Downward PE Pricing Projected With Processors To Gain Leverage

Ethylene and polyethylene plant startups to have impact, as will China’s scrap plastic import ban.

U.K.-based energy research and consultancy Wood Mackenzie recently shared the following insight from senior research analyst Ashish Chitalia: ‘Global Polyethylene Markets: 6 things to look for in 2018’.

● North American investments and polyethylene type optimization:

The pace of North American investments in ethylene and PE will be critical. Of the 8 million tons of expected PE projects, approximately 4 million tons capacity began the production in 2017. From the monomer feedstock side, only 2 million tons of new ethylene capacity started the production, but several new ethylene plants are scheduled to startup in Q1/Q2 of 2018. Some of the ethylene-PE complexes were severely impacted due to Hurricane Harvey, which led to delays in 2017.

New PE facilities are running at a lower operating rate, due to the typical ramp-up cycle before reaching the on-spec resin and delays in the on-site monomer from the steam crackers. Starting up of the steam cracker will be essential in ramping up the PE operating rates. “We expect that the market will start seeing the effects of large stockpiles of PE soon, which will be exported in large volumes after the Chinese New Year,” notes Chitalia. “Due to large inventories, we expect HDPE spot-export FOB Houston price to drop from $1,100/ton in December 2017 to $910/ton by the end of 2018. Our recently revised increase in crude oil price forecasts will result in better U.S.-based PE margins than anticipated in our latest update.”

Many global PE producers will optimize their production assets to effectively respond to the changing market dynamics. For example, many companies are evaluating the switch of mLLDPE from the older assets into the newer assets. However, significant optimization will occur after 2018. Many producers will use the majority of 2018 to improve the market share in the Asian markets for differentiated products such as mLLDPE and higher-alpha-olefins LLDPE.

China’s scrap plastic import ban

The regulation change in China will accelerate the demand for the virgin PE in 2018. Last year, China domestic demand grew at 11% year-on-year, thanks to organic plastic demand growth and virgin plastic demand growth related to the “National Sword” campaign (an initiative to reduce imports of foreign waste products and smuggled goods). “We forecast 10% additional year-on-year growth for the China domestic PE market in 2018. The majority of this increase is attributed to increasing virgin plastics consumption post the ban on the scrap plastics imports,” notes Chitalia.

More recycling companies are investing in the U.S. and Europe, and it will lead to greater recycled PE volume in the region during the second half of 2018.

China is looking to recycle its accumulated plastics waste efficiently. Reduced plastic waste imports will lead to higher levels of domestic recycling for Chinese recyclers. Net-net, it will reduce the overall availability of domestically sourced recycled PE volume in China in 2018.

Changes in tax structures in the United States and India

The lowered corporate tax in the U.S. starting in 2018, when aligned with low PE resin prices, will be supportive of the further justification of plastics manufacturing facilities. Overall, the new tax structure is poised to positively impact the long-term domestic demand growth prospects for PE resin.

The impact of India’s Goods and Service Tax (GST) will be more visible in 2018 as the initial “teething problems” are in the rearview mirror. Inland logistics are likely to be more efficient with the implementation of the GST, which will lead to more expansions and new investments in the plastics manufacturing facilities.

European import volumes

“We expect an increase of 39% in the net-imports of PE into Europe in 2018. This increase is not only due to an expected rise in imports from the U.S., but also a reduction in exports from Europe due to more competition around the world,” notes Chitalia.

The net-import increase is likely to be more pronounced for HDPE due to high local demand for the bi-modal HDPE in the bottle and pipe applications in Europe. “In the case of LLDPE, we expect that Europe will take more time to accept change in film extrusion applications. As a result, the large incorporation of the metallocene and high-alpha-olefins-LLDPE (from the U.S.) into European extrusion lines is likely to be muted until the second half of 2018,” notes Chitalia. Some of the LDPE exports of Europe will give way to the U.S. when DowDuPont’s new LDPE facility starts up in Q2-2018.

Impact on pricing and margins

“Besides the impact of changes in the energy and feedstock prices, we will see PE prices and margins impacted due to resin supply and demand fundamentals. With incrementally large volumes of PE entering the export markets, we will see downward price movement, and thereby margins squeeze in 2018. We already see some of this coming true, for example, in case of Europe, the spread between ethylene prices and contract HDPE was over $200/ton until September 2017. After Q3, we started seeing narrower spreads as the volumes from the U.S. and the Middle East began impacting the domestic margins,” says Chitalia.

“We are expecting 2018 to be a positive year in China market due to net-reduction in the recycled PE volumes. Increased recycling investments in other countries such as India, Vietnam, Indonesia, the U.S. and Europe will likely results in an overall zero-sum demand change in the longer term. However, in 2018, while the world order for recycling plastics is rearranging, we anticipate more demand will need to be met by the virgin polyethylene. Low oil prices and large volumes entering the international markets from the U.S. will only support the use of the virgin polyethylene,” emphasizes Chitalia.

For North American domestic PE prices, we expect 2018 would see a downward pressure due to the high levels of inventories from the additional new capacity (an increase of approximately 4 million tons).

The United States logistics infrastructure constraints

The North American PE supply chain participants have been anticipating the onslaught of new resin capacity for the last 5-7 years. Almost all of the bagging companies have invested in expanding the bagging machines, upgrading their machines with high-speed lines and expanded rail-yards to accommodate a larger number of railcars. Additionally, shipping companies, port authorities, train and trucking companies are also well aware of additional 4 to 5 million tons of PE. However, none of these investments have been tested yet. New PE exports in the second half of 2017 had been very limited due to the impact of the Hurricane that caused domestic PE converters to enter the market with large purchasing quantities, Chitalia explains.

“We expect that PE logistics infrastructure will be challenged in the first quarter of 2018. The U.S. PE producers are likely to use the contingency ports for export such as Charleston, Savannah and Los Angeles/Long Beach increasingly in 2018, which will help secure containers economically. During Q4-2018/Q1-2019, we will start seeing container availability improve in the Port of Houston and New Orleans, which will result in many producers increasingly utilizing ports in the Gulf Coast.”