Polyolefins under pressure as new capacity comes on line
Polyolefins remain under pressure, with economic growth weak and costs still stubbornly high. New capacity developments in the Middle East and Asia will add to the considerable pressure faced by established producers in all markets.
2008 was among the most challenging and dynamic periods so far experienced in the polyolefins industry. Broadly speaking, 2008 can be assessed in two parts. In the first half of 2008, prices rose to record levels as tight supply demand balances allowed producers to pass through unprecedented levels of feedstock prices. However, the second half of 2008 was a completely different story. Demand plummeted as the reality of a collapse in financial markets became widespread and as economies around the world suffered a rapid slowdown. The decline in demand was also significantly impacted by falling feedstock prices, with Brent crude averaging $40 per barrel in December 2008, a 70 percent fall its peak earlier in the year. As polymer prices declined rapidly, purchasers withdrew from the market and inventories throughout the value chain were reduced significantly.
In 2008, the global economy is estimated to have grown by 2.5 percent and yet polyolefin consumption declined by 1.6 percent. This shows that the fall in demand was far beyond that anticipated from the economic slowdown and reflects the degree of drawing down inventory in the value chain that occurred in the second half of 2008.
Turning to 2009, the analysis presented in this report projects operating rates to fall dramatically compared to 2008. On the demand side, the outlook is for slightly improved demand over 2008 but still not returning to 2007 levels in some regions. However, capacity additions are scheduled to be immense in 2009 as new capacity from the Middle East and Asia comes onstream. Even with a moderate demand recovery in 2009, this will be far exceeded by new capacity additions. Consequently, global operating rates in 2009 are projected to average 83 percent for polypropylene, 85 percent for LLDPE, 82 percent for HDPE and 86 percent for LDPE. This does not include the impact of unplanned outages.
For the remainder of 2009, Nexant believes that there are both upside and downside potential to operating rates. On the upside, capacity due to come onstream this year has the potential to be delayed, although a number of plants have already been delayed from 2008. In addition, the analysis does not include potential unplanned outages such as specific plant problems and the hurricane season in the U.S. Gulf Coast, which was once again significant in 2008. On the downside, polyolefin demand growth is projected at 3.2 percent for 2009. While this is well below average growth levels seen in the last ten years, the short term outlook remains uncertain.
Global Polyolefin Capacity Growth
The outlook beyond 2009 is one of a prolonged period of low operating rates, at least to 2012. This is partly as a consequence of relatively poor demand growth in the midst of a poor economic environment, but also, and arguably to a greater extent, by the size of further capacity additions. In particular, 2010 is scheduled to deliver another enormous tranche of new capacity. Consequently, this downturn (2009 2012) is forecast to be very severe. The forecasts do include some closures of old and uncompetitive assets, yet much higher levels of closures will be required before a significant upturn in operating rates is seen.
Global trade patterns will also change dramatically as the United States and Western Europe become large net importers of LLDPE, HDPE and polypropylene over the next few years, with the Middle East becoming the supplier to the world. The United States and Western Europe will continue to be net exporters of LDPE.
Report Availability
The report “Petroleum and Petrochemical Economics (PPE) – Polyolefins Market Dynamics” is published by Nexant as part of its ChemSystems PPE program. Subscriptions or single copies of the report are available from www.chemsystems.com. For further details please email chemsystems@nexant.com. If you have any comments on the analysis, please contact Stewart Hardy ( shardy@nexant.com).
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©2009 Nexant, Inc.
