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Commodities 2023: Propylene, PP faces global supply overhang amid uncertain demand


Supply glut expected in China

European PP faces competition from imports

US PP supply to outpace demand, propylene may see support

  • Author
  • Staff
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  • Norazlina Jumaat
  • Commodity
  • Electric Power Natural Gas Oil Metals Petrochemicals
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  • United States
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  • Commodities 2023 Europe Energy Price Crisis

Polypropylene is expected to welcome fresh additional supplies in 2023, which would contribute to rising price competitiveness between regions, as producers vie for global market share.

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Upstream propylene will likely be bogged down by lackluster and weak downstream margins, further highlighting the theme of feedstock cost advantages amid the current high oil price scenario.

China braces for a supply glut from PDH startups

In Asia, Chinese demand is expected to start the new year on a weak note as buying appetites will likely taper as the Lunar New Year nears. The prevailing oversupply for propylene and PP will likely persist into the first half of 2023 on high upstream refinery run rates and low downstream converter activity.

"PP inventory levels at end-2022 are lower than 2021 but still much higher compared to previous years so it is hard to measure where actual demand stands," an industry source said. "Nonetheless, Middle East refinery-based PP plants are unlikely to reduce PP production in order to increase market share."

Southeast Asia's recovery, on the other hand, hinges on the reinvigoration of the Chinese economy as the region is hampered by currency devaluations, ample supply, and rising costs of living due to a wave of subsidy reductions in fuel, electricity, and food costs in 2022. Some reprieve is expected in the Indonesian and Malaysian markets leading up to Eid al-Fitr in H2 April 2023, but downturns in crude oil markers could see prices drop to a new floor.

"We expect greater volumes of cargoes coming into Southeast Asia from the Middle East, especially amid weak global demand, [and given] its advantage over regional suppliers in terms of feedstock costs," a source based in Southeast Asia said.

South Korea's spot propylene supply, meanwhile, is set to decline amid waning production margins, with producer YNCC delaying the restart of its 450,000/mt No.1 cracker to January and LG Chemical shutting down its 450,000/mt No. 2 cracker in Q2.

However, a supply glut is expected in China, as five propane dehydrogenation plants with a total name plate capacity of 2.85 million mt is scheduled to come online in 2023.

Bearish sentiment in Europe to continue, macroeconomics to depress demand

Europe's bearish propylene market will likely continue into 2023 amid weak demand and a lack of market competitiveness.

"Everything is still in a depressive motion...this will continue," a trader said.

While prices recovered from record lows of Eur460.50/mt FD NWE on Sept. 13, following tighter supply due to cracker outages and strikes, spot activity remained subdued as consumers reduced contractual volumes to a minimal in light of macroeconomic pressures.

These weak demand fundamentals are expected to pick up from seasonal lows over Christmas in the initial stages of H1 2023 but inflation and the ongoing Russia-Ukraine war will likely extend overall market length.

The prevailing disconnect between term and spot market pricing is expected to persist as energy and feedstock price volatilities limit sellers' pricing maneuverability in negotiations for the former.

The ambiguity and pessimism for propylene extends to downstream PP as an uneasy balance between strong production costs and weak demand is expected to continue well into the new year.

The market has seen consistent pressure from energy prices and weak demand throughout H2 2022, resulting in widespread illiquidity. This was compounded by increased availability of lower cost imported material from the Middle East and Asia.

US propylene may receive support from new PP plants

Prices in the US propylene market may be supported in H1 2023 but downstream PP demand is unlikely to outpace fresh supplies from new capacities.

Prompt polymer-grade propylene prices sank more than 60% over March-December 2022 as rising interest rates and high inflation siphoned demand for downstream polypropylene. PP prices fell 56% during that same period, as demand for durable goods remained minimal, while Asian-origin resin was priced more competitively than US Gulf Coast exports.

Nevertheless, the December start up of ExxonMobil's new 450,000 mt/year PP unit at its Baton Rouge, Louisiana, complex could boost propylene demand.

"Hearing propylene has reached its low," a market source said. "Flat to slightly up for December and January, then projected upward through Q2, then flat Q3 and slightly up Q4."

Enterprise Products Partners' new 750,000 mt/year propane dehydrogenation unit under construction in Texas is slated to start up in Q2 2023, which will increase US PDH capacity to 3 million mt/year.

North America is not expected to see additional new capacity until 2024 when Formosa Plastics is slated to complete a new 250,000 mt/year unit in Point Comfort, Texas. In addition to the new ExxonMobil capacity, Inter Pipeline started up a 525,000 mt/year PP unit in Calgary, Alberta, in July.

Rob Stier, senior lead of global petrochemical analytics with S&P Global said PP demand was not expected to keep up with the growing global capacity, even if severe weather events like hurricanes interrupt output.

"There are way too many plants starting up to absorb any bullish demand scenario you can come up with," Stier added.