Global glut of polyethylene, polypropylene to challenge margins for producers

More than one-third of new capacity will come from U.S., rebalancing decades-old trade flow
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A surge in new plastics chemical capacity coming from low-cost producers in North America, the Middle East and China is driving an oversupply in the global market for polyethylene (PE) and polypropylene (PP). The glut will pressure margins for producers and change the global competitive landscape, according to a new report from global business analyst IHS (Englewood CO).

IHS estimates that more than 24 million metric tons (MMT) of new PE capacity will be added globally during the 2015 to 2020 timeframe. More than one-third of the new capacity—approximately 8 MMT—will come from the United States, which will significantly increase its net-export position for PE and PP and other chemicals, rebalancing the global chemical trade flows that have favored the Middle East for decades.

“The surge of shale gas–derived feedstock has enabled North American PE and PP producers to achieve a level of cost-competiveness that is unprecedented, since the Middle East has traditionally served as the world’s lowest-cost [source] of these products,” said Nick Vafiadis, Global Business Director of Polyolefins and Plastics, IHS Chemical. “In the near term, the excess capacity is good news for North American converters, who will be more competitive on a global basis due to the increased competition associated with the PE capacity expansions. However, on the producer side, economics will be challenged in the near term, as global capacity expansions exceed demand growth and pressure margins.”

Chris Geisler, Director, Chemical Consulting, at IHS Chemical and author of the upcoming U.S. Bulk Chemical Trade and Logistics in the Shale Gas Era report, said, “Chemical producers are clearly looking to take advantage of continued low natural gas and natural gas liquids prices in the U.S., which is enabling the significant expansion of these gas-based projects. Solid plastics trade, as well as trade for bulk liquid chemical products, will change substantially in the U.S. This capacity expansion means there will be significant uptick in chemical trade activity and logistics considerations not only for producers and traders, but also the key ports, terminals and logistics providers, both in the U.S. and globally.”

Beyond North America, China is also growing its influence as a key, low-cost provider of PE, thanks to its production additions in coal-to-olefins technology, Vafiadis said. China is expected to add approximately 17 MMT of new PE/PP capacity during the next five years, according to IHS, which will drive further market volatility.

“The U.S. and China are now competing with the Middle East for global PE/PP market share, which should have significant impact on pricing and margins. At IHS, we expect to see big changes ahead for the global industry,” Vafiadis said. “There will be significant trade imbalances, as we see North America and the Middle East both add more PE capacity than is warranted for their domestic markets, so exports will be key for producers.”

In Europe, imports of PE from the Middle East in 2016 have surpassed 2015 numbers, as the region continued to see strong demand and offered attractive net backs for Middle East producers, IHS said. HDPE import figures for January and February 2016 overall, were the highest of the last eight years at 148,000 MT, and exports were lowest for the same period at only 42,000 MT. IHS said a similar, but less pronounced, trend is occurring for other PE grades, as well.

“According to our IHS chemicals forecasts, we expect Asian pricing for PE to remain depressed for the remainder of 2016. With European producers giving little margin away, this will mean net backs from the Middle East to Europe will remain attractive in the coming months,” Vafiadis said. “The net result will mean PE imports will continue to arrive in Europe at relatively high levels from the Middle East.”

These market realities also will drive much of the conversation when major industry executives, along with other leading IHS experts, speak at the PEPP 2016: 24th Annual Polyethylene/Polypropylene Chain Global Technology and Business Forum on June 1 to 3, 2016, at the Swissotel Zurich in Switzerland. “One of the key issues of discussion we will explore at PEPP 2016 will be the next wave of polymer capacity additions worldwide, and the ripples it will have throughout the supply chain,” Vafiadis said. “The additional supply will result in major changes in market dynamics, increasing trade flows and driving the need for improved supply-chain management. We will also explore evolving consumer trends and regulations, which mean increasing demand for enhanced product quality in several end uses such as packaging and automotive.”

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