.

40-YEAR FLOOD

The amount of ethylene and PE capacity that will be added during one two-year stretch of this wave will exceed any other two-year period in the past 40 years, he said. What is making this wave of new plants possible in the US is low-cost ethane. The nation’s producers rely predominantly on ethane for their ethylene plants, while much of the world relies on oil-based naphtha. This has given the US a cost advantage.

That advantage, combined with growing demand for downstream PE, is what encouraged companies to build the plants. The US gets its ethane from gas plants, which extract it from raw natural gas, and associated gas produced from oil wells.

Gas plants have some flexibility in meeting the additional demand from these new ethylene units. Many plants do not bother extracting all of the ethane in the gas stream, because the price of the material does not justify the cost. Instead, the plants leave the ethane in the gas stream and it is burned as fuel.

If ethane prices rise high enough, then gas plants can extract this ethane from the raw gas stream and sell it to petrochemical producers.

Lippe expects gas plants that are close to the Gulf Coast to start recovering as much ethane as possible to meet demand from the crackers coming on line.

With that, he expects US producers will retain their cost advantage through the first half of 2018.

ETHANE ADVANTAGE TO DISSIPATE

But starting in the second half of 2018 and running through 2020, companies will add another wave of new capacity in the US. This influx of new capacity will further increase ethane demand. The Gulf Coast will need to receive ethane from gas plants in higher cost basins.

In many cases, these gas plants are much farther away from the Gulf Coast. Prices will have to rise to cover the shipping costs from these more distant plants. Once ethane prices rise high enough, these gas plants will shift to full recovery and begin providing more feedstock to the new Gulf Coast crackers.

One of the largest suppliers of ethane, Enterprise Products, has discussed this scenario in numerous calls with analysts.

The US will have plenty of ethane to meet demand. However, not all of this ethane will be cheap, because it is far from the nation’s demand centres.

This higher priced ethane will increase production costs for all US supply starting in the second half of 2018, eating into PE margins, Lippe said.

Much of this PE will be exported to foreign markets, where it will compete with material from the other new plants being built. The magnitude of this margin contraction will depend on a lot of factors.

PERMIAN FACTOR

The recovery in oil prices has led to increased drilling in the Permian basin, increasing demand for gas plants and providing the Gulf Coast with more supplies of ethane and other natural gas liquids (NGLs). Companies are now building pipelines to ship these NGLs to fractionators near the Gulf Coast, which will extract the ethane and send it to crackers.

Recently, increased drilling in Oklahoma has attracted midstream companies like ONEOK to build processing plants to serve producers in the SCOOP (South Central Oklahoma Oil Province) and the STACK (Sooner Trend Anadarko Canadian Kingfisher).

If this continues, the Gulf Coast could have another, growing, nearby source of ethane. If it doesn’t, then more ethylene plants will have to compete with a limited amount of ethane.

Higher oil prices will also help US producers maintain their margins. If oil is more expensive, then this will increase production costs for the competitors of the US, who rely predominantly on naphtha.

Of course, if oil prices fall, then US producers will lose some of their competitive advantage.

HIGHER VALUE PE

Much of the ethylene being produced by these new US crackers will feed higher value PE plants, which should provide these companies with better margins.

The new units being built by Chevron Phillips Chemical, for example, will be the first dedicated to feature the company’s new PE technologies.

LyondellBasell’s new PE plant will use its new 
Hyperzone technology. Likewise, ExxonMobil said its new plants will produce premium PE.

DowDuPont is already marketing new grades of PE that are used in packaging. These high-end resins could help the companies concerned compete in what could be an oversupplied market.

DowDuPont and others are also betting that consumers in emerging markets will continue adopting middle-class buying habits and move to cities. Both of these trends are increasing demand for plastics used in packaging. A slowdown in these markets, however, would interrupt this trend. Still, companies worldwide are adding a lot of new capacity in a short period.

Even DowDuPont warned of an imbalance between supply and demand in its recent earnings presentation. However, it maintains that the pace of capacity additions will be measured, thus reducing the duration and severity of the imbalance.

Lippe, though, said the industry should be prepared for five challenging years as demand catches up with this influx of supply.

Companies will have two options, he said. They can accept lower and weaker margins for the next three to five years, he said. Or they can shut down old PE plants.

If they chose the latter, Lippe said such closures could equal 50-75% of the new US PE capacity.