North American investments and polyethylene type optimisation
The pace of North American investments in ethylene and polyethylene will be critical. Of the 8 million tons of expected polyethylene projects, approximately 4 million tons capacity began the production in 2017. From the monomer feedstock side, only 2 million tons of new ethylene capacity started the production, but several new ethylene plants are scheduled to start-up in Q1/Q2 of 2018. Some of the ethylene-polyethylene complexes were severely impacted due to the Hurricane Harvey, which led to delays in 2017.
New polyethylene facilities are running at a lower operating rates, due to the typical ramp-up cycle before reaching the onspec resin and due to the delays in the on-site monomer from the steam crackers. Starting up of the steam cracker will be essential in ramping up the polyethylene operating rates. We expect that the market will start seeing the effect of large stockpiles of polyethylene soon, which will be exported in large volumes after the Chinese New Year. Due to large inventories, we expect HDPE spot-export FOB Houston price to drop from $1,100/ton in Dec 2017 to $910/ton by the end of 2018. Our recently revised increase in crude oil price forecasts will result in better US-based polyethylene margins than anticipated in our latest update.
Many global polyethylene producers will optimise their production assets to effectively respond to the changing market dynamics. For example, many companies are evaluating the switch of mLLDPE from the older assets into the newer assets. However, significant optimisation will occur after 2018. Many producers will use the majority of 2018 to improve the market share in the Asian markets for differentiated products such as mLLDPE and higher-alpha-olefins LLDPE.
China’s scrap plastic import ban
The regulation change in China will accelerate the demand for the virgin polyethylene in 2018. Last year, China domestic demand grew at 11% year-on-year, thanks to organic plastic demand growth and virgin plastic demand growth related to the “National Sword” campaign (an initiative to reduce imports of foreign waste products and smuggled goods). We forecast 10% additional year-on-year growth for the China domestic polyethylene market in 2018. The majority of this increase is attributed to increasing virgin plastics consumption post the ban on the scrap plastics imports.
More recycle facilities are investing in the United States and Europe, and it will lead to greater recycled polyethylene volume in the region during the second half of 2018.
China is looking to recycle its accumulated plastics waste efficiently. Reduced plastic waste imports will lead to higher levels of domestic recycling for Chinese recyclers. Net-net it will reduce the overall availability of domestically sourced recycled polyethylene volume in China in 2018.
Changes in tax structures in the United States and India
The lowered corporate tax in the United States starting in 2018, when aligned with low polyethylene resin prices, will be supportive of the further justification of plastics manufacturing facilities. Overall, the new tax structure is poised to positively impact the long-term domestic demand growth prospects for polyethylene resin.
The impact of India’s Goods & Service Tax (GST) will be more visible in 2018 as the initial “teething problems” are in the rearview mirror. Inland logistics is likely to be more efficient with the implementation of the GST, which will lead to more expansions and new investments in the plastics manufacturing facilities.
Europe import volumes
We expect an increase of 39% in the net-imports 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.
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).
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 newinvestments 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.