US polymer wave turns into just a ripple

28 March 2018 17:15 Source:ICIS Chemical Business

Ethane will be more expensive and cracker margins are likely to suffer as the feedstock mix shifts towards other NGLs (natural gas liquids) in the US. Add to that the uncertainty around the short (a year or so out) term outlook for US polyethylene and we can expect an interesting few months, to say the least.

That does not mean that North Americas petrochemical producers are not in a buoyant mood. Talk of “perpetual prosperity” is preposterous, of course. A wrench will be thrown into the works at some stage. But the questions are when, and how much damage might be caused. The wrench will not be the great slug of new US polyethylene volumes, many in the industry believe. “We think in three-to-six months the capacity is going to be absorbed,” president and CEO of Kuwait’s EQUATE, Ramesh Ramachandran, told ICIS on the sidelines of the AFPM IPC on 24 March.

“We might see a small dip [in prices] when this [US] capacity comes on, maybe in Q4 this year, and then we should see the markets tightening again,” he said, citing research reports talking about a “saucer-type reduction” in prices.

“I like the word ‘saucer’, because it [indicates the decline] is much more shallow,” Ramachandran said. Has our thinking moved on from looking on the US olefins and polyethylene capacity additions as a wave, to even less than a ripple?

“The outlook is good – we have a growing population and middle class, and everything is there for a robust industry for years to come, unless some wrench gets thrown in,” said Chet Thompson, president of the AFPM, on the eve of the International Petrochemical Conference (IPC).

“Certainly a trade war with China is a concern.” Currently, it must top the agenda.

The initial response to President Trump’s plan to impose further tariffs on China is seen by some in China as too modest. An escalation might include soya beans, planes and automobiles. There might well be a knock-on impact on imports of petrochemicals. “We are quite bullish through the early 2020s where we see demand outpacing supply,” said Naushad Jamani, senior vice president, olefins and feedstock at NOVA Chemicals, speaking on the sidelines before the start of the meeting.

“Demand is coming from all economies – emerging and developing, including from the US and Europe. We don’t see any downturn,” he added. But while it is “hard to see anything” that could derail the positive scenario, an escalation of tariffs or the US Federal Reserve raising interest rates too fast could trigger a pullback from consumers, he noted.

“We just don’t believe there is sufficient PE capacity coming on. We might have expected a bump up in supply in the second half of 2017 but this seems to have disappeared with the hurricane and delays in start-ups,” he said.

Companies continue to eye further investment in North America to take advantage of ethane availability. At least two cracker projects in China are planned based on imported US ethane. Construction costs in China will be much less than in America. Construction costs in the US, however, are clearly a major factor when it comes to making a final investment decision on a new project, notwithstanding the feedstock advantage. Chevron Phillips Chemical, for instance, said on 21 March that its proposed new cracker project in the US would hinge on capital spending costs.

It is clearly confident about other success factors including the availability of ethane and other NGLS and continuing demand as the world population grows and more people in emerging economies having more money to spend.

A panel discussion at the IHS World Petrochemical Conference in Houston, prior to the IPC, highlighted some of the thinking of the majors as they view the outwardly extremely attractive investment climate.

Complacency has posed as one of the perennial threats for this industry, Huntsman CEO Peter Huntsman said. “The most feared time in the chemical industry is that very time when people say we’ve learned our lesson,” he added.

Thomas Casparie, vice president, Chemicals Americas, Shell Chemicals, said it is difficult to see how some investments will provide companies with a return that is higher than the cost of capital as Mark Lashier, Chevron Phillips Chemical CEO, singled out rising capital expenditure costs as an increasing risk factor the larger and more complex a petrochemical project becomes.

There is no doubt that the industry also has a very real job on its hands to continue to highlight the way that petrochemicals help improve and underpin the quality of life of individuals worldwide.

Too often the debate on plastics is focused on litter instead of how the materials are responsible for modern life suggested Tom Salmon, CEO of plastics processor, Berry Global Group.

He stressed the need for an industry-wide effort to promulgate the benefits of plastics. If companies pursue this individually, the results would be scatter-shot and ineffective.

This could be a defining moment for the petrochemical industry suggests consultant Paul Hodges, CEO of International eChem, as the new polyethylene capacities come on stream. Growing public concern over plastic waste and chemical pollution in general in China means that there is unlikely to be a ‘business as usual’ option for producers and consumers, he says. A paradigm shift is underway which will change business models.

Low-cost suppliers will be integrated back to the wellhead or the refinery. Others will be more service-led, generating sales and profits from the value provided by the polymer – virgin or recycled – and not simply the value of the virgin polymer itself.

Interviewed by ICIS before the AFPM IPC, John Rogers, head of North America chemicals at Moody’s Investor Services, warned that expectations of a supercycle in US petrochemical profitability should be tempered by higher ethane costs and not as much capacity being taken down in China for environmental reasons as many expect.

Ethane cracking cost effectiveness will decline, he suggested, with prices moving ahead of 35 cents/gal compared with current Mont Belvieu prices of around 25 cents/gal and a range over the past year of 19.5-28.5 cents/gal. US integrated PE margins will remain strong but the will weaken. Moody’s is forecasting a 2018/19 trough range in the mid 20 cents/lb. In the mid-1990s peak they were also in this range, plunging to low-to single-digit levels in the 2000-2002 trough.

Additional reporting by Pearl Bantillo, Al Greenwood and Joseph Chang

 

By Nigel Davis