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Dow Chemical cuts global polyethylene production by 15%: letter

Highlights

Logistics logjams in US, Europe prompt cutback amid falling demand

Duration of cutback depends on when disruptions clear: Dow

Global petrochemical giant Dow Chemical is cutting global polyethylene production rates by 15% amid logistics logjams in the US and Europe that have stymied exports since late 2021, according to a customer letter seen Aug. 24 by S&P Global Commodity Insights.

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"Given continued global logistics constraints, including port and rail congestion in the US Gulf Coast and dynamic conditions in Europe, Dow is reducing operating rates across our polyethylene assets, resulting in temporarily lowering 15% of our global polyethylene nameplate capacity," the Aug. 24-dated letter said.

The letter also said Dow's cutbacks were expected to help balance high inventories at key global ports and in packaging warehouses, particularly in the US Gulf Coast during August and September, which typically are the months during which strong hurricanes can form.

Hurricane season, which lasts from June to November, has been quiet so far in 2022.

Dow spokesman Kyle Bandlow confirmed the company's plan to reduce global PE nameplate capacity by 15%.

Rate cuts expected

US polymer producers have been expected to reduce rates, with global resin demand softening on top of logistics clogs that emerged in late 2021 that have lingered through early-to-mid 2023.

Export and domestic PE prices have nosedived in recent months in the US and globally, as have prices for resins used to make more durable plastics used in construction and in the automotive industry, such as polyvinyl chloride and polypropylene.

US export high-density PE prices have slid 33.3% to $1,036/mt FAS Houston since late May, while European prices have fallen 23.4% to $1,373/mt FOB NWE in the same span.

Turkish price have fallen 20.4% to $1,130/mt CFR Turkey, and Asian prices have fallen 10% to more than 16% in that span to $950/mt CFR Far East Asia and $1,000/mt CFR Southeast Asia, S&P Global data showed.

Dow is the second-largest global PE producer, with a total of 9.8 million mt/year of capacity, according to Platts petrochemical analytics. ExxonMobil is the top PE producer, with 10.6 million mt/year of capacity.

Asian polymer exports have ramped up because domestic demand has not rebounded from coronavirus-related shutdowns earlier in 2022, as record-high container freight rates out of Asia have softened. US polymer prices that reached all-time highs amid tight supply in 2021 retreated to compete with Asian export volumes, but logistic clogs at ports have impeded outflows just as producers need to increase exports as domestic demand slows.

European ports also have seen logistical clogs emerge, slowing imports, while domestic demand has waned amid recession fears and record-high energy costs exacerbated by Russia's ongoing invasion of Ukraine.

Still, Dow's announcement to its customers brought the need to cut rates to the forefront, sources said.

"Dow's notification made it official, but everybody already knew," a US-based PE source said.

"This is a very defensive and well thought-out plan to prevent additional price and margin erosion," Rob Stier, senior lead of global petrochemical analytics at S&P Global Commodity Insights, said. "We're quickly approaching a global net zero margin environment where supply rationalization like Dow just did is going to be required for the foreseeable future and all it will do is provide a temporary reduction in price and margin pressure."

The duration of the rate cuts will depend on how long it takes for European market dynamic, as well as jammed-up US and European logistics, to normalize, Dow's letter said.

Europe-based INEOS's US division gave an early view in April of what was to come. In mid-April, the company declared force majeure on polymers produced at all of its US manufacturing sites in anticipation of scaling back rail shipments because of congestion and backlogs, according to a customer letter dated April 14. INEOS has five US manufacturing sites with a combined capacity of $1.25 million mt/year of high-density PE and 1.429 million mt/year of polypropylene capacity.