In real estate, it's "location, location, location." In plastic resins, it's "capacity, capacity, capacity." At the recent Global Plastics Summit, organized by IHS and SPI: The Plastics Industry Trade Association in Chicago, Nick Vafiadis, Senior Director, Global Polyolefins and Plastics for IHS Chemical, noted that for polyethylene (PE), a 0.03 cent increase per pound is a "reasonable expectation under regional market conditions." He added that ethylene constraints in the first and second quarters of 2016 will ease and PE prices will drop by a nickel. During Q3, Akzo Noble will start up high-density capacity, with high-density separated from low and linear low density. Arbitrage will be below 0.10 cents per pound.
With contracts for 2017 starting in Q4 2016, prices will be affected by 31 billion pounds of capacity coming on stream. With 22 announcements from 15 companies involving capacity expansion of 15 million metric tons, capacity in North America will reach 210,500 million metric tons. "Buyers being buyers will leverage this new capacity," said Vafiadis. "Incumbent producers will be less flexible in trying to hold market share. Previously they could cherry pick what they wanted to sell, but increased capacity and competition from new suppliers [will remove] some of that leverage. Instead of contracting up 100% [of production], they will contract 75% and play the spot market."
In his conclusion, Vafiadis noted that with respect to capacity, "many of the announced PE capacity expansions will occur; some scheduled start dates could slip, others will cancel. Demand is expected to continue to grow near GDP levels until new processor capacity and increasingly competitive resin prices accelerate domestic demand growth," he added.
Near-term trade will see most incremental U.S. resin exports initially going "to Canada, Mexico, and Latin America, as these sales provide the best net back," while long-term trade projects that "Latin American PE imports will ultimately be insufficient to absorb incremental U.S. production." That means that U.S. producers "must ship excess to China, which initiates a drive to global price equilibrium," stated Vafiadis.
The global polypropylene (PP) outlook was presented by Joel Morales, Director of Polyolefins for IHS Chemical. The market for PP is changing, as global crude has impacted patterns, said Morales. "Lower naphtha values improved the competitive position for Western European, South American and Asian producers, but Chinese capacity builds are likely to pressure exiting exporters to China," he said. "China's quest for self-sufficiency will impact exporters, as on-purpose PP technology using coal-based power plants make PP very competitive, more so than naphtha or petroleum-based [products]. As we go forward, [China] will become pretty close to self-sufficient."
In North America, sales of PP are up 5% through September this year. Prices have declined 0.32 cents from October 2014 highs of 93.5 cents per pound. "That's a win-win for 2015," Morales noted.
With respect to producers, no new capacity is planned until 2019. "To date, only two PP plants have been approved and appear to be moving forward in the Americas," said Morales, adding that Formosa plans to bring on 1.9 million metric tons of PP in 2019, and that the North American market will be sold out by the end of 2016. That will result in growth of North American dependency on imports.
PP is extremely volatile compared with polystyrene and "will be challenged in applications versus other materials such as PS, PET, PE, HDPE and so forth. "Large Chinese and Middle Eastern capacity expansion affects global trade and puts downward pressure on regional prices in the short term," Morales added.
Concluding his overview, Morales projects that overall demand growth will lag behind capacity growth in the region during the 2015 to 2016 period, and that regional production is expected to increase steeply because of an increase of more than eight million metric tons during that time frame. Prices are forecast to remain weak because of long supplies in the near term before recovering after 2016. Favorable production cost economics of the CTO producers in China will enable them to sell at lower prices in the domestic market, which will weigh on import offers.