Global polyolefin market sees dramatic changes

12:00 AM @ Monday - 01 January, 1900
Polyolefins represent almost two-thirds of the major commodity thermoplastics used worldwide, and have numerous applications ranging from automotive parts to carpet fibers, household and food containers, toys, stretch film/shrink film, diapers and trash bags. As per Chemical Market Associates, Inc. (CMAI), acquired by IHS Inc., the global polyolefin market is changing dramatically in response to the quickly advancing industrialization process in emerging markets, as well as improvements in global communications and trade liberalization.Increases in consumption will continue to be driven by novel applications where plastics can deliver cost advantages, performance enhancements, or both. Investments in polyolefin production capacity are increasingly concentrated in regions with affordable supplies of feedstocks or high-demand growth areas, such as the Middle East and the Asia Pacific region. The same trend, particularly in Western Europe, is driving industry consolidation, operations optimization, and a shift toward the production of higher-value, higher-performance products. In North America, low-cost feedstock from shale gas is revitalizing the polyethylene (PE) business, making PE exports highly competitive globally. In response, several producers have announced new capital projects that are currently scheduled to come on-stream in the second half of the decade. One of the most challenging issues facing the polyolefin industry during the last decade has been the loss of its pricing power. Wedged between the demands of upstream oil and gas corporations and major retail chains like Walmart on the downstream side, the polyolefin production chain has been caught in the middle. While energy and raw material prices increased in response to tighter global market conditions, prices for finished goods remained at the same level or even declined, as imports from low labor cost countries flooded the market. As a result, profits in the polyolefin industry had all but disappeared. Although the recession of 2008-2009 only exacerbated the already unfavorable market conditions for polyolefins, producers of the product are making strategic moves to protect against further margin erosion. Instead of engaging in competition for market shares, producers have been controlling production and inventories to keep the market balance tight. The development of "green" sources for the production of plastics is advancing steadily and is generating the first tangible results. In September 2010, Braskem started operations at a Brazilian facility that produces conventional polyethylene from sugar cane. Brakem's customers include major consumer-product corporations that will be using the sugar-cane-based polyethylene resins for packaging of cosmetics and container closures. A second project for the production of bio-polymer, also in Brazil, was recently announced jointly by Dow and Mitsui & Co.
As per a report by Nexant, the industry exhibited an improvement in 2010 after a dramatic slump in demand in 2009, following the onset of the global economic slowdown. This improvement was driven by a faster pace of recovery in the Asia Pacific markets. Additionally, a level of inventory restocking has also been taking place as buyers look to replenish previously depleted stock levels. The short term outlook of the industry remains under pressure as further capacity additions are expected in the short-term. However, a gradual recovery is expected in utilisation rates and industry margins to continue throughout 2011. Industry margins are forecast to climb to a new cyclical peak in around 2015, with returns comparable to those seen in the last major peak in 2006/7. Within this context, Asia Pacific will represent the most attractive market in terms of growth and profitability and will be a key driver for profitability of the global petrochemical sector. Global demand for olefins was estimated at 205 mln tons in 2010 and is forecasted to grow at approximately 4% over the period 2011-2017. Demand in the Asia Pacific region accounts for around 40% of global demand and is projected to grow at 4.1% over the period 2011-2017. Rising living standards and the continuing trend of substitution of basic materials with plastics are key drivers across many Asia Pacific countries. Global demand for polyolefins was estimated at approximately 116 mln tons in 2010 and is forecasted to grow at approximately 5% CAGR over the period 2011-2017. Key demand drivers are the packaging and construction sectors and further product substitution of basic materials. Asia Pacific is a key demand driver with forecasted growth of over 5.5% CAGR over the period 2011-2017.
Profitability levels for most producers appeared to bottom out in 2009 and showed a significant improvement in 2010. A recovery in demand was initiated by various government stimulus packages and supported by a recovery in manufacturing across Asia and a level of industry restocking. Lower crude oil prices combined with various production outages also supported increased product margins in key sectors such as olefins and polyolefins. Margins in Q1-2011 were marginally higher than expected due to some unplanned production outages and delays in new project start-ups. Furthermore, the recent earthquake disaster in Japan resulted in unplanned outages at major olefin facilities in Japan. Nexant believes that demand fundamentals remain good for the remainder of the year but are ultimately tied to the overall global economic recovery. The report forecasts petrochemical industry profitability to continue to exhibit a gradual sustainable recovery in 2011 as fewer capacity start-ups are scheduled. Total new ethylene additions in 2011 are forecast of approximately 7 mln tons compared with approximately 12 mln tons in 2010. The rate of new capacity additions is expected to decline from a peak of 18 mln tons (combined ethylene and propylene) in 2010 to approximately 8 mln tons in 2014. Industry margins are forecast to climb to a new peak around 2015, with returns comparable to those seen in the last major peak in 2006/7. This forecast is based on the assumption that a stable improvement in the global economy is sustained. In terms of consumption of polyolefins, the market is increasingly being driven by Asia Pacific, principally China. Nexant forecasts consumption in Asia and China to grow at a CAGR of 5.5% and 6.3%, respectively, over the period 2011-2017, and also forecasts higher consumption growth from other developing regions such as the Middle East with a CAGR of 6.9% over the period 2011-2017, albeit from a lower base.Consumption growth in Americas and Europe for the period 2011-2017 is forecast to be lower, at approximately 4.3% and 3.1% CAGR basis both of these markets have largely reached maturity. Asia Pacific has become a major consuming region for petrochemicals over the past decade. According to their analysis, demand growth for polyolefins has been growing at approximately 4% CAGR over the period 2005-2010 and is set to continue at around 5.5% over the forecasted period 2011-2017. This development has occurred largely in support of the region’s rapidly expanding manufacturing sectors. A large proportion of this manufacturing is for export oriented goods. However, domestic consumption levels for finished goods are also increasing, thus providing further demand growth potential for chemical-related products throughout the region.
Demand growth for petrochemicals in Asia Pacific during 2011-2017 is forecast to continue to outpace the rate of new supply additions in the region. As a result, we believe that Asia Pacific will remain a significant importer of various chemical intermediates and polymers for the foreseeable future. China is a significant contributor to overall Asia Pacific industrial growth. Domestic demand for polyolefins alone is forecast to grow at approximately 6.3% CAGR basis over the period 2011-2017. However, other markets, including Malaysia and Thailand have also undergone rapid expansions over the last decade. Furthermore significant growth potential exists in population rich countries such as Indonesia and Vietnam. Demand growth for polyolefins in South East Asia to grow at approximately 4.6% CAGR basis over the period 2011-2017. Current and future investments in new petrochemical capacity are taking place predominantly in the Middle East and throughout Asia Pacific. Capacity expansions in other markets are relatively minor in comparison. Investments in olefins capacity in the Middle East are primarily driven by the availability of low cost gas (advantaged feedstocks) in the region. However, longer-term developments in the region will primarily depend on future availability of advantaged feedstocks, specifically ethane and other natural gas liquids (NGLs) extracted from associated (from crude oil production) and non-associated gas sources. We expect the pace of development in the region to slowdown as future availability of low cost gas in the region will not be widely available beyond the current investment wave taking place over the period 2011-2014. Majority of new capacity investments in Asia Pacific are taking place in China. China alone is forecast to add approximately 2-3 mln tpa of olefins capacity over the period 2011-2017. These projects are supported primarily by excellent domestic demand fundamentals and available feedstock from local coal reserves and new refinery investments (providing a source of naphtha). Coal based projects are also being promoted by the Chinese government to reduce dependency on oil-based products. This is the principal driver for new capacity developments in the region. Despite the level of investment taking place, we believe China will continue to rely heavily on imports of key materials including polyolefins and styrene over the period 2011-2017 and beyond. Outside of China, major new investments are also taking place in India, Thailand and Singapore.Olefins capacity growth in South East Asia is forecasted at over 3.1% CAGR basis over the forecasted period 2011-2017, representing an addition of approximately 0.6 mln tpa capacity. In Europe and the US, rationalisation of older, higher cost plants has been taking place. This trend is expected to continue in the near-term as lower cost capacity from other regions start production.
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