INDUSTRY INSIGHT

Polyolefins market set for improvement

The polyolefins industry is in the process of re-establishing stability on a global scale, although the development of individual regions continues to evolve

By David Lines, Principal, Energy and Chemicals Consulting – Europe, Africa and the Middle East Nexant

China remains the driver for global capacity additions and demand growth for polyolefins globally, with substantial investment in coal-to-olefins and cracker projects and associated polyolefin derivative plants.

China is in the middle of a decade-long wave of investment in new polyolefins capacity, with little sign of easing until 2023. Despite this, there are concerns about the sustainability of these plans given weaker economic projections. However, GDP growth is still more than twice that of the United States and Western Europe.

Aside from China, demand in most Asian countries is growing rapidly, supporting Asia Pacific as the engine for global growth. Domestic polyolefin markets in the US are large and mature with modest levels of growth. However, export markets are set for a step change. The availability of inexpensive ethane in the US has led to the construction of numerous ethane crackers, PDH units, and polyolefins plants – the first major construction in these markets in more than a decade.

The first of these integrated complexes are scheduled to come on stream in 2017-18 and will move the US to a much stronger net export position. Plans for new capacity developments in South America have thus slowed due to the large capacity build in the US, as well as continuing economic and political issues in South America.

Capacity addition is focused in regions with either low cost feedstock or centers of large demand. Massive capacity development began in the low cost GCC and Middle East region, moved to the high demand center in Asia Pacific, and is now continuing in the recently low cost North American region. Capacity addition is expected to increase in the GCC and Middle East after a slowdown in investment, as the lifting of international sanctions against Iran could speed up development of many planned petrochemical complexes.

Other regions, such as Western Europe and Japan, continue to face competitive pressure from overseas markets; hence countries in Western Europe have made arrangements to import low cost ethane from the US that will improve their competitive position.

Domestic demand has also improved, boosted by low oil prices and a more advantageous exchange rate, which has led to improving business confidence. The overall situation has progressed to the stage where plans for new polyolefins capacity have been announced. In contrast, plans in Eastern Europe have been delayed mainly due to the challenging economic conditions.

The sharp drop in crude oil prices since the end of 2014 has not had much of an effect on the overall global economy, with global GDP growth declining from 2.8 percent in 2014 to 2.6 percent in 2016. It has, however, closed the gap between high and low cost producers, as naphtha-based complexes have become more competitive with ethane-based complexes. Competitive cracking of heavier feedstocks has also increased propylene supply, thus helping the polypropylene business.

Economic performance in a downturn varies by sector. Food and beverage, home and personal care and healthcare (all non-discretionary areas of spending) are less affected by changes in economic growth. The automotive, construction and housing sectors, however, are greatly affected by the economy and consumer spending.

While these sectors continue to struggle in some regions, such as South America, there have been some notable improvements in other regions. Polyolefins are used in all of these sectors, and thus demand is affected.  Against this background, global polyolefins demand increased by 4.1 percent in 2013, 4.7 percent in 2015 and 4.6 percent in 2016.

China has continued to drive global polyolefins consumption, but at lower rates than previously forecast.  Asia has also contributed strong demand growth, while developing markets in the GCC, Middle East and Africa have shown high levels of improvement but from a lower base. The developed and mature economies of the US and Western Europe have experienced growth lower than global averages, but with more stability in recent years.

Capacity addition has been affected by the fall in oil price and the slowdown in China. Although most of the planned capacity addition in North America, GCC, Middle East and China are going through as planned, some have been delayed or cancelled. A modest 6.2 million tons per year of polyolefins capacity was added in 2016, with 2017 set for over 11 million tons of new capacity, the most since 2010.

This will herald the start of a large wave of capacity addition with the current forecast having more than 31 million tons per year starting up by 2020. This will have a negative effect on global operating rates.  However, demand growth is also expected to increase, thus reducing some of the excess capacity.  It is also possible that some projects will be further delayed. Lower operating rates are also expected to result in limited closures of uncompetitive assets in developed regions.

Global trade patterns will change. With the availability of relatively advantaged ethane from shale gas projects in the US, North America is expected to develop a strong polyethylene export capability while also developing a growing requirement for polypropylene imports.  The final extent of the developments in North America is yet to be established and new projects continue to be announced.

Western Europe was previously regarded as a region in decline with weak market growth, declining competitiveness, capacity rationalization and rising imports.  The outlook for Western Europe is now considerably more optimistic with stronger demand growth, no further plant closures and there are plans for regional investment in polyolefins and olefin feedstocks.  While LDPE net exports are expected to stabilize, the region is still expected to become a larger net importer of LLDPE and HDPE, and polypropylene is expected to switch to a net export position.

The GCC will maintain its position as the major supplier to the world based on advantaged feedstock.  In China, high levels of capacity will continue to be added with the aim to reduce reliance on imports, but high demand growth will increase net imports in the long term.

Asia, excluding China, will experience improved demand growth and competition from new overseas capacity as well as China’s drive to limit its dependence on imports will lead to the region switching to be a net importer of polyolefins by 2023.  This net import position will then strengthen over the forecast period.

Demand growth for polyolefins is a function of economic growth.  Other factors that impact demand growth are environmental actions, for example recycling and plastic bag bans, energy and feedstock costs, inter-polymer and inter-material competition, and new product development.  Inventory changes will continue to impact pricing, as will the overall operating rates of the industry.

Global GDP growth has averaged 2.9 percent per year from 2000 to 2016.  Except for a contraction in 2009, GDP growth has fluctuated within a range of 2.0 to 4.5 percent and has been characterized by a range of peaks and troughs that lead to economic cycles.  Over the last five years GDP growth has achieved consistent average growth of 2.6 percent per year, and in 2016 GDP matched that recent average.

After this period of stability, stronger growth is slowly expected to return, starting with a rise to three percent in 2017 and global GDP growth is forecast to average three percent per year to 2035, which is similar to average historical growth.

Speculative eight-year economic cycles (peak to-peak) are included during the forecast. GDP growth for the developed economies of the US and Western Europe will be lower than the global average, while GDP growth for China and India will be higher than the global average, although at lower rates than in the past.

Polyolefins are commodity plastics that are used globally in a wide range of market segments including consumer, automotive, construction, general industrial and agriculture. Polyolefins are so termed as they are produced by the polymerization of olefins, primarily ethylene and propylene.  The commodity polyolefins discussed in this article are:

 

·         Polypropylene

·         High Density Polyethylene (HDPE)

·         Linear Low Density Polyethylene (LLDPE)

·         Low Density Polyethylene (LDPE)