Chemical Conversations: Polyolefins Outlook

Polyolefins expert Terry Glass talks to Amanda Richardson about the outlook for polyolefins, including:

• Current trends and their effect on the polyolefins market and its key drivers over the next 12-24 months 
• How Argus approaches its 5-year forecast and what industry should be looking out for 
• Asian, and especially Chinese capacity additions and what that means for rationalization and trade flows elsewhere 
• Other key factors industry needs to stay close to in 2023 and beyond 
  
  
  

Amanda: Hi, I'm Amanda Richardson with the Argus Chemical Sector, and you're listening to our latest edition of Chemical Conversations featuring Terry Glass, our VP of Polymer Services. Today he's going to be discussing our latest price and fundamentals forecasting for polyethylene and polypropylene outlooks and analytics. 

Terry: Ah, nice. Thank you, Amanda, for the introduction, and welcome, everybody. 

Amanda: So, so far in 2023, we've seen lots of transitions. There's a new normal with COVID-19, there's China lifting its COVID-related restrictions, Russia, Ukraine, fundamentally altering trade dynamics, the world's also watching strong inflationary factors that might affect consumer demand. So how have these trends affected the Polyolefin markets and the key drivers for polyolefin markets? And how do you see that impacting the next 12 to 24 months? 

Terry: That's a key question that's on everyone's mind right now. Certainly, the buying behavior has shifted in the last 12 to 24 months, and we expect that that buying behavior will continue in the foreseeable future as we return back to our normal buying behavior we had prior to COVID. And by that, I mean that consumers because of the COVID were definitely limited in terms of the social activities that they could go out to restaurants or movies or et cetera. And they were more focused at staying at home. And so there was a major surge in buying finished goods out of, say, China for appliances or furniture or miscellaneous electronics. And that has shifted primarily because we've returned to more of an open services society. People are going back out and interacting at restaurants and movies and events. 

The surplus monies that the government was providing during that COVID pandemic period is also starting to dry up. So the surplus funds, particularly in the U.S., have shifted and buying behavior has changed quite a bit. We also were faced at this time with a supply chain logistics issue because there was a tremendous amount of imports coming out of China, and that put a big strain on the shipping industry and the container transportation industry, the rail industry at a time when we were still recovering from employment...low employment issues. 

Amanda: Another important part of what you do in the polyethylene, polypropylene outlook service is the five-year price forecast. How do you approach constructing your view for that time period, three to five years out? 

Terry: Well, three to five years I think is probably doable with a reasonable forecast based on GDP dynamics in the different regions. So the way we look at it is to study the individual markets. So for example, blow molding or injection molding, or thermoforming, whatever are the relevant major key items for the polyethylene and polypropylene markets. In the case of polypropylene let us look at automotive, for example, that's a key driver. So we look at how these different market segments are forecasted to grow over the next three to five years. We also then take into account supply and demand dynamics, new plant capacities that are coming online, and how these new capacities in the different regions are going to impact the global trade patterns. 

So, for example, in the U.S., with all this new capacity that's coming online or has been coming online for the last couple of years, the industry is shifting from what was a 20% to 25% export volume of total production. Now, they're going to be exporting 40% to 45% of their production in order to participate or meet the 85% to 90% plant efficiency operations as typical of the industry. So indeed, the global trade patterns are affecting the overall logistics and trade, and there's political implications as well given the Russian-Ukraine crisis and how the Chinese and Asian markets might participate in the global trade patterns. Things are shifting, but for now we're kind of going back to what we think is a status quo. 

Amanda: The next question I have is around the Asian and China outlook because that's where they're adding the most, or that's where the most polyethylene and polypropylene capacity is being added in the medium term. So what does that mean for rationalization elsewhere? And do you foresee adjustments in trade flows? 

Terry: Indeed, there is some shifts going on, but I think we have to look at these separately. Polyethylene is different from polypropylene. So in the case of polyethylene, China is going to continue to be a major demand driver for polyethylene globally. The imports into China in 2024, we estimate will be in the range of 12 million tons, total demand in China is around 50 million tons per year. So you can see that they are, from a global perspective, going to be a major importer of polyethylene resin. And that's really the strategy that was behind all this investment in the U.S. because of the shale gas, ethane economics advantages that we had that we would be able to export a lot of our production into the China markets. And as such, we don't really think that there's going to be a lot of rationalization on polyethylene in the next three to five years. 

Now, polypropylene is a very different situation. Polypropylene, the Chinese market is pretty much now self-sufficient. So we're going to see more and more of their participation in the export market on polypropylene. What people may not understand is that there's over 200 polypropylene plants in China. 25% of these plants that are in operation are very small, only about 100 kiloton capacity, but yet 25% of these plants only represents 5% of the total production because of the improvements in scale, economies of scale on the 300 to 400 kiloton type plants that have been built recently. 

So I do suspect we're going to see some rationalization of some of these smaller plants in China. Albeit, it's probably worth noting that if you were to shut down all of these small plants, the ones that are less than a hundred kilotons, it would only represent 5% of the total polypropylene production in China today. So, yes, I do think that there will be some rationalization of polypropylene plants in China, not so much elsewhere in the other regions. It's important to keep in mind that propylene costs, monomer, and feedstocks really are not advantaged in any one region over the other. You're pretty much tied to PDH economics, oil, and gas economics. There's no one region that has a big advantage over the other. So I look at polypropylene as somewhat more of a regional supply-demand market segment as opposed to polyethylene. 

Amanda: So is there anything else that the industry should be staying close to as we look deeper into 2023 and beyond? 

Terry: In the case of polyethylene, we've got a huge amount of capacity coming online in Asia and even in the U.S. there's still several new plants coming online. So supply chain logistics, inventory management, operating rates, inflation, exchange rates, currency exchange rates are all the variables that we need to pay particular attention to in the foreseeable future. I do suspect plants are going to be running in the low 80% range. And particularly in the U.S. and in Asia. And so for polyethylene, those are the short-term dynamics we have to pay attention to. Long term, of course, the environmental issues are going to be playing a more significant role, particularly for single-use packaging. 

On polypropylene, I think the biggest issue there is going to be the EGP, the polymer-grade propylene supply-demand dynamics. That particular market segment and feedstock dynamic is more or less balanced. And when a derivative plant or a PDH unit goes through some kind of turnaround or goes through unexpected shutdowns, you will see a more significant impact in how that's going to play out in those markets. 

Amanda: Great. Thank you so much, Terry, for sharing all these views with us today, giving us a glimpse into the trends affecting the polyolefins outlooks.  

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