The global polyethylene (PE) market outlook remains positive despite the large amounts of US capacity coming on this year, the CEO of LyondellBasell said.
“[Operating rates globally] are still pretty high. The unique feature about this cycle… or this build-out of capacity is [that] we’re coming off of full operating rates essentially,” said Bob Patel, CEO of LyondellBasell, on the company’s Q1 earnings conference call.
“This year, it seems to me that supply growth may exceed demand growth by 1 or 2%, still leaving us with operating rates that are greater than 90%,” he added.
In the near term, higher oil prices, higher prices in Asia and overall healthy demand should drive strong profitability, he noted.
“I see a very constructive market for the next quarter or two, and we’ll have to see how Q4 develops. Until then, it seems to me that this supply is coming just in time to meet the demand growth globally,” said Patel.
While he acknowledges the potential for a “choppier US PE market later this year”, Patel believes the downcycle will be “short and shallow”.
CHINA PE TARIFF IMPACT
China tariffs on linear low density polyethylene (LLDPE) and low density polyethylene (LDPE) would lift prices in Asia in the near term if implemented, he noted.
“You could see trade flows shift, but the near-term impact will be higher prices in Asia,” said Patel.
“[As for] substitution from [LLDPE] to [HDPE] in end use applications – some of that can be done, but I don’t think it’s substantial,” he added.
LyondellBasell is a major producer of high density polyethylene (HDPE), which is not under the proposed China tariffs. It produces more limited amounts of LDPE, and “very little” LLDPE, Patel noted.
The company projects that China’s trade deficit in PE will steadily grow to around 38bn lb (17.2m tonnes) by 2020.
CHINA ETHANE IMPORTS
China would pay a large premium to import ethane from the US to make PE domestically instead of just importing the resin, the CEO said.
Recently, companies have started announcing plans to build China’s first crackers that would use ethane imported from overseas (see table). These plants would produce ethylene for PE and other downstream plants.
The cost of shipping ethane in terms of the cost of ethylene is about $450/tonne or 20 cents/lb, said Patel. In contrast, the cost for shipping PE is 8 cents/lb, he said. “There is a significant delta in terms of shipping gas versus PE.”
EXPORTS TO EUROPE
LyondellBasell sees an opportunity to export HDPE to Europe from its Hyperzone plant under construction in the US.
“Given that the European market is growing, albeit modestly at 1-2%/year, eventually the need for imports into that market is going to grow. And the needs for the European market are very different than the needs for the Asian market in terms of the types of products,” said Patel.
“So as we think about our new investment in the Hyperzone technology, I think that plays very well into targeted exports from the US to Europe, to supplement what we already do over there,” he added.
The CEO said the company can export more product from the US to Europe competitively because of cheap ethane feedstock. In addition it would benefit from its existing large local presence in Europe, he said.
“This new Hyperzone technology is going to be really unique in the high density space, and it will be the type of product that many, many European customers will want,” said Patel.
“So as we think about this one, and a potential one in the next decade, we will certainly think about Europe as part of being the marketing plan for the new assets,” he added.
LyondellBasell’s Hyperzone PE technology is a cascade gas-phase process based on the company’s multizone circulating reactor technology.
Hyperzone can produce a wide range of multi-modal HDPE resins, meaning it combines the benefits of low molecular weight and high molecular weight PE. As a result, products made with Hyperzone PE can maintain strength and durability while still being lightweight and easy to process, according to the company.
Given the properties of Hyperzone PE, LyondellBasell is targeting four end uses – large-part blow-moulded products such as industrial bulk containers (IBCs), smaller blow-moulded parts, high molecular weight film and plastic pipe, a company executive said earlier.
STRONG Q1 RESULTS
LyondellBasell’s Olefins & Polyolefins – Americas segment posted a 13% year-on-year gain in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in the first quarter to $780m on 6% higher sales of $2.76bn. The adjusted EBITDA margin came in at 28.2% versus 26.6% in the year-ago period.
The company’s Olefins & Polyolefins – Europe, Asia, International segment saw first quarter EBITDA fall 2% year-on-year to $518m, despite a $65m benefit from the stronger euro versus the US dollar. Its EBITDA margin was 14.5% compared to 17.5% in the year-ago period.
Additional reporting by Al Greenwood