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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US ethylene spot prices are tumbling as the major new shale gas expansions come on line, as the chart based on ICIS pricing data confirms:
- They began the year at $617/t, but have since more than halved to $270/t on Friday
- They are only around 10% higher than their all-time low of $240/t in September 1998
- WTI crude oil was then $15/bbl and ethane was $0.15c/gal
- On Friday, WTI closed at $70.5/bbl and ethane was $0.25c/gal
The collapse in margin has been sudden, but is hardly unexpected. It is, of course, true that downstream polyethylene plants associated with the crackers were delayed by the hurricanes. So ethylene prices may recover a little once they come online. But unfortunately, that is likely to simply transfer the problem downstream to the polymer markets.
The issue is shown in the second chart, based on Trade Data Monitor data:
- It shows annual US net exports of polyethylene since 2006
- They peaked in 2009 at 2.6 million tonnes as China’s stimulus programme began
- China’s import demand doubled that year to 1 million tonnes, but then fell back again
- Net exports have actually fallen since 2016 to 1.9 million tonnes last year
The problem, of course, was that companies and investors were fooled by the central bank stimulus programmes. They told everyone that demographics didn’t matter, and that they could always create demand via a mix of money-printing and tax cuts. But this was all wishful thinking, as we described here in the major 2016 Study, ‘Demand – the New Direction for Profit‘, and in articles dating back to March 2014.
Unfortunately, the problems have multiplied since then. President Trump’s seeming desire to launch a trade war with China has led to the threat of retaliation via a 25% tariff on US PE imports. And growing global concern over the damage caused by waste plastics means that recycled plastic is likely to become the growth feedstock for the future.
In addition, of course, today’s high oil price is almost certainly now causing demand destruction down the value chains – just as it has always done before at current price levels. People only have so much money to spend. If gasoline and heating costs rise, they have less to spend on the more discretionary items that drive polymer demand.
COMPANIES HAVE TO REPOSITION FAST TO BECOME WINNERS IN THIS NEW LANDSCAPE As I suggested with the above slide at last month’s ICIS World Polymers Conference, today’s growing over-capacity and political uncertainty will create Winners and Losers:
- Ethylene consumers are already gaining from today’s lower prices
- Middle East producers will gain at the US’s expense due to their close links with China
- Chinese producers will also do well due to the Belt & Road Initiative (BRI)
As John Richardson has discussed, China is in the middle of major new investment which will likely make it a net exporter of many polymers within a few years. And it has a ready market for these exports via the BRI, which has the potential to become the largest free trade area in the world. As a senior Chinese official confirmed to me recently:
“China’s aim in the C2/C3 value chains is to run a balanced to long position. And where China has a long position, the aim will be to export from the West along the Belt & Road links to converters / intermediate processors.”
The Losers will likely be the non-integrated producers who cannot roll-through margins from the well-head or refinery. They need to quickly find a new basis for competition.
Luckily for them, one does exist – namely the opportunity to develop a more service-led business model and work with the brand owners by switching to use recycled plastics as a feedstock. As I noted in March:
“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.”
Time, however, is not on their side. As US ethylene prices confirm, the market is already reacting to the reality of over-capacity. H2 will likely be difficult under almost any circumstances.
The industry made excellent profits in recent years. It is now time for forward thinking producers – integrated and non-integrated – to reinvest these, and quickly reinvent the business to build new revenue and profit streams for the future.
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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.
The post 2018 will see Winners and Losers appear in plastics markets appeared first on Chemicals & The Economy.
“By Monday, the third straight day of flooding, the aftermath of Hurricane Harvey had left much of the region underwater, and the city of Houston looked like a sea dotted by small islands. ’This event is unprecedented,’ the National Weather Service tweeted. ‘All impacts are unknown and beyond anything experienced.’”
This summary from the New York Times gives some idea of the immensity of the storm that struck large parts of Texas/Louisiana last week, including the 4th largest city in the US. And this was before the second stage of the storm.
I worked in Houston for 2 years, living alongside the Buffalo Bayou which flooded so spectacularly last week. The photo above from the Houston Chronicle shows the area around our former home on Saturday, still surrounded by water. Today, as the rest of America celebrates the Labor Day holiday, the devastated areas in Texas and Louisiana will be starting to count the cost of rebuilding their lives and starting out anew:
Some parts of the Houston economy will recover remarkably quickly. It is a place where people aim to get things done, and don’t just sit around waiting for others to do the heavy lifting
But as Texas Governor Abbott has warned, Harvey is “one of the largest disasters America has ever faced. We need to recognize it will be a new normal, a new and different normal for this entire region.”
The key issue is that the Houston metro area alone is larger in size than the economies of Sweden or Poland. And as Harris County Flood Control District meteorologist Jeff Lindner tweeted:
“An estimated 70% of the 1,800-square-mile county (2700 sq km), which includes Houston, was covered with 1½ feet (46cm) of water”
Already the costs are mounting. Abbott’s current estimate is that Federal funding needs alone will be “far in excess of $125bn“, easily topping the costs of 2005′s Hurricane Katrina in New Orleans. And, of course, that does not include the cost, and pain, suffered by the majority of homeowners – who have no flood insurance – or the one-third of auto owners who don’t have comprehensive insurance. They will likely receive nothing towards the costs of cleaning up.
SOME PARTS OF THE ECONOMY HAVE THE POTENTIAL FOR A QUICK RECOVERY
Companies owning the large refineries and petrochemical plants in the affected region have all invested in the maximum amount of flood protection following Katrina, when some were offline for 18 months
Oil platforms in the Gulf of Mexico are used to hurricanes and are already coming back – Reuters reports that only around 6% of production is still offline, down from a peak of 25% at the height of the storm
It is hard currently to estimate the impact on shale oil/gas output in the Eagle Ford basin, but the Oil & Gas Journal reports that 300 – 500 kb/d of oil production is shut-in, and 3bcf/d of gas production
ExxonMobil is now restarting the country’s second-biggest refinery at Baytown, and Phillips 66 and Valero are also restarting some operations, whilst ICIS reports that a number of major petrochemical plants are now being inspected in the expectation that they can soon be restarted
Encouragingly also, it seems that insurance companies are planning to speed up inspections of flooded properties by using drone technology, which should help to process claims more quickly. Loss adjusters using drones can inspect 3 homes an hour, compared to the hour taken to inspect on roof manually. But even Farmers Insurance, one of the top Texas insurers, only has 7 drones available – and has already received over 14000 claims.
RECOVERY FOR MOST PEOPLE AND BUSINESSES WILL TAKE MUCH LONGER
For the 45 or more people who have died in the floods, there will be no recovery.
Among the living, 1 million people have been displaced and up to 500k cars destroyed. 481k people have so far requested housing assistance and 25% of Houston’s schools have suffered severe or extensive flood damage.
These alarming statistics highlight why clean-up after Harvey will take a long time. Basic services such as water and sewage are massively contaminated, with residents being told to boil water in many areas. The “hundreds of thousands of people across the 38 Texas counties affected by Harvey” using their own wells are particularly at risk.
And as the New York Times adds:
“Flooded sewers are stoking fears of cholera, typhoid and other infectious diseases. Runoff from the city’s sprawling petroleum and chemicals complex contains any number of hazardous compounds. Lead, arsenic and other toxic and carcinogenic elements may be leaching from some two dozen Superfund sites in the Houston area”
FEW IN HOUSTON HAVE FLOOD INSURANCE
Then there is the issue that, as the chart from the New York Times shows, most of those affected by Harvey don’t have home insurance policies that cover flood damage. Similarly, a survey in April by insurer Aon found that:
“Less than one-sixth of homes in Harris County, Texas, whose county seat is Houston, currently have active National Flood Insurance Program policies. The county has about 1.8 million housing units.”
As the Associated Press adds:
“Experts say another reason for lack of coverage in the Houston area was that the last big storm, Tropical Storm Allison, was 16 years ago. As a result, people had stopped worrying and decided to use money they would have spent for insurance premiums on other items.”
Even those with insurance will get hit by the low levels of coverage – just $250k for a house and $100k for contents. Businesses carrying insurance also face problems, according to the Wall Street Journal, as they depend on the same Federal insurance scheme, which:
“Was primarily designed for homeowners and has had few updates since the 1970s. Standard protections for small businesses, including costs of business interruption and significant disaster preparation, aren’t covered, and maximum payouts for damages haven’t risen since 1994.
The maximum coverage for business property is $500k, and the same cap applies to equipment and other contents, far below many businesses’ needs. And even those with insurance find it difficult to claim, according to a study by the University of Pennsylvania and the Federal Reserve Bank of New York after Hurricane Sandy in 2012:
“More than half of small businesses in New York, New Jersey and Connecticut that had flood insurance and suffered damages received no insurance payout. Another 31% recouped only some of their losses.”
Auto insurance is a similar story. Only those with comprehensive auto insurance are likely to be covered for their loss – and even then, people will still suffer deductions for depreciation. According to the Insurance Council of Texas:
“15% of motorists have no car insurance, and of those who do, (only) 75% have comprehensive insurance. That leaves a lot of car owners without any protection.”
In other words, around 1/3rd of car owners probably have no insurance cover against which to claim for flood damage.
HARVEY’S IMPACT WILL BE LONG-TERM
It is clearly too early, with flood waters still rising in some areas, to be definitive about the implications of Hurricane Harvey for Houston and the affected areas in Texas and Louisiana.
Of course there are supply shortages today, and the task of replacement will created new demand for housing and autos. But over the medium to longer term, 3 key impacts seem likely to occur:
It will take time for the supply of oil, gas, gasoline and other refinery products, petrochemicals and polymers to fully recover. There will inevitably also be some short-term shortages in some value chains. But within 1 – 3 months, most if not all of the major plants will probably be back online
It will take a lot longer for most people affected by Harvey to recover their losses. Some may never be able to do this, especially if they have no insurance to cover their flooded house or car. And those working in the gig economy have little fall-back when their employers have no need for their services
The US economy will also be impacted, as Slate magazine warned a week ago, even before the full magnitude of the catastrophe became apparent:
“For the U.S. economy to lose Houston for a couple of weeks is a human disaster—and an economic disaster, too….Given that supply chains rely on a huge number of shipments making their connections with precision, the disruption to the region’s shipping, trucking, and rail infrastructure will have far-reaching effects.”
Last week’s summit meeting between US President Donald Trump and China’s President Xi Jinping was initially overshadowed by Friday’s news of US missile strikes on Syria. But from the details since released, it is clear the summit will likely have far-reaching impact on the global economy. As US Commerce Secretary Wilbur Ross revealed afterwards, the 2 leaders agreed to implement:
“A 100-day plan with way-stations of accomplishment. We made very clear that our primary objectives are twofold:
One is to reduce the trade deficit quite noticeably between the United States and China
The second is to increase total trade between the two countries
Ominously, he added, “Words are easy, discussions are easy, endless meetings are easy. What’s hard is tangible results, and if we don’t get some tangible results within the first 100 days, I think we’ll have to re-examine whether it’s worthwhile continuing them.”
Ross has set a tough target to be met with 100 days (18 July), especially given the range of major issues involved.
This is why ICIS and International eChem have combined their expertise to produce a new Report, The War of Words, focused on the implications of any deal – or lack of any deal – on the global petrochemicals industry. The Report highlights how a “business-as-usual scenario” is the least likely outcome for the years ahead. As my co-author, John Richardson of ICIS highlights:
“Our aim is to provide a clear understanding of the tectonic shifts now under way in the world’s two largest economies, and to offer a detailed road map outlining the potential impact of these developments on business and investments.”
The Report provides companies and investors with the insight and analysis needed to prepare for almost inevitable change to today’s business models. It highlights how today’s globalised world – whereby raw materials are routinely shipped half-way around the world, and then returned as finished product – is most unlikely to survive for much longer.
The “War of Words” Report is the first in a quarterly series of “Uncertainty Studies“. It provides a clear understanding of the tectonic shifts now under way in the world’s two largest economies, and a detailed road map highlighting the likely impact of these developments on business and investments. It is essential support for decision-makers.
Please click here for subscription details, or contact me directly at email@example.com
“There isn’t anybody who knows what is going to happen in the next 12 months. We’ve never been here before. Things are out of control. I have never seen a situation like it.” This comment last month from former UK Finance Minister, Ken Clarke, aptly summarises the uncertainty facing the global economy.
As I note in a new analysis, major policy changes are now underway in both the US and China – the world’s two largest economies. Almost inevitably, they will create structural changes in the petrochemicals and polymers industry. These changes will not only impact the domestic US and Chinese economies. They will also impact every supply chain which has a link into either economy.
Half of Apple’s iPhones, for example, are currently made in the Chinese city of Shenzhen, using products from over 200 suppliers from around the world. Under President Trump’s new “America First” policies, it is highly likely that in the future, more and more iPhones will instead start to be made in the US.
This highlights how the world is now moving into the early stages of a “War of Words” scenario, where both the US and China are preparing to develop a totally new trading relationship:
Will this develop into an all-out “Global Trade War” scenario, as the new chairman of President Trump’s National Trade Council, Peter Navarro, has been advocating? This was the key message of his 2006 book, “The Coming China Wars: Where They Will Be Fought, How They Can Be Won”?
Will President Trump go ahead with his proposed 35% border tax on imports into the US?
Or will the two sides negotiate a less confrontational trading relationship that still takes account of the president’s desire to reshore manufacturing to the US?
Nobody can know at the moment. But we do know that China’s President Xi is equally determined to push forward with his reforms for the domestic Chinese economy. He also seems to have finally sidelined Premier Li Keqiang, who has been responsible for economic policy until now. This is a critically important development, as Li has masterminded the stimulus policies that meant China became the key driver for global growth in recent years.
Instead, Xi is determined to refocus on his $6tn “One Belt, One Road” (OBOR) project – which absorbed $450bn of start-up finance last year. OBOR creates the potential for China to lead a new free trade area including countries in Asia, Middle East, Africa and Europe – just as the US appears to be withdrawing from its historical role of free trade leadership.
It is hard to over-estimate the potential importance of these changes. As President Trump said in his recent Inauguration speech, his aim is to completely overturn the framework that has governed the global economy during our working lives.
Today’s business models based on global supply chains are therefore under major threat, and companies probably have very little time to develop new ones. It seems most unlikely, for example, that the globalisation model of recent decades – whereby raw materials are routinely shipped half-way around the world, and then returned as finished product – will survive for much longer. Companies and investors also have to prepare for the risk that today’s moves are only the start of a more profound shift in the global economy.
The current “War of Words” on trade could well evolve into outright protectionism, with countries reimposing the trade barriers of the pre-globalisation era.
The imminent start-up of 4.5m tonnes of new North American polyethylene (PE) capacity confirms the scale of the potential challenges ahead. As the chart highlights:
US net exports in 2016 were 5,000 tonnes lower than in 2015
Normally, one would have expected them to be ramping up in advance of the new capacity coming on line
Even more worrying is that they were 22% lower than their 2009 peak
Exports to China were down by 50% due to its self-sufficiency having increased
The scope for disappointment later this year – and in turn the potential for the “War of Words” to be replaced by a “Global Trade War” – is obvious.
I analyse the risks in a new feature article for ICIS Chemical Business with John Richardson. Please click here to download a copy (no registration required)