Global polyolefins industry absorbs initial new capacity wave, awaits the second

; Houston) World Petrochemical Conference (WPC; March 23-25; Houston; Hilton Americas). In previous WPCs, CMAI analysts and market participants assessed a doubling of olefin capacity in the Middle East, with additional production built in China, and forecast a global market swimming in polyethylene (PE), polypropylene (PP), and their chemical antecedents.

Instead, Gary Adams, CMAI president, said new capacity in the Middle East and China had little impact last year, before noting: "This will change...the demand crisis is over, but over supply has just arrived." Historically around 12 to 15% of the industry's capacity is underutilized, but that figure could reach 26 to 27% this year. "That's significant," Adams said, "and it's something this industry is going to have to deal with."

Paul Pang, CMAI's managing director for China, said China's 2008 stimulus, officially pegged at $600 billion (equal to 20% of its GDP), fed plastics and chemicals growth through infrastructure- and consumer-driven demand. On the consumer side, domestic retail demand accounted for 46% of the country's GDP in 2009, up from 30% in 2005. That awakening of China's consumer class helped the country consume more chemicals in 2009 than the U.S. and Western Europe combined, according to Pang.

Mark Eramo, executive VP market advisory services at CMAI, said that in addition to Chinese consumption carrying the global market, capacity closures helped synch production with demand. Going forward, there will be 32 million tonnes/yr of ethylene capacity rationalization globally, with 23 million tonnes of those shut downs in the U.S., Canada, France, and Italy. Even with that effort, however, ethylene overcapacity will reach a projected 20 million tonnes, equal 18% of global capacity.

Eramo said the full impact of the previously announced ethylene additions will be felt in 2010, as 12 million tonnes/yr of new capacity comes online, with most of that in Northeast and Southeast Asia. The effect on the market will be utilization rates pushed down into the 80% range, with levels not reaching 90% again until 2014.

Steve Zinger, CMAI's managing director for Asia, pointed out that start-up delays in the Middle East provided some respite, with the market receiving about 8 million tonnes/yr of new capacity in 2008 and 2009, instead of the announced 10 million tonnes. PE exports that were expected to double in that same time frame, actually stayed about the same. On top of those factors, China stimulus proved quite stimulating. "China's demand surprised everybody," Zinger said, with the growth not tied to exports of finished goods, but driven by local demand. Its PE imports came in about 1.5 million tonnes higher than expected.

CMAI forecasts that Middle East ethylene production will rise from 15 million tonnes/yr in 2007 to more than 30 million tonnes/yr in 2014. Much, but not all of that capacity will be absorbed by Asia. In 2009, China led the way, according to Howard Rappaport, CMAI global business director plastics, particularly in the case of PE. "[China] was pulling in any excess capacity from around the globe," Rappaport said. Of its imports, 50% came from Asia, 24% from the Middle East, and 9% came from U.S., which actually saw its PE exports to China briefly eclipse shipments to Mexico.  Export opportunities to China are expected to continue for the next few years before falling off, especially as 15 million tonnes/yr of new PE capacity comes online over the next three years. The realignment of resin production and converting continues apace, with 2009 likely to be viewed in retrospect as only a sizable speed bump. "Capacity has shifted to the poles," Adams said, "the poles of lower price hydrocarbons or lower price labor."