Difficult times ahead for US polyethylene exports as business models change

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.

 

The post Difficult times ahead for US polyethylene exports as business models change appeared first on Chemicals & The Economy.

4.5 million tonnes of new US polyethylene exports on front-line as War of Words hits US-China trade

Trump Mar17

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.

US PE Mar17

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)

China’s PVC exports confirm its move to self-sufficiency

China PVC Aug16Many commentators were shocked by China’s weak trade data on Monday – with imports falling 12.5% versus July 2015, and January – July imports down 10.5%.  But they were no surprise to anyone focused on developments in the chemical industry, which has once again confirmed its status as the most reliable leading indicator for the economy.

The chart shows net trade data in H1 2009 – 2016 for PVC – one of the most traded chemical products, used in construction for doors, windows, cables and other key areas.  China’s own production has almost doubled over the period to 8.3 million tonnes, whilst its demand has only increased by around a third.  As a result:

□  China has swung from being the world’s largest importer in 2009 to one of the leading exporters in 2016
□  NE Asia has been the main loser, with its exports to China falling by two-thirds to 187kt:  NAFTA exports have fallen by more than a third to 130kt
□  China’s own exports have also started to surge, up from just 30kt in 2009 to 575kt this year

The data also confirms that China is now well on the way to reaching its ambitious targets for self-sufficiency (as set out in the current 5-Year Plan to 2020).  For ethylene (the raw material for PVC, alongside chlorine) the aim is to reach 62% by 2020, compared to 49% in 2014.

Triangle Aug16Unfortunately, however, many commentators still remain in denial about these developments.  Their shocked reactions to the trade data confirm their continuing failure to appreciate that China’s economic policies have never been based on Western concepts of cost-curves and corporate profitability.

As the chart above suggests, China is instead focused on avoiding social unrest, and preserving the Communist Party’s hold on power.  It follows Deng Xiaoping’s policy, which aimed to keep living standards rising in order to maintain the Party’s role in government.

This policy makes perfect sense for China, as it seeks to avoid a return to the chaos of Mao’s ‘Cultural Revolution’:

□  It means that maintaining employment is a key objective, along with steady growth in incomes
□  Western concepts of focusing on corporate profitability and shareholder value are much less important
□  Productivity improvement is therefore critical to economic progress.  New data shows, for example, that factory workers now have an average of 10 years schooling, compared to 8 years just a decade ago, helping to enable productivity to double over the same period

The other key change in recent years has been President Xi’s decision to move away from the stimulus policies followed between 2009 – 2013, in response to the financial crisis.  China had provided around half of the total stimulus during this period.  Inevitably, therefore, this triggered the Great Unwinding of global stimulus.

Unfortunately, as shown by this week’s reaction to China’s trade data, consensus thinking still fails to recognise the impact of these New Normal developments. But this failure also creates a major opportunity for those individuals, companies and investors who prefer to trust their own judgement on the outlook for China and the global economy .

China’s polymer expansions make new US exports hard to place

China PP Apr16China used to be the manufacturing capital of the world.  It would buy raw materials, and sell finished products to the West.  But these volumes are now in decline.  The West’s ageing populations already own most of what they need, and their incomes are reducing as they enter retirement.

So China’s business model is changing.  It can’t afford to lose jobs, because that would lead to social unrest.  So its exports are still booming.  But today, these are exports of basic products such as diesel, gasoline and polymers.  And they are gaining market share by cutting prices, at the expense of other Asia producers.  Thus gasoline margins in Singapore, the Asian pricing benchmark, have halved to just $7/bbl since the start of the year:

  • China’s diesel exports trebled in March to 1.25 million tonnes as the economy slowed
  • Gasoline exports were also up 8% to 670kt
  • Gasoline stocks in Singapore are now close to all-time highs at 15MT

Polymers are seeing the same effect, as the chart shows for polypropylene (PP) in Q1:

  • China’s production has risen by a third since 2014, causing imports to also fall by a third
  • Middle Eastern exporters have been badly hit, losing nearly half of their volume
  • Exports are also starting to rise, from a small base, following the diesel and gasoline model
  • And China’s polyethylene (PE) capacity is also rising – it is up 13% versus 2014

PP is therefore following the path set last year by PVC, where China now seems set to become a net exporter.  PP will take longer to reach this position, but net imports are already seeing a major decline, down to just 640kt in Q1, versus 1 million tonnes in Q1 2014.  So the direction of travel is clear.

One other fact is critical, of course, as we discuss in our new Study, ‘Demand – the New Direction for Profit’.  This is that PP can often substitute for polymers such as PE, PVC, PET, ABS and others in certain applications.  So today’s downturn hitting the C3 chain – and European propylene prices are now trading at just 69% of ethylene prices – has wider implications.  It will make it even harder for the new US PE and PP capacity to find a home.

scenario-study-iec-horiz

45-year shortage of babies hits Europe’s chlorine/PVC demand

EU Cl2 May15
Companies and investors often say “we don’t need to think about demographics – its too far in the future to matter”. This might have been true 20 years ago, but not today.  As European chlorine industry demand confirms, the truth is that “history catches up with us”.

The reason is simple.  Europe stopped having enough babies to replace its population with the end of the BabyBoom in 1970.  Today, women have just 1.7 babies each, compared to the 2.7 babies/woman seen in the early 1960′s. Replacement rate would be 2.1 babies.  And this, of course, matters enormously for demand:

  • Consumption is around 2/3rds of GDP in developed economies
  • And it is those in the ‘wealth creator’ 25 – 54 age group who drive spending and economic growth

Of course, the overall European population is still expanding today.  But this is mainly because of the dramatic increase in life expectancy.  This means someone aged 65 can now expect to live for 20 years in retirement.  And older people contribute much less to GDP growth

  • They already own most of what they need
  • And their incomes decline as they enter retirement.

The chart above of chlorine production and operating rates highlights the impact of these two developments for demand. The reason is that chlorine, and its co-product caustic soda, are essential products in modern society.  Based on salt, they are used in applications ranging from construction through to water treatment, detergents and pharmaceuticals. Based on Eurochlor data it shows:

  • Annual chlorine production on the left, and operating rates (%) on the right since 2007, with Q1 2015 annualised
  • In 2007, production was 10.7MT (black line) and operating rates averaged 84.5% (red)
  • They have never been close to this level since, with 2010 the peak year at 10MT and 79% operating rates

The key is the decline in construction and therefore PVC demand.

EU construction May15

As the chart on the left shows, based on Eurostat data, this peaked in 2007 and has never recovered.  Part of the reason is the end of the speculative rush to build second homes in countries such as Spain.  Vast numbers of these apartments have never been occupied, and the local population in most holiday resorts is not big enough to fill the gap.

The other reason, of course, is the ageing population and lack of babies.

Young adults normally provide major support for construction markets. They have to set up home for the first time, and then they often need to have bigger homes when they start a family.  Equally, employers have to build offices and factories where they can work.

But older people already have somewhere to live, and are instead leaving work to retire.  They might in the past have thought about buying holiday homes, but today they are increasingly concerned about having sufficient savings for their retirement.

The relative lack of young people since 1970 has enormous consequences for future economic growth.  As the head of Copenhagen’s University Hospital’s fertility clinic warned last year:

“We have for many years addressed the very important issues of how to avoid becoming pregnant, how to avoid sexual diseases, how kids have a right to their own bodies, but we totally forgot to tell them we cannot have children forever.”

These demographic changes mean that Europe’s adult population is increasingly being dominated by people in the 55+ generation for the first time in history.  Even in 1950, life expectancy at birth was roughly equal to retirement age at 65 years.

The result, as European chlorine demand confirms, is that the European economy has gone ex-growth.  And as the European Central Bank is just beginning to realise, you can print money, but you can’t print babies.