Market Outlook: Global polyolefins outlook driven by supply/demand dynamics and China policies

16 November 2017 22:13 Source:ICIS Chemical Business

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ICIS forecasts growth in polyolefins consumption in Europe in 2017 and 2018, making continuity of supply a key issue for converters

Supply and demand issues are driving the European polyolefins market, which is expected to remain healthy into 2018.

In Asia, the success or otherwise of China’s economic reforms will have a huge bearing on polyolefins consumption. And in North America, all eyes are on the long-term impact of Hurricane Harvey on polyolefins supplies.

Here three ICIS consultants – Fabrizio Galie, John Richardson, and James Ray – discuss their outlooks for the three regions and highlight the factors likely to have the biggest impact on polyolefins markets in the coming year.

EUROPE OUTLOOK – SOLID DEMAND AND IMPORTS

Fabrizio Galie / Milan, Italy

As we approach year end, the attention of polyolefins market players in Europe is focused around the prospects of supply developments.

Integrated polyolefins producers in Europe have continued to enjoy robust margins in 2017, despite the significant gain in Brent crude oil prices. The oil price has averaged $52/bbl in the first nine months of 2017, 24% higher than the $41.90/bbl average during January-September last year. Higher crude quotations brought a similar increase in naphtha prices, which rose by 25.5% year on year in the same period.

However, the trend has changed in more recent months, when a stronger euro/dollar exchange rate has also contributed to mitigate any increase in euro-denominated naphtha prices. Naphtha prices averaged €457/tonne in Q1 2017, decreasing to €396/tonne in Q2 and Q3.

It appears that higher raw material costs in 2017 have not affected the overall profitability of petrochemical operations in Europe. ICIS estimates that cracker margins were 25.3% higher this year from January to September, compared with the corresponding nine-month average in 2016, as a result of higher prices of ethylene and propylene and, to an even larger extent, of heavier co-products including butadiene and benzene.

Margins were also stable year on year for integrated polyethylene (PE) and polypropylene (PP) producers, when taking as a reference basic commodity grades.

If there is a marginal rise in Brent crude 
prices in 2018, which ICIS estimates at approximately 4-5% year on year in its base-case scenario, margins should remain significant and support healthy operations at the polymers plants. As the scenario for raw materials looks relatively stable under present circumstances, what can really make a difference in the polyolefins industry are supply and demand.

The attitude of major buyers in Europe permanently changed after 2015, when a number of issues at polymers plants across the region caused situations of prolonged product shortage and price surge. It is reasonable to expect that buyers continue to pay strong attention to inventory management, anticipating seasonal peaks in demand and evaluating implications from short-term price movements.

According to preliminary estimates by the analytics team at ICIS, regional PP consumption in 2017 will be 3.0-3.5% higher year on year, while consumption of high density PE (HDPE) and linear low density PE (LLDPE) will increase by 2.0-2.5% each, and consumption of low density PE (LDPE) will grow at the lower rate of 0.5-1.0%.

Projections put the corresponding growth rates in 2018 at 0.1-0.2 percentage points higher than in 2017. Improved economic conditions in the eurozone, and growing economic confidence so far this year, support this view despite recent threats coming from the political tensions in Spain.

With demand likely to increase, business continuity becomes essential to European converters. Sources confirmed that some of them have started discussions early in Q4 about next year’s contracts, which may also be symptomatic of the strong focus on securing supply.

On the other hand, there is no real concern around product availability and certainly not in the PE business. Expectations are growing that the start-up of new PE units abroad and especially in the US will enhance import opportunities for European buyers. ICIS expects that the bulk of these new units will start introducing significant volumes to the market around Q2 2018, possibly affecting supply and prices from around mid-next year.

It is worth considering that a large share of the new LLDPE plants in the US will adopt metallocene catalysis for the production of high-performance products. These may bring some additional pressure to the metallocene LLDPE market in Europe, where long supply has been prevalent since mid-2017.

The PE supply structure in the region will be largely unchanged, except for larger LDPE volumes coming from the recently started Slovnaft 220,000 tonne/year unit at Bratislava, Slovakia. Larger PE imports could also be made available from other sources, for example from Sadara Chemical in Saudi Arabia.

Perspectives look different in the PP market, where ICIS expects that a tighter supply situation could prevail in the next couple of years. The only recent change to the European industrial assets is the expansion of Unipetrol’s complex in Litvinov, Czech Republic, with PP 
capacity debottlenecked to 345,000 tonnes/year.

Investments look limited also around the world, with only 5.5m tonnes/year of new capacity set to come on stream in total during 2017-2018. Such volumes look short if compared with the projected gain in global demand, which ICIS forecasts to be 7.2m tonnes higher in 2018 than in 2016. World average PP plant utilisation rates have been growing continuously since 2014, when they averaged less than 86%, and are expected to exceed 91% in 2018.

With such a backdrop, PP supply in Europe will likely remain balanced to tight, whereas healthy demand in western Europe will consume increasing shares of output by local producers, and central eastern Europe will remain in a deficit trade position and consuming in 2018 around 750,000 tonnes more PP than will be produced in the area. This should fuel producers’ hopes of retaining significant margins next year.

To discuss the European outlook, including price forecasts, please contact fabrizio.galie@icis.com

ASIA OUTLOOK – CHINA POLICY DOMINATES

John Richardson / Perth, Australia

China’s president, Xi Jinping, greatly strengthened his political power at the recently 
concluded 19th National Party Congress in Beijing – a key political meeting which takes place every five years. This included appointments of his supporters to the Politburo, China’s top governing body, and a doubling down on an anti-corruption campaign that he began when he first came to office in 2012.

Why, you might think, is this relevant to polyolefins markets? China is attempting the most difficult set of economic reforms, probably in its entire economic history. The success or otherwise of the reforms will have a huge bearing on consumption growth in its key polyolefins market. We lay out three scenarios on GDP growth in 2018-2025.

Does Xi taking firmer control of the economy make the success of these reforms more or less likely? Nobody really knows the answer to this question. This, right now, is a key topic of debate.

You can argue that firmer central control of the economy will make it easier for Beijing to enforce capacity shutdowns in oversupplied industries, debt restructuring and a major environmental clean-up across China’s vast land mass. This land mass comprises 34 provinces and autonomous regions that have, in the past, been largely able to ignore central government policy.

Alternatively, you can claim that more state control is bad for another major reform objective, which is an attempt to shift into more innovative, value-added manufacturing.

Perhaps this cannot work without less, rather than more, state control. It can be argued that reduced state control would allow private sector companies to flourish. In western economies, private sector companies are seen as the main drivers of innovation in manufacturing.

For the global polyolefins industry, China matters like no other country or region in the world because of the size of its deficits. This year, for example, China will import some 10m tonnes of PE, far more than anywhere else in the world.

So, if Scenario 1 (see box) happens and GDP growth averages 5.6% in 2018-2025, import volumes are likely to continue to surge. Polyolefins demand grows at multiples over GDP and so the higher the GDP growth the better.

But what if Scenario 2 or Scenario 3 happen? Not only might the growth in imports disappoint, but the global economy would surely flounder. This would be bad news for polyolefins demand everywhere.

And the US needs a vibrant Chinese economy because it has big new export volumes to place as a result of its shale gas-based PE capacity expansions. US production of LLDPE, for example, is forecast to rise by 67% in 2018-2025. Meanwhile, local consumption is only expected to increase by 12%.

Let’s take our three scenarios for GDP growth and calculate what these would mean for China’s PE consumption growth:

■ Under Scenario 1, which is our base case, PE consumption is 10m tonnes higher in 2025 versus 2018.

■ In Scenario 2, using the same multiples of PE growth over GDP as our base case, PE consumption is 7.8m tonnes higher in 2025 over 2018.

■ Under Scenario 3, where we again use the same multiples over GDP, consumption increases by just 5.7m tonnes.

A more in-depth analysis can be found in the ICIS PE Asia and PP Asia price forecast reports. We go beyond just predicting prices and margins over the next 12 months, providing an original insight into what is happening in the wider economies of China, southeast Asia and the rest of the world. What happens in wider economies will ultimately have a bearing on pricing and margins.

For more information about our forecast reports, and for a one-on-one preliminary discussion about the dynamics of the markets, contact john.richardson@icis.com.

NORTH AMERICA OUTLOOK – HURRICANE HARVEY IMPACT

James Ray / Houston, Texas, USA

Hurricane Harvey has raised many questions in the US and around the globe. With petrochemical supply on allocation, the first domestic question was: “When will supply be restored?” After two or three increases already, the next question for most buyers is: “What price will I be paying?” In Europe, many are wondering: “How this will affect us here?”

Hurricane Rita hit the US Coast in September 2005. Like Harvey, production from about 13 refineries was lost for weeks. Harvey brought notably more rain and flooding.

Looking at the ICIS Petrochemical Index (IPEX), which represents a basket of 12 petrochemicals and polymer prices weighted for 
capacity, we see that US prices spiked by 29% immediately following Hurricane Rita (September 2005) and increased again in October, before beginning a slow decline back to normal (see graph at top of next page). The solid blue line represents the US IPEX. The blue dotted line represents the crude oil adjusted index price – think of this as a baseline or “should pay” price. The difference between these two lines, in theory, represents the Hurricane Harvey Effect.

The solid red line shows the percentage (on average) that petrochemical prices in the index increased after Hurricane Rita. Since these two hurricanes are similar, it is reasonable to expect a similar impact to that of Hurricane Rita. The important thing to note is that the red line does not return to zero (or below) until May 2008.

So what does this mean for Europe? After Hurricane Rita, EU prices and margins immediately spiked by 20% and then looked to be returning to normal before prices and margins increased even further (over 40%) in late 2006, after exports to the US from the EU grew by 17.1%, driving tight domestic supply.

Starting in Q3 2006, crude prices fell, and normally petrochemical prices would have followed. Instead, they rose slowly and steadily (blue line) while crude oil prices, and the price buyers “should pay” (dotted blue line) went down, further increasing producer margins.

How is the US recovery coming along? As we look at refinery restarts, we see a couple of interesting things.

■ Three weeks prior to Hurricane Rita in 2005, US refineries were running at 86.8% utilisation vs 96.1% prior to Hurricane Harvey in 2017. The point is that refineries needed to run at 9.3% higher utilisation to keep up in 2017 compared with 2005, leaving less reserve capacity to catch up.

■ Recovery after Hurricane Harvey has been slower than it was after Hurricane Rita. As of mid-October, refinery utilisation recovery after Hurricane Harvey is 8.8% behind the recovery rate of Hurricane Rita. This could drive tight supplies and higher prices on many products.

Could we see a similar post-hurricane market shortage/price spike in 2018? What precautionary measures should we be taking? Buying ahead now could mean paying premium prices. Not buying ahead could mean paying even higher prices as supplies grow tighter.

We cannot avoid market issues, but we can minimise the risk and mitigate repercussions with a few good practices. Good market intelligence to stay on top of things and maintaining “strategic inventory” is a good start. Which products have high utilisation or very few suppliers, making them more likely to experience supply issues?

In our ICIS Advanced Purchasing Class and Advisory Service (www.icis.com/about/icis-purchasing-advisory-service), we teach how to manage such risk.

To discuss the Americas outlook, including price forecasts for the North American region, please contact james.ray@icis.com

Scenario One

■ China easily deals with its debt problems. Growth in the new economy makes up for shutdowns of capacity in oversupplied industries

■ Environmental degradation is brought under control

■ China successfully moves up the manufacturing value chain

■ GDP growth averages 5.6% per year between 2018 and 2025

Scenario Two

■ Debt problems are a drag on the economy for several years, but a full-scale financial sector crisis is avoided

■ New industries continue to thrive, but their growth slows

■ Air pollution crisis is resolved, but soil and water pollution remain major burdens on the economy

■ GDP growth averages 4.6% between 2018 and 2025

Scenario Three

■ Major financial sector crisis occurs

■ Growth of new industries does not compensate for restructuring of old industries

■ Failure to bring air, soil and water pollution under control

■ GDP growth averages just 3.6% between 2018 and 2025

ICIS PRICE FORECAST REPORTS

ICIS price forecast reports are available for the PP and PE markets in Europe, the US and Asia, as well as the global benzene market and the European styrenics market. A new price forecast report covering the global methanol market was launched in November 2017. Find out more at www.icis.com/priceforecast

By Fabrizio Galie, John Richardson and James Ray