“The polyethylene industry faced two storms this year: Hurricane Harvey and the capacity storm,” Nick Vafiadis said at Global Plastics Summit 2017. “We rode out the initial impact, but there could be a second impact that’s longer lasting.”
Prior to Harvey hitting the Texas coast in late August, there was perception in the regional PE market that producers would have less leverage because of new capacity coming on, according to Vafiadis, vice president of global polyolefins and plastics for GPS co-host IHS Markit. Regional PE processors also had lowered their inventories in expectation of lower prices, he added, and international markets also were anticipating the arrival of new resin.
The impact of the hurricane led to delayed starts or lowered production from several PE makers, including Chevron Phillips Chemical Co., which had operational problems at its Cedar Bayou complex. As a result, a market that was expecting price reductions of 6 cents per pound between August and October instead saw prices rise an average of 10 cents. Harvey-related issues could keep regional PE prices and margins high through the first quarter of 2018, Vafiadis said.
In the longer term, North American PE is in the midst of a surge that will see more than 25 billion pounds of annual capacity added to a base of about 65 billion pounds between 2017 and 2022. This ballooning of capacity has been made possible by newfound supplies of natural gas throughout North America.
“Capacity growth will continue to surpass demand growth in 2017 and 2018,” Vafiadis said. “And North American exports should triple, with China accounting for more than 50 percent of that amount.”
China’s National Sword program, which is limiting imports of recycled plastics from other countries, could lead to increased demand for virgin resin.
Vafiadis added that metallocene-based PE resins should play a larger role in the packaging and film markets. Metallocenes are becoming more of a commodity and should account for 30 percent of linear low density PE growth through 2022.
PE market veteran Diego Donoso of DowDuPont Inc. said in a recent phone interview that global demand and the impact of Harvey changed expectations for the 2017 PE field.
“We didn’t really see the tsunami of production that was expected,” said Donoso, who serves as packaging and specialty plastics business president for global materials giant DowDuPont. “And it was a very good year for polyethylene growth. North America saw GDP-level growth, while we saw double-digit growth in India, China and Southeast Asia.”
Donoso added that brand owners and PE processors globally are optimistic about their own businesses and about new resin capacity being added worldwide. For its part, DowDuPont recently added a specialty PE line with almost 900 million pounds of annual capacity in Freeport, Texas. Between 9 billion and 11 billion pounds of new PE demand are created globally each year from a variety of applications, Donoso said.
“We’re seeing a lot of markets like India that are in the infancy of their use of packaging,” he explained. “There’s growth in everything from milk and water pouches to infrastructure and pipes.”
He added that U.S. brand owners are making “a lot of capital investments” and are asking DowDuPont how they can design their products for sustainability. “They’re reviewing designs to make their products more recyclable,” Donoso said. “Millennials are looking for that more.
Phil Karig, managing director of the Mathelin Bay Associates consulting firm, had a slightly different take on the PE market, saying in an email that the large amounts of new regional capacity should create “inevitable, sharp PE price erosion” in 2018. Karig added that the new capacity could be a boon to resin exports and to foreign processors investing in the United States. “We’re continuing to see increased interest in PE exports all along the supply chain, as evidenced by foreign resin demand and also by expanded interest in the nuts and bolts of U.S. resin packaging and transfer facilities,” he said.
“There’s still anecdotal evidence of companies reshoring their plastics processing back to North America, and there has also been an uptick in foreign plastics processors interested in starting up resin processing in the U.S. for the first time because they’ve heard stories of the U.S. being paved with low-cost polyethylene from the Shale Revolution.”
Karig explained that some of these foreign PE processors are interested in using the U.S. as a low-cost manufacturing base for exporting finished products back to their home markets and to other markets. There’s also been real interest in them serving the U.S. market with U.S.-produced product.
“Up until this point, the dominant scenario has been that PE resin producer margins would suffer from depressed margins due to overcapacity while PE processors would see only benefits from lower-cost resin and expanded supply options,” he said. “But given the interest we have seen from foreign producers looking to set up PE processing in the U.S. — including in some very low-margin film segments — domestic PE processors could also start to see their margins pressured by formerly foreign producers in some markets in the years ahead.”
The 2018 PE outlook from Mike Burns at Resin Technology Inc. features “a resin market in which processors will have the advantage.”
“Processors should expect similar resin cost and ample inventory as more resin is produced through the end of the year 2018,” Burns said in a recent report. “New capacity and higher inventory should reduce the sudden impact of events and the duration of an implemented price increase.”
Most of the 10 cents in recent price increases seen in North American PE in late 2017 should recede during the first quarter of 2018, Burns added. He also said that North American PE makers will have to price PE resins within 10 cents per pound of the global price to keep the imported finished products and exported resin markets balanced.
New polypropylene capacity on the way
On the PP front, new capacity — fueled by expansions in propylene monomer — is on the way by 2020, according to Mark Nikolich, CEO of PP maker Braskem Americas.
“North American propylene expansion is going to be an advantage going forward,” he said. “We’re going from a high-price market to a low-price one, and that will lead to derivative growth.”
The North American PP market has undergone a major transformation in the last decade, Nikolich explained. Increased use of natural gas, which produces less propylene than crude oil does, led to more than 5 billion pounds of capacity being closed in the region between 2007 and 2014.
“The market culled the herd and took out high-cost assets,” Nikolich said. “That had a dramatic impact of rightsizing capacities to local market needs. We had been an export market for 30 years, but now we were only serving the local market.”
The propylene supply challenge now is being met by on-purpose propylene production via propane dehydrogenation (PDH) technology. Some new PDH propylene already is online, and more is on the way, Nikolich added.
This new propylene supply eventually will lead to new PP resin capacity in the region. Braskem itself plans to add a new PP line with almost 1 billion pounds of annual capacity in LaPorte, Texas, by 2020.
“Polypropylene demand recovery took eight years, but now steady growth is expected to drive the need for domestic polypropylene,” Nikolich said. “North American demand growth will be met by imports until new domestic capacity is built.”
Joel Morales of IHS Markit agreed that both regional and global PP markets will experience near-term tightness and that the global PP market “looks to be tighter than expected.”
Mathelin Bay’s Karig said that he expects the 2018 PP market to be similar to that of 2017 because of the lack of new capacity. “Absent force majeure events such as hurricanes, PP resin pricing will continue to fluctuate mainly in tandem with propylene monomer prices,” he said.
And although more propylene monomer is on the way, Karig said that on-purpose production “will likely not be a big enough factor” in 2018 to change the dynamics of the overall propylene monomer market.
He added that although PP imports were not large in 2017, they continue to represent “a ready alternative resin source” for PP processors that have established relations with U.S. distributors of foreign PP, or those that have established relationships directly with foreign PP resin producers.
Scott Newell of RTI said that new PDH propylene “certainly helps the monomer supply situation, but he added that if the market sees any growth from other propylene derivatives, “the PDH [propylene] gets absorbed pretty quickly.”
Debottlenecking helped add some PP capacity in North America this year, Newell said, but he added that “without any grassroots capacity until late 2019 or early 2020, the next couple years could get challenging, especially if domestic demand continues to grow.”