Global oversupply of polyethylene, polypropylene challenges margins

A surge in new plastics chemical capacity from low-cost producers in North America (NA), the Middle East and China is driving an oversupply of polyethylene and polypropylene (PP), pressuring margins and potentially altering the global competitive landscape, according to new analysis from IHS.

IHS estimates that more than 24 MMt (million metric tons) of PE capacity will be added globally between 2015 and 2020. It is estimated that over one-third of that capacity will come from the US. This will significantly increase the US net-export position for PE, PP and other chemicals, and could rebalance the global chemical trade flows that have favored the Middle East for decades.

“The surge of shale gas-derived feedstock has enabled NA polyethylene and polypropylene producers to achieve a level of cost-competitiveness that is unprecedented,” said Nick Vafiadis, global business director of polyolefins and plastics, IHS Chemical. “In the near-term, this excess capacity is good news for NA converters, which will be more competitive due to the increased competition associated with 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 US, which is enabling the significant expansion of these gas-based projects,” said Chris Geisler, director, chemical consulting at IHS Chemical.

IHS asserted that beyond NA, China is also growing its influence as a key, low-cost provider of PE, due to its added production from coal-to-olefins (CTO) technology. The country is expected to add approximately 17 MMt of new PE/PP capacity during the next five years, further driving market volatility.

In Europe, imports of PE 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, IHS said. High-density polyethylene (HDPE) import figures for January and February 2016 were the highest of the last eight years at 148 Mt, and exports were the lowest for the same period at only 42 Mt. IHS said a similar, but less pronounced, trend is occurring for other PE grades as well.

“According to our IHS Chemical forecasts, we expect Asian pricing for PE to remain depressed for the remainder of 2016. With European producers giving little margin away, this will mean netbacks from the Middle East to Europe will remain attractive in the coming months,” Mr. Vafiadis said. “The net result will mean PE imports will continue to arrive in Europe at relatively high levels from the Middle East.”

He said that 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.