2018 Will See Winners And Losers Appear In Plastics Markets

Two major challenges face petrochemical and polymer producers and consumers in 2018:

The likely disruption created by the arrival of the ethylene/polyethylene expansions in the US

The growth of the circular economy and the need to dramatically increase recycling capacity

They will create Winners and Losers.

The new US product will likely change the global market. Its ethane feedstock is essentially a distressed product, which has to be removed to enable the shale gas to be sold. It is also clear that this 40% expansion of USA polyethylene capacity, around 6 million tonnes, cannot be sold into the US domestic market, which is already very mature:

US net exports have actually been in decline in recent years, so it will also be a challenge to export the volumes

President Trump’s apparent wish to start a trade war with China will make that market difficult to access

It is likely, therefore, that a significant volume will end up arriving in Europe, causing a price war

We have seen price wars before, and the “winners” are usually the integrated producers, who can roll through margins from the well-head or the refinery into ethylene and polyethylene sales.

The economics of this are relatively simple. In the US, producers will have to absorb lower margins on the small percentage of shale gas that is used as ethane feed into the cracker. Similarly in Europe, refinery-integrated producers will have to absorb lower margins on the small percentage of oil that is used as naphtha feed into the cracker.

As the chart shows, this development will be good news for ethylene consumers. As Huntsman CEO, Peter Huntsman noted a year ago:

“There is a wave of ethylene that is going to be hitting the North American markets quite substantially over the next couple of years. I’d rather be a spot buyer than a contract buyer. I can’t imagine with all of the ethylene that is going to be coming to the market that it’s not going to be a buying opportunity.”