CHEMICALS OUTLOOK: Supply issues, regional divergence to remain key C3 value chain pressures in H2

Regional oversupply, expanding capacity and competitive import availability are expected to remain key pressures for global propylene and polypropylene markets in the second half of 2024.

Europe braces for weak structural conditions despite improvement

In Europe, lack of competitiveness against other regions, coupled with weak structural demand, look set to limit any substantial improvement in propylene market conditions following a volatile first half of the year.

Europe continues to command significant premiums to Asia and the Americas, raising concerns that the continent will be exposed to competitive import availability upon the potential easing of security tensions in the Red Sea.

Less volatile conditions are expected across H2, amid increased normalization of the diverted trade flows provoked by the Red Sea challenges. While players expect comparatively stronger demand levels than 2023 to continue, underlying oversupply and weakness in key derivatives will limit any wholesale improvement in market conditions.

In polypropylene, while tightness is expected due to reduced import supply and outage driven restrictions on domestic availability, weakness in underlying demand from pivotal construction and automotive derivatives is likely to mitigate any improvement in buyer appetite.

"Any easing of C3 conditions will impact the PP industry in provoking bearishness, exacerbating oversupply" one PP producer said. "We were more optimistic for Q2 than we are now for the rest of the year."

Rationalization also remains a dominant consideration in the outlook for Europe. In the first half of the year, producers SABIC and ExxonMobil announced plans to shut down crackers in the Netherlands and France, respectively, while LyondellBasell announced a strategic review of its European assets.

With structural oversupply weighing heavily on regional conditions, speculation on further shutdowns will continue, clipping industry confidence.

Expanding capacity weighs on Asian trade flow dynamics

In Asia, additional capacity from new propane dehydrogenation plants could further lengthen an already oversupplied propylene market, exacerbating the pressure on prices amid tepid demand.

S&P Global Commodity Insights anticipates the startup of four PDH plants in H2 with a total propylene capacity of 2.61 million mt. In H1, five new PDH units began operations, contributing an additional 3.6 million mt of propylene capacity to the region.

On the back of this increased domestic supply, China, a key demand outlet in Asia, may limit its appetite for imported material. Propylene derivatives are largely grappling with subdued end demand. This is likely to result in minimal spot propylene buying activity as end-users remain cautious amid weak margins.

China's PDH expansions will also strongly influence trade flows in polypropylene as it repositions to a net PP exporter by increasing self-sufficiency in production and demand unable to keep up.

An estimated four new plants with 1.25 million mt/year PP capacity are slated to start up in China in H2, including Sinopec and INEOS' 350,000 mt/year Tianjin line and ExxonMobil's two 450,000 mt/year Huizhou lines.

Traders are noting aggressive offers for China-origin PP homopolymer cargo in Southeast Asia, further pressuring a market already riddled by low converter demand.

"The China-SEA freight situation is not nearly as bad as costs to ship to the Americas and Europe, which makes trades more workable," a Northeast Asian trader said.

C3 bearishness, domestic focus for PP sellers in the Americas

In the Americas, feedstock propane prices are expected to stabilize, which could in turn could provide stability for propylene spot levels in H2, S&P Global Olefins Analyst Walt Hart said. The market has expressed similar sentiment, with one source anticipating stable to bearish pricing in H2 as long as production is kept balanced.

A source said that increased diversification of demand is likely, with various derivative units coming back online and expanding the downstream consumption base beyond traders.

Downstream, PP market participants expect to continually grapple with challenging fundamentals in H2 2024 as new capacity comes online during a period of lackluster export demand.

Many exporters in 2024 have been unable to compete with Asian-origin PP material with US propylene prices elevated, spurring decreased global interest in US spot resin. Run rates have been reduced below 80% and are expected to remain at this level in H2, reflecting a focus on domestic sales due to more favorable netbacks.

Formosa Plastics Corp. will bring its new 250,000 mt/year PP plant online at Point Comfort, TX, in July, according to a source familiar with company operations. At the same time, the existing PP unit at the facility will be taken offline for maintenance to be completed in Q3.

Producer LyondellBasell expects the region's building and construction sector to benefit from moderating interest rates "and the inevitable recovery in demand for durable goods," CEO Peter Vanacker said during the company's Q1 earnings call in April.