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H2 outlook: Global polyethylene market seen bearish on weak demand, rising supply

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Demand growth for packaging seen lukewarm

US-China trade tensions, weak currencies add further weight

Singapore — The outlook for the polyethylene market globally is bearish for the remainder of the year due to a combination of weak feedstock costs, weak global demand and anticipated plant startups, according to market participants.

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An estimated 4 million-5 million mt of new polyethylene supply is expected to come online by end December -- 2.9 million mt of it in the US and the rest in Asia. However, the new polyethylene units are expected to contribute only around half their nameplate capacities initially due to the various delays in the typical ramp-up cycle before reaching on-specification resin, and due to potential delays in receiving on-site monomer from steam crackers.

Market sources were expecting more US shale-based PE to enter the market worldwide excluding China in H2, in regions such as Latin America, Europe and then Asia. Producer sources in the key supply region of the Middle East estimated that around 12 million mt/year of PE in 2019 will continue to diversify end-product portfolios, where competition is less intense.

Weak ethylene feedstock markets were expected to weigh on PE buying ideas, while demand was expected to be generally more bearish in H2 than a year earlier due to uncertain macroeconomics, particularly resulting from the US-China trade tensions.

"Even if there is a resolution with China, there is still no guarantee that China will come back to the market," a US PE distributor said. While US-China trade tensions continue to simmer heading into H2, PE market participants have been more concerned about the recent weakness in global demand. South Asia and Southeast Asia have not seen a rise in polymer finished orders from the US as their manufacturing capacities are not as big as China's, traders said.

The current PE surplus will continue to be absorbed by China's demand through some redirection of regional cargoes, sellers said. Some participants were expecting more Southeast Asian cargoes to be exported to China due to regional plant expansions and the ASEAN-China free trade agreement. Some small Chinese plastic recyclers have also relocated to Southeast Asian countries such as Cambodia and Myanmar due to cheaper labor costs, sources said.

US exports of high density polyethylene, linear low density PE and low density PE combined totaled 1.8 million mt over January-April, surging almost 50% from the same period a year earlier, according to US International Trade Commission data. However, with exports for some grades of PE to China impacted by a 25% tariff, specifically LLDPE and HDPE, US exporters have relied on Latin America as a key export destination.

With escalating tensions between the US and China, Europe has seen imports from the US increase this year, with market participants expecting this will continue into H2. According to latest Eurostat data, HDPE imports between January and April 2019 totaled 35,300 mt, up from 22,160 mt in the same period a year earlier.

The Asian PE market was forecast to be in net deficit of 14 million mt/year by end 2019, with a spike in demand expected in September during China's seasonal peak manufacturing period. India has also been importing and will need more PE, especially LDPE and HDPE grades, traders said.

An uptrend in PE packaging demand in the long term driven by the global e-commerce boom, consumer convenience and portion control, is expected to drive demand, although at a slower pace than earlier expected, sources said. Market participants in China said demand was growing and coal-based expansions have slowed, leading to an import dependency.

Virgin PE was likely to remain the preferred substitute despite the recent government push for recycling; recycled resins account for around 3%-4% of the volume of production used in polymer resins. Recycled material is still less easily available and requires a large capital outlay.

The performance of recycled material was also generally not up to expectations, and a lack of financial incentives to collect and sort waste and a fragmented industry comprising mostly small players continued to constrain development, market sources said. Some traders were not optimistic that recycled PE could replace virgin PE, noting that virgin resin made from ethane was currently very cheap.

Currency depreciation against the US dollar has also dampened imports to several countries.

In one of the leading polymer markets, Turkey, the weak US dollar-Turkish lira exchange rate continues to hamper selling into the Turkish market, as imported material is purchased in US dollars and then sold into the market in the local currency. "Turkey is going through difficult times and businesses are squeezed," one trader said.

-- Fumiko Dobashi, fumiko.dobashi@spglobal.com

-- Hui Heng, hui.heng@spglobal.com

-- Brian Balboa, brian.balboa@spglobal.com

-- Lara Berton, lara.berton@spglobal.com

-- Edited by Wendy Wells, wendy.wells@spglobal.com