US polypropylene imports rise as China aims for self-sufficiency

US propane Jul16

Difficult times lie ahead for global polymer markets, as I note in a new analysis for ICIS Chemical Business.

In the short-term it is clear that downstream users have, once again, been busy building stock in recent weeks as the oil price rose. But now, finance directors are getting calls from their bankers asking about working capital levels. It would be no surprise if demand soon slackened off again ahead of the seasonal summer slowdown, as this excess inventory is unwound.

Unfortunately, however, this is not the main problem facing us as we head into H2. There are more fundamental reasons for concern in the polymer markets themselves, as China starts to ramp up its own production of polymers, in line with the objectives of its new 5 Year Plan. This calls for 93% self-sufficiency in the propylene chain, and 62% in the ethylene chain, by 2020:

  • Polypropylene (PP) highlights the change underway, as China’s capacity expands and its import needs reduce
  • In turn, this is creating a chain reaction, as displaced export producers in NE Asia and the Middle East seek new markets
  • The US market is one obvious target – and it is also starting to receive large volumes from Latin America, as the region’s economy heads into recession following China’s slowdown
  • Europe has seen an even greater change in its trade patterns.  It has now become a net importer, due to the arrival of displaced product from the Middle East and NE Asia, and a 9-fold increase in Latin American imports

These developments highlight the rapid shift that is taking place in demand drivers for the entire petrochemical and polymer industry:

  • Until recently, the industry has operated on the “build it, and buyers will come” principle of Kevin Costner’s 1989 baseball movie ‘Field of Dreams
  • It profited from a 25-year economic SuperCycle, which caused business models to become supply-driven, based on the strength of BabyBoomer demand
  • Today, however, we are going ‘Back to the Future’
  • Feedstock cost advantage remains necessary, but it is no longer enough to guarantee profit in a world where demand growth is slowing sharply, as we describe in Denand – the New Direction for Profit

Unfortunately, the post-Crisis meddling by central banks has increased the potential surpluses, by destroying price discovery in key markets.  High oil prices were never justified by supply constraints.  But, understandably, producers assumed new supply was needed, and rushed to expand production.

Only now are they starting to realise they were fooled.  A new Study by Rystad Energy highlights the extent of the problem – it shows that the US now has larger oil reserves than either Saudi Arabia or Russia.  And as the charts show, the US is also seeing a vast increase in propane production, as the Wall Street Journal describes:

“In a first, U.S. oil-and-gas companies are on track this year to export more propane than the next four largest exporting countries combined—OPEC members Qatar, Saudi Arabia, Algeria and Nigeria, which have long dominated the trade… U.S. exports already account for more than a third of the overall market for waterborne shipment”.

In essence, a chain reaction has developed, which is expanding in scope all the time:

  • The US is exporting low-cost propane to China
  • This means that China can cheaply expand its own propylene and polypropylene capacity via PDH technology
  • It is now 81% self-sufficient in PP, with H1 output up 37% since 2014, dramatically reducing its import need
  • NEA and the Middle East therefore need to send their newly-surplus production to the US
  • This reduces the need for US domestic PP production, freeing up more cheap propane for export to China

And, of course, cheap PP can often replace polyethylene and other polymers in certain applications.  So in turn, this will further pressure all the new PE capacity now about to come online on the US Gulf Coast, by reducing potential demand for the new product.

Please click here to read the ICB article.  And please do contact me at phodges@iec.eu.com if you haven’t yet ordered the Demand Study, and would like further details.

New propylene supply increases market uncertainty

C3 expansions Aug12.pngAlmost unnoticed, an important shift is underway in propylene markets.

Propylene (C3) is the second largest olefin after ethylene, with production around 75 million tonnes in recent years. Its main sources are steam crackers and refineries – neither of which see C3 as their core product.

Thus the recent increased use of ethane as a cracker feedstock in the US/ME, and the decline in western refinery operating rates, have led to supply shortages developing. The result has been that C3 prices have become very similar to ethylene levels for the first time in history.

Now, however, a new dynamic is entering the market. As the chart shows, both China and NAFTA are starting to see major increases in propylene production:

• China is adding 17MT in 2012-16 (red column), vs 6MT in 2007-11 (blue)
• The USA is adding 3MT, after seeing no new net capacity in 2007-11
• Other regions are also continuing to add production

The key issue is that most of the new US/Chinese production is not based on traditional steam cracker and refinery sources. Instead, it is coming from propane via propane dehydrogenation (PDH), and from coal via coal/methanol to olefins technology (CTO).

This could be a potential game-changer for the industry. The first PDH plants in the 1980s were essentially ‘swing producers’, which operated when propylene margins were strong. More recently, they have become an essential part of the supply portfolio, ~10% of total production, due to lower output from traditional cracker/refinery sources.

These new plants mean further change is underway:

• PDH will be driven by the spread between propane and propylene prices. Since propane is already in surplus, and is expected to continue to be long, this could well lead to relatively high operating rates for the units
• This trend towards weak propane markets also has the ability to impact steam cracker production, as potentially propane could become competitive with ethane
• Meanwhile, CTO plants will be driven by China’s need to create employment in the coal mining regions, and so can also be expected to run at high rates. Economics, as the blog has discussed before, is not the fundamental driver for China’s petchem industry

It is, of course, early days for these developments. But it is not too early for both buyers and sellers to start considering the potential impact of these expansions. 6MT comes online this year, and 8MT in each of 2013, 2014 and 2015. Thus new supply will be well ahead of demand growth.

Key questions therefore include whether C3 prices will stay at parity to ethylene, or return to their traditional discount? Alternatively, if prices remain strong, will demand growth slow as buyers switch to cheaper alternatives where possible?

Developments in C3 markets thus mirror rising Uncertainty in the wider world.