Read part one of our Global Polyethylene series here.
4. Europe import volumes
We expect an increase of 39% in the net imports (total imports minus total exports) of polyethylene into Europe in 2018. This increase is not only due to an expected rise in imports from the United States, but also a reduction in exports from Europe due to more competition around the world.
The net-import increase is likely to be more pronounced for HDPE due to high local demand for the bi-modal HDPE in the bottle and pipe applications in Europe. In the case of LLDPE, we expect that Europe will take more time to accept change in film extrusion applications. As a result, the large incorporation of the metallocenes and high-alpha-olefins-LLDPE (from the United States) into European extrusion lines is likely to be muted until the second half of 2018. Some of the LDPE exports of Europe will give way to the United States when DowDupont’s new LDPE facility starts up in Q2-2018.
5. Impact on pricing and margins
Besides the impact of changes in the energy and feedstocks prices, we will see polyethylene prices and margins impacted due to resin supply and demand fundamentals. With incrementally larger volumes of polyethylene entering the export markets, we will see downward price movement, and thereby margins squeeze in 2018. We already see some of this coming true, for example, in case of Europe, the spread between ethylene prices and contract HDPE were over than $200 per tonne until September 2017. After Q3, we started seeing narrower spreads as the volumes from the United States and the Middle East began impacting the domestic margins.
We are expecting 2018 to be a positive year in China market due to net-reduction in the recycled polyethylene volumes. Increased recycle investments in other countries such as India, Vietnam, Indonesia, the United States and Europe will likely result in an overall zero-sum demand change in the longer term. However, in 2018, while the world order for recycling plastics is rearranging, we anticipate more demand will need to be met by the virgin polyethylene. Low oil prices and large volumes entering the international markets from the United States will only support the use of the virgin polyethylene.
For North American domestic polyethylene prices, we expect 2018 would see a downward pressure due to the high level of inventories from the additional new capacity (an increase of approximately 4 million tons).
6. The United States logistics infrastructure constraints
The North American polyethylene supply chain participants have been anticipating the onslaught of new resin capacity for the last 5-7 years. Almost all of the bagging companies have invested in expanding the bagging machines, upgrading their machines with high-speed lines and expanded rail-yards to accommodate a large number of railcars. Additionally, shipping companies, port authorities, rail and trucking companies are also well aware of additional 5 million tons of polyethylene. However, none of these new investments has been tested yet. New polyethylene exports in the second half of 2017 had been very limited due to the impact of the Hurricane that caused domestic polyethylene converter to enter the market with large purchasing quantities.
We expect that polyethylene logistics infrastructure will be challenged in the first quarter of 2018. The United States polyethylene producers are likely to use the contingency ports for export such as Charleston, Savannah and Los Angeles / Long Beach increasingly in 2018, which will help secure containers economically. During Q4-2018/Q1-2019, we will start seeing container availability improve in the Port of Houston and New Orleans, which will result in many producers increasingly utilising ports in the Gulf Coast.