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Global polyethylene oversupply to weigh on prices in H1 2020

Highlights

PE trade flows shifting amid US-China trade dispute

Increased US imports pressuring European pricing

Asia demand growing, but below previous peaks

Houston — The US natural gas shale boom's bountiful cheap ethane feedstock has given producers a key supply cost advantage, bringing about an infrastructure renaissance transforming the US into a global supplier, with its sights increasingly on Asia, the largest demand center.

Commodities 2020 | S&P Global Platts

However, with the first wave of new US crackers and polyethylene plants reaching its end, global polyethylene markets will enter 2020 facing oversupply and pressured prices, with demand expected to lag behind throughout the year.

Asia, Europe and Turkey see similar challenges with abundant resin supply amid economic slowdowns and continued uncertainty stemming from the US-China trade tension.

Thirteen new PE plants in the first wave of startups from 2017-2019 will increase North American PE capacity by 35% to more than 27 million mt/year. The 15 plants slated to start up through the 2020s will push that overall capacity up by another 26% to 34.35 million mt/year.

Prices are showing oversupply pressure. By early November 2019, HDPE blowmolding prices had fallen 43% to $782/mt FAS Houston since mid-March 2018. In the same span, LLDPE fell 41% to $772/mt FAS, and LDPE fell 37% to $871/mt FAS.

At least one of the new plants slated to start up by year-end 2019 will ramp up in early 2020, that being LyondellBasell's new 550,000 HDPE plant alongside the Houston Ship Channel. The plant had been slated for startup in mid-2019. However, market participants expect price pressure from oversupply to linger into 2020.

"We don't see prices rising in Q1 2020," a PE trader said. Globally, there's already so much supply."

POLYETHYLENE IMPORTS TO CHALLENGE EUROPEAN PRICING

Over the course of 2019, fallout from that US capacity expansion has been sorely felt in Europe. Spot pricing for some grades, in particular HDPE, have fallen 19% since June under the weight of cheaper US imports. Further decreases are expected for the remainder of 2019 and well into 2020, the result of a double whammy of a weak global economy and increased US imports set to challenge high-cost European producers.

Net imports of HDPE into the EU more than tripled to 732,007 mt from January to August, compared with 274,300 mt in the same period in 2018. That increase stemmed mainly from a jump in US imports of lower cost resin, European statistics agency Eurostat data showed. US HDPE film import cargoes at the start of November saw DDP trucks offered below Eur900/mt ($983), and even as low as Eur800, down from the June high of Eur1,170/mt.

Market participants question when availability of such low spot prices will impact the system of monthly contract prices that dominates European supply. In other ethylene derivatives contracts, such as glycols, spot was already reflected in 2020 monthly contract formulas. A weak 2020 awaits both sellers and buyers as they grapple with anticipated reduced consumer demand.

In the same vein as Europe, supply is expected to remain abundant in the Turkish market amid incoming US volumes with structurally low demand.

ASIAN WAIT-AND-SEE APPROACH TO POLYETHYLENE SUPPLY

With most parts of the world experiencing an economic slowdown, Asian buyers adopted a wait-and-see approach throughout 2019. Market players fear this trend will continue globally, with sources taking market cues from Asia, as the region accounts for 60% of global demand.

While polyethylene demand in China continues to grow, it has not matched the same peak levels seen in previous years, sources said.

Average PE demand growth was expected to rise in line with GDP growth forecasts across most of Asia in 2020, market sources said. Consumer convenience and portion control will lend support to the boom in packaging, and hence higher PE demand.

However, China's PE demand is expected to be negatively impacted by about 2% annually, or 1 million-2 million mt, of plastic production if tariffs persist, market sources said, even though the US in October held off on increasing those taxes to 30% from 25%.

On the other hand, some end-users outside of China said they have more finished product orders from the US, but were cautious to expand aggressively due to the current volatile macroeconomics from the trade dispute.

Asia's 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.

The Asian PE market was forecast to be in net deficit of 14 million mt/year in 2020, with a spike in demand expected in March during China's seasonal peak manufacturing period. Middle East producer sources estimate that around 12 million mt/year of PE in 2020 will continue to diversify end-product portfolios, where competition is less intense.

China remains the third-largest export market for US PE despite 25% tariffs on US HDPE and linear low density PE in place since August 2018. While flows of US material have increased to Europe, Vietnam, Turkey and Brazil, Asia remains the largest global demand center, with China at the top.

Commodities 2020 | S&P Global Platts

-- Kristen Hays, kristen.hays@spglobal.com

-- Hui Heng, hui.heng@spglobal.com; Miguel Cambeiro

-- Edited by Richard Rubin, newsdesk@spglobal.com

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