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Global oversupply of Polyethylene, Polypropylene challenging margins for producers, but competitive landscape shifting

15 May 2016 Nick Vafiadis

Polyethylene, Polypropylene Industry Outlook

A surge in new plastics chemical capacity coming from low-cost producers in North America, the Middle East and China is driving the global market for key plastics called polyethylene (PE) and polypropylene (PP) to oversupply, which will pressure margins for producers and change the global competitive landscape.

More than 24 million metric tons (MMT) of new PE capacity will be added globally during the 2015 to 2020 timeframe -more than one-third of that, approximately 8 MMT--will come from the U.S., which will significantly increase the U.S. net-export position for PE and PP and other chemicals, rebalancing the global chemical trade flows that have favored the Middle East for decades.

The surge of shale gas-derived feedstock has enabled North American polyethylene and polypropylene producers to achieve a level of cost-competitiveness that is unprecedented, since the Middle East has traditionally served as the world's lowest-cost producer for these products. In the near-term, this excess capacity is good news for North American converters, who will be more competitive on a global basis due to the increased competition associated with the PE capacity expansions. However, on the producer side, economics will be challenged in the near-term as global capacity expansions exceed demand growth and pressure margins.

Chemical producers are clearly looking to take advantage of continued low natural gas and natural gas liquids prices in the U.S., which is enabling the significant expansion of these gas-based projects. The upcoming U.S. Bulk Chemical Trade and Logistics in the Shale Gas Era Report discusses how solid plastics trade, as well as trade for bulk liquids chemical products, will change substantially in the U.S. This capacity expansion means there will be significant uptick in chemical trade activity and logistics considerations for not only producers and traders, but also the key ports, terminals and logistics providers, both in the U.S. and globally.

Polyethylene, Polypropylene Production Capacities

Beyond North America, China is also growing its influence as a key, low-cost provider of PE, thanks to its production additions from coal-to-olefins technology. We at IHS Chemical expect China to add approximately 17 MMT of new PE/PP capacity during the next five years which will drive further market volatility.

The U.S. and China are now competing with the Middle East for global PE/PP market share which should have significant impact on pricing and margins, so at IHS, we expect to see big changes ahead for the global industry. There will be significant trade imbalances as we see North America and the Middle East both add more PE capacity than is warranted for their domestic markets, so exports will be key for producers.

In Europe, imports of PE into Europe from the Middle East in 2016 have surpassed 2015 numbers as the region continued to see strong demand and offered attractive net-backs for Middle East producers. HDPE import figures for January and February 2016 overall, were the highest of the last eight years at 148,000 MT, and exports were lowest for the same period at only 42,000 MT. A similar, but less pronounced, trend is occurring for other PE grades as well.

We at IHS Chemical expect Asian pricing for PE to remain depressed for the remainder of 2016, and with European producers giving little margin away, this will mean netbacks from the Middle East to Europe will remain attractive in the coming months. The net result will mean PE imports will continue to arrive in Europe at relatively high levels from the Middle East.

The next wave of polymer capacity additions worldwide will have ripples throughout the supply chain. The additional supply will result in major changes in market dynamics, increasing trade flows and driving the need for improved supply chain management. We will also explore evolving consumer trends and regulations, which mean increasing demand for enhanced product quality in several end uses such as packaging and automotive.

Low oil prices could make the environment even more attractive for new plastics applications, which will drive new innovations in PE/PP technology and applications.

END

Industry-specific insight alone is not sufficient to make decisions of great scale. Connecting the dots to reveal interdependencies between both adjacent and seemingly unrelated sectors is required. It's at these connection points where the greatest risks and opportunities await.

Nick Vafiadis is Global Business Director of Polyolefins and Plastics, IHS Chemical
Posted 16 May 2016

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