Sadly, my July forecast that US-China tariffs could lead to a global polyethylene price war seems to be coming true.
As I have argued since March 2014 (US boom is a dangerous game), it was always going to be difficult for US producers to sell their vastly increased output. The expansions were of course delayed by last year’s terrible hurricanes, but the major plants are all now in the middle of coming online. In total, these shale gas-based expansions will increase ethylene (C2) capacity by a third and polyethylene (PE) capacity by 40% (6 million tonnes).
ICIS pricing reports this weekend confirm my concern, following China’s decision to retaliate in response to President Trump’s $200bn of tariffs on US imports from China:
Even worse, as the chart above confirms, is that US ethane feedstock spreads versus ethylene have collapsed during 2018, from around 20c/lb to 5c/lb today. Ethane averaged 26c/gal as recently as May, but spiked to more than double this level earlier this month (and even higher, momentarily) at 55c/gal.
The issue appears to be that US producers had calculated their ethane supply/demand balances on the basis of the planned US expansions, and never expected large volumes of ethane to be exported. Yet latest EIA data shows exports doubling from an average 95kbd in 2016 to 178kbd last year. And they are still rising, with Q2 exports 62% higher at 290kbd.
The second chart from the latest pH Report adds a further concern to those of over-capacity and weak pricing power.
It focuses attention on the weak state of underlying demand. Even the prospect of higher oil prices only led to modest upturns earlier this year in the core olefins, aromatics and polymers value chains as companies built inventory. Polymers’ weak response is a particularly negative indicator for end-user demand.
This concern is supported by recent analysis of the European market by ICIS C2 expert, Nel Weddle. She notes that PE is used in packaging, the manufacture of household goods, and also in the agricultural industry and adds:
“Demand has been disappointing for many sellers in September, after a fairly weak summer. “I don’t see a big difference between now and August,” said one, “for both demand and pricing. Customers are very very quiet.” All PE grades were available, with no shortage of any in evidence.
“The market is generally quieter than many had expected, and the threat of imports from new capacities in the US looms large – particularly with the current trade spat between the US and China meaning that product may have to find a home in Europe sooner than expected.”
US producers, as would be expected, remain optimistic. Thus LyondellBasell CEO Bob Patel has suggested that:
“Trade patterns are shifting as China sources from other regions and [US producers] are shifting to markets that are vacated. Supply chains are adjusting but there is a bit of inventory volatility as a result. Where product has landed [in China] and has to be redirected, there is price volatility. But we think that is [transitory].”
But the detail of global PE trade suggests a more pessimistic conclusion. Data from Trade Date Monitor shows that China was easily the largest importer, taking a net 11.9 million tonnes. Turkey was the second largest importer but took just 1.7 million tonnes, around 14% of China’s volume. And given Turkey’s economic crisis, it is hard to see even these volumes being sustainable with its interest rates now at 24% and its currency down 60% versus the US$.
As the 3rd chart confirms, the US therefore has relatively few options for exporting its new volumes:
- Total net exports have increased 29% in January-July versus 2016, but were still only 1.8 million tonnes
- Latin America remained the largest export market at 939kt, taking 52% of total volume
- China volume had doubled to 524kt, but was only 29% of the total
- Europe was the next largest market at 369kt, up 40%, but just 20% of the total
- Other markets remain relatively small; S Africa took the largest volume in Africa at just 12kt
China’s US imports will now almost certainly reduce as the new tariffs bite. And the onset of the US trade war is likely to further boost China’s existing aim of increasing its self-sufficiency in key areas such as PE. Its ethylene capacity is already slated to increase by 73% by 2022, double the rate of expansion in 2012-2017 and from a higher base. The majority of this new volume will inevitably go into PE, as it is easily the largest derivative product.
Back in May, I used the chart above to highlight how the coming price war would likely create Winners and Losers in olefin and polymer markets. Unfortunately, developments since then make this conclusion more or less certain. I fear that complacency based on historical performance will confirm my 2014 warning about the dangers that lie ahead.
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Two major challenges face petrochemical and polymer producers and consumers in 2018:
- The likely disruption created by the arrival of the ethylene/polyethylene expansions in the US
- The growth of the circular economy and the need to dramatically increase recycling capacity
My new interview with Will Beacham, deputy editor of ICIS Chemical Business, focuses on both these key issues and suggests they will create Winners and Losers.
The new US product will likely change the global market. Its ethane feedstock is essentially a distressed product, which has to be removed to enable the shale gas to be sold. It is also clear that this 40% expansion of USA polyethylene capacity, around 6 million tonnes, cannot be sold into the US domestic market, which is already very mature:
- US net exports have actually been in decline in recent years, so it will also be a challenge to export the volumes
- President Trump’s apparent wish to start a trade war with China will make that market difficult to access
- It is likely, therefore, that a significant volume will end up arriving in Europe, causing a price war
We have seen price wars before, and the “Winners” are usually the integrated producers, who can roll through margins from the well-head or the refinery into ethylene and polyethylene sales.
The economics of this are relatively simple. In the US, producers will have to absorb lower margins on the small percentage of shale gas that is used as ethane feed into the cracker. Similarly in Europe, refinery-integrated producers will have to absorb lower margins on the small percentage of oil that is used as naphtha feed into the cracker.
As the chart shows, this development will be good news for ethylene consumers. As Huntsman CEO, Peter Huntsman noted a year ago:
“There is a wave of ethylene that is going to be hitting the North American markets quite substantially over the next couple of years. I’d rather be a spot buyer than a contract buyer. I can’t imagine with all of the ethylene that is going to be coming to the market that it’s not going to be a buying opportunity.”
In turn, of course, this will pressure other plastics via inter-polymer competition
Non-integrated producers clearly face more difficult times. And like the integrated producers, they share the challenge being posed by the rise of sustainability concerns, particularly over the 8 million tonnes of plastic that currently finds its way into the oceans every year.
This issue has been building for years, and clearly consumers are now starting to demand action from brand owners and governments.
In turn, this opens up major new opportunities for companies who are prepared to realign their business models with the New Plastics Economy concepts set out by the Ellen MacArthur Foundation and the World Economic Forum.
The New Plastics Economy is a collaborative initiative involving leading participants from across the global plastic packaging value chain, as the second chart illustrates. It has already prompted action from the European Union, which has now set out its EU Strategy for Plastics in the Circular Economy. This aims to:
“Transform the way plastics and plastics products are designed, produced, used and recycled. By 2030, all plastics packaging should be recyclable. The Strategy also highlights the need for specific measures, possibly a legislative instrument, to reduce the impact of single-use plastics, particularly in our seas and oceans.”
Clearly this represents a paradigm shift for the industry, both producers and consumers.
It may seem easier to do nothing, and to hope the whole problem will go ahead. But the coincidence of the arrival of all the new US shale gas capacity makes this an unlikely outcome. Companies who do nothing are likely instead to become Losers in this rapidly changing environment.
But as I discuss in the interview, companies who are prepared to rethink their business models, and to adapt to changing consumer needs, have a potentially very bright future ahead of them. Please click here to view it.
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Polymer markets face two major challenges in coming months. The most immediate is the arrival of the major US shale gas-based ethylene and polyethylene expansions. The longer-term, but equally critical challenge, comes from growing public concern over plastic waste, particularly in the ocean.
The EU has set out its vision for a new plastics economy, where:
“All plastic packaging is reusable or recyclable in a cost-effective manner by 2030”.
Similarly, China has launched a ‘War on Pollution’, which has already led to all imports of plastic waste being banned.
Together, these developments mean there is unlikely to be a “business as usual” option for producers or consumers. A paradigm shift is under way which will change business models.
Some companies will focus on being low-cost suppliers, integrated back to the well-head or refinery. Others will become more service-led, with their revenue and profits based on exploiting the value provided by the polymer (virgin or recycled), rather than just the value of the virgin polymer itself.
The next 18 months are therefore likely to see major change, catalysed by the arrival of the new US production, as I discuss in a new analysis for ICIS Chemical Business.
The second chart indicates the potential impact of these new capacities by comparison with actual production since 2000, with 2019 volume forecast on basis of the planned capacity increases. But can this new PE volume really be sold? It certainly won’t all find a home in the US, as ExxonMobil Chemicals’ then President, Stephen Pryor, told ICIS in January 2014:
“The domestic market is what it is and therefore, part of these products, I would argue, most of these products, will have to be exported”.
And unfortunately for producers, President Trump’s new trade policies are unlikely to help them in the main potential growth market, China. As John Richardson and I noted a year ago, China’s $6tn Belt and Road Initiative:
“Creates the potential for China to lead a new free trade area including countries in Asia, Middle East, Africa and potentially Europe – just as the US appears to be withdrawing from its historical role of free trade leadership”.
The task is also made more difficult by the inventory-build that took place from June onwards as Brent oil prices rose 60% to peak at $71/bbl. As usual, buyers responded by building inventory ahead of price increases for their own raw materials. Now they are starting to destock again, slowing absolute levels of demand growth all around the world, just at the moment when the new capacity comes online.
SUSTAINABILITY CONCERNS ARE DRIVING MOVES TOWARDS A CIRCULAR ECONOMY
At the same time, the impact of the sustainability agenda and the drive towards the circular economy is becoming ever-stronger. The initial catalyst for this demand was the World Economic Forum’s 2016 report on ‘The New Plastics Economy’, which warned that on current trends, the oceans would contain more plastics than fish (by weight) by 2050 – a clearly unacceptable outcome.
Last year’s BBC documentary Blue Planet 2, narrated by the legendary Sir David Attenborough, then catalysed public concern over the impact of single use plastic in packaging and other applications. Even Queen Elizabeth has since announced that she is banning the use of plastic straws and bottles across the royal estates, as part of a move to cut back on the use of plastics “at all levels”.
Single use plastic applications in packaging are likely to be an early target for the move to recycling and the circular economy. This will have a major impact on demand, given that they currently account for more than half of PE demand:
- Two-thirds of all low density and linear low density PE is used in flexible packaging – a total of 33 million tonnes worldwide
- Nearly a quarter of high density PE is used in packaging film and sheets, and a fifth is used in injection moulding applications such as cups and crates – a total of 18 million tonnes worldwide
Virtually all of this production is potentially recyclable. Producers and consumers who want to embrace a more service-based business model therefore have a great opportunity to take a lead in creating the necessary infrastructure, in conjunction with regulators and the brand owners who actually sell the product to the end-consumer.
Please click here to read the full analysis in ICIS Chemical Business.
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This wasn’t the chart that companies and investors expected to see when they were busy finalising $bns of investment in new US ethylene and polyethylene (PE) capacity back in 2013-4. They were working on 3 core assumptions, which they were sure would make these investments vastly profitable:
- Oil prices would always be above $100/bbl and provide US gas-based producers with long-term cost advantage
- Global growth would return to BabyBoomer-led SuperCycle levels; China would always need vast import volumes
- Globalisation would continue for decades and plants could be sited half-way across the world from their markets
The result is that US ethylene capacity is now expanding by 34% through 2019, adding 9.2m tonnes/year of new ethylene supply, alongside a 1.1m tonnes/year expansion of existing crackers. In turn, PE capacity is expanding by 40%, with supply expanding by 6.5m tonnes/year through 2019.
It was always known that most of this new product would have to be exported, as then ExxonMobil President, Stephen Pryor, explained in January 2014:
“The reality is that the US from a chemical standpoint is a very mature market. We have some demand growth domestically in the US but it’s a percentage or two – it’s not strong demand growth,” Pryor said, adding that PE hardly grew in the US in a decade. “That is not going to change…The [US] domestic market is what is it and therefore, part of these products, I would argue, most of these products, will have to be exported,” Pryor said.”
But now the plants are starting up, and sadly it is clear that none of these assumptions have proved to be correct:
- Oil prices have fallen well below $100/bbl, despite the OPEC/Russia cutback deal, and US output is soaring
- Companies were badly misled by the IMF; its forecasts of 4.5% global GDP growth proved hopelessly optimistic
- Protectionism is rising around the world, with President Trump withdrawing from the Trans-Pacific Partnership and threatening to leave NAFTA
As a result, US PE exports are falling, just as all the new capacity starts to come online, as the chart shows:
- US net exports were down 15% in the January – September period, confirming the major decline seen this year
- Net exports to Latin America were down 29%, whilst volume to the Middle East was down 31%
- Volume has risen by 40% to China, but still amounts to just 440kt – enough to fill just one new reactor
And, of course, PE use is coming under sustained pressure on environmental grounds, with the UK government suggesting last week it might tax or even ban all single-use plastic in an effort to tackle ocean pollution.
The same assumptions also drove expansion in US PVC capacity, with 750kt coming online this year. US housing starts remain more than 40% below their peak in the subprime period, and so it was always known that much of this new capacity would also have to be exported. Yet as the second chart confirms:
- US net exports were down 6% in the January – September period, confirming the decline seen through 2017
- Exports to Latin America were down 9%: volumes to NAFTA, the Middle East and China were at 2016 levels
PRODUCERS NEED TO DEVELOP NEW BUSINESS MODELS
These developments are also unlikely to prove just a short-term dip. China is now accelerating its plans to become self-sufficient in the ethylene chain, with ICIS China reporting that current capacity could expand by 84%. And the pressures from pollution concerns are growing, not reducing.
The key issue is that a paradigm shift is underway as the info-graphic explains:
- Previously successful business models, based on the supply-driven principle, no longer work
- Companies now need to adopt demand-led strategies if they want to maintain revenue and profit growth
We explored these issues in depth in the recent IeC-ICIS Study, ‘Demand- the New Direction for Profit‘. It is the product of 5 years of ground-breaking forecasting work, since the publication of our jointly-authored book, ‘Boom, Gloom and the New Normal: how the Western BabyBoomers are Changing Demand Patterns, Again‘.
As we highlighted at the Study’s launch, companies and investors have a clear choice ahead:
- They can either hope that somehow stimulus policies will finally succeed despite past failure
- Or, they can join the Winners who are developing new revenue and profit growth via demand-led strategies
US export data doesn’t lie. It confirms that the expected export demand for all the planned new capacity has not appeared, and probably never will appear. But this does not mean the investments are doomed to failure. It just means that the urgency for adopting new demand-led strategies is ramping up.
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The Stone Age didn’t end because we ran out of stones. Similarly, coal is being left in the ground because we no longer need it any more. And the same is happening to oil, as Saudi Arabia recognised last year in its Vision 2030:
“Within 20 years, we will be an economy that doesn’t depend mainly on oil“.
And so now the debate is moving on, to products such as plastics that are made from oil.
The move began several years ago with the growing concern over plastic bags. Consumers decided they no longer wanted to live in a world filled with waste bags. Now, in a landmark new Study*, the debate is evolving to focus on the question of ‘What happens to plastic after we have used it?’ As the chart shows:
The world has produced 8.3bn tonnes of plastic over the past 60 years
Almost all of it, 91% in fact, has since been thrown away, never to be used again
But it hasn’t simply disappeared, as plastic takes around 400 years to degrade
Instead, the Study finds, 79% is filling up landfills or littering the environment and “at some point, much of it ends up in the oceans, the final sink”
Nobody is claiming that this waste was created deliberately. Nobody is claiming that plastics aren’t incredibly useful – they are, and they have saved millions of lives via their use in food packaging and other critical applications. The problem is simply, ‘What happens next?’ As one of the Study authors warns:
“We weren’t aware of the implications for plastic ending up in our environment until it was already there. Now we have a situation where we have to come from behind to catch up.”
The good news is that potential solutions are being developed. As the video shows, Recycling Technologies, for example (where I am a director), is now trialling technology that will recycle end-of-life plastic into virgin plastic, wax and oils. Other companies are also hard at work on different solutions. And more and more effort is focused on finding ways of removing plastic from the sea, as I noted last year:
“95% of plastic packaging material value is currently lost after just a short first-use cycle
By 2050, there will be more plastics in the ocean than fish by weight, if current policies continue
Clearly, this state of affairs cannot be allowed to continue.”
SUSTAINABILITY IS REPLACING GLOBALISATION AS A KEY DRIVER FOR THE ECONOMY
But there is another side to this debate that is just about to move into the headlines. That is the simple question of “How do we stop putting more and more plastic into the environment?” Cleaning up the current mess is clearly critically important. But the world is also starting to realise that it needs to stop creating the problem in the first place.
As always, there are a number of potential solutions potentially available:
The arrival of 3D printing dramatically reduces the volume of plastic needed to make a finished product. It operates on a very efficient “additive basis”, only using the volume that is needed, and producing very little waste
Digitalisation offers the opportunity to avoid the use of plastics – with music, for example, most people today listen via streaming services and no longer buy CDs made of plastic
The ‘sharing economy’ also reduces demand for plastic – new business models such as car-sharing, ride hailing and autonomous cars enable people to be mobile without needing to own a car
The key issue is that the world is moving to adopt the principles of the circular economy as the Ellen MacArthur Foundation notes:
“Underpinned by a transition to renewable energy sources, the circular model builds economic, natural and social capital.”
This paradigm shift clearly creates major challenges for those countries and companies wedded to producing ever-increasing volumes of plastic. OPEC has an unpleasant shock ahead of it, for example, as its demand forecasts are based on a belief that:
“Over one-third of the total demand increase between 2015 and 2040 comes from the road transportation sector (6.2 mb/d). Strong growth is also foreseen in the petrochemicals sector (3.4 mb/d)”
They are forgetting the basic principle that, “What cannot continue forever, won’t continue“. After all, it took just 25 years for cars to replace horses a century ago. More recently, countries such as China and India went straight to mobile phones, and didn’t bother with landlines. And as I noted last year, underlying demand patterns are also now changing as a result of today’s ageing populations:
In the BabyBoomer-led SuperCycle, the growing population of young people needed globalisation in order to supply their needs. And they were not too worried about possible side-effects, due to the confidence of youth
But today’s globally ageing populations do not require vast new quantities of everything to be produced. And being older, they are naturally more suspicious of change, and tend to see more downside than upside
Of course, change is always difficult because it creates winners and losers. That is why “business as usual” is such a popular strategy. It is therefore critically important that companies begin to prepare today to be among the winners in the world of the circular economy. As we all know:
There is no such thing as a mature industry, only mature firms. And industries inhabited by mature firms often present great opportunities for the innovative”.
As the 3rd chart shows, the winners in the field of plastics will be those companies and countries that focus on using their skills and expertise to develop service-based businesses. These will aim at providing sustainable solutions for people’s needs in the fields of mobility, packaging and other essential areas. The losers will be those who bury their heads in the sand, and hope that nothing will ever change.
* The detailed paper is in Science Advances, ‘Production, use, and fate of all plastics ever made‘
China is the world’s largest polyethylene market. One-third of the way through the year, it is therefore interesting to analyse the ratio of its own production versus imports, and look at relative import market shares. The chart shows annual data since 2005, with 2015 data to April, based on trade data from Global Trade Information Services:
- China’s domestic production has maintained an average market share of 57% over the period. This dropped to 52% when stimulus began in 2009, but was back at 56% in 2015, as its new capacity has come online (red area)
- Unsurprisingly, the Middle East has seen major gains in share. It averages 16% since 2005, but it has been rising steadily since its new capacity began to come online in 2010. It is thus at 22% so far in 2015 (blue)
- SE Asia has seen a reasonable performance. Its share averages 9%, but this disguises a dip from 11% in 2005 to 7% in 2010, followed by a recovery to 10% today, as its new capacity came online (light blue)
- NE Asia has been the main loser. Its share has fallen from a 15% peak in 2005 to just 7% today (green)
- NAFTA has been the other loser. Its share hit a peak of 8% in 2009, but has since collapsed to just 2% (orange)
- The EU share has been stable but tiny at 1% (yellow), as has that of Others (black)
The chart thus highlights the major challenge facing US producers as they seek to find markets for their new production. They will not have a cost advantage versus the largely ethane-based supplies from ME/SEA. And they have a considerable logistical disadvantage, as they are operating on the other side of the world from China.
There is also, of course, a major question mark over whether China’s demand will continue to expand as it did under the stimulus programme. Its New Normal policies in fact look designed to slow the economy, in order to burst the lending/property bubble that was created by stimulus. As a result, the US faces a difficult choice:
- Does it continue with its current plans in the hope that China’s demand does continue to expand as previously?
- Or does it settle down for a long and attritional battle to force its product into the market versus current suppliers?
It is hard to see that any other options remain. The Latin American market is simply not big enough to take the planned new capacity. In fact, the arrival later this year of the new Mexican capacity will probably reduce the Region’s import needs from the rest of NAFTA. Equally, the option of trying to force the closure of European capacity seems far-fetched, given the importance to EU refineries of naphtha demand for petrochemicals.
Of course, US producers are still euphoric today about the arrival of shale-based feedstock. But cold reality shows that their export volume and share has been falling over the past few years, despite this advantage. And the example of the Incredible India campaign shows that euphoria alone is not sufficient to create sustainable business advantage. It is thus hard to disagree with the recent analysis presented by former LyondellBasell CEO Jim Gallogly:
“Some don’t look far into the future but just react. Some will be too late. It is time to recognise (the reality). I would suggest that you think very, very hard about these investments. Some of you simply are going to be too late. And you need to recognise where you are at.