Some polymer makers believe the sector is set fair for 2008/9 and even into the early years of the next decade. They point to high costs and intense activity in the construction industry, which could mean delays bringing new production units on stream.

Consultants and industry commentators are more pessimistic however, suggesting that supplies will increase significantly as demand slackens. 

Announced capacity additions and expected demand growth indicate the very nature of regional and global polymer markets will change. Given its hugely advantaged ethylene cost position, the Middle East will become the low-cost supplier of polyethylene to the world. Considerable tonnages of new polypropylene (PP) capacity are also planned in the region, based on refinery-based feedstock and propane dehydrogenation (PDH). This will almost certainly put pressure on domestic suppliers in markets as far apart as China, Europe and the US.

The industry has been aware for years that the Middle East will ultimately cater for incremental polyolefins demand growth. Most of that capacity will be used to supply fast-growing markets in Asia, particularly China. But if China growth is curtailed – for whatever reason – then material is likely to back up into Europe and other parts of the world. Polyolefins producers believe North American producers will be pushed out of valuable export markets and that the polyolefins trade balance in Europe will dip into negative territory.

The impact of new capacities, not simply in the Middle East but also in Asia and Latin America, could be significant.

Consultants Nexant Chem Systems, for example, suggest that global economic growth could fall to around 1.5 per cent a year from the recent average of 3.8 per cent a year. This could depress the growth in olefins consumption to about half its current 11 million tonnes (mt) per year. The firm projects oil prices of $80/bbl on average in 2008 and a drop to $60/bbl on average as global economic growth slows.

However, significant new capacity additions are expected over the next few years.

“Global olefins supply is projected to grow consistently ahead of consumption for the next five years, building a cumulative excess of 30mt per year of production capacity. Previous downturns in the industry have never witnessed a net excess capacity build-up of more than 6mt per year,” says Nexant Chem Systems.

More optimistic observers point out that numerous factors are working to slow the addition of new capacity or to curtail it. New production capacities have not come on-stream in Iran as planned and plant start-ups have been delayed elsewhere because of tightness in the global construction market.

As a result, some producers are sanguine about the future. Jeff Lipton, chief executive of US polyethylene (PE) maker Nova Chemicals, expects 2008 to be a “very good year and stronger than our previous forecast”.

Lipton believes global PE operating rates can remain quite strong and industry margins excellent, even if US gross domestic product growth drops to zero in 2008.

Feedstock propylene and PP capacity additions, however, may lengthen markets for the polymer more than for LLDPE. PP could even go long in its own right with the addition of mixed feedstock crackers in Saudi Arabia and metathesis and PDH units due on-stream in the Kingdom in the first quarter of this year. The pressure on global PP markets could also be more severe, as new plants are brought on-stream worldwide in places as far afield as India, Mexico, Brazil, Taiwan and China.

According to Andrew Powell at Nexant ChemSystems, global PP capacity will increase by around 30 per cent from 2007 volumes of 14mt per year. The majority of new capacity will be located in Asia and the Middle East, raising their combined share of global capacity from 45 per cent in 2005 to more than 55 per cent by 2010.

Annual consumption growth, by comparison, is projected to fall by more than 30 per cent to less than 2mt in 2010. The divergence of global supply and demand could result in a net excess capacity build of almost 8mt by 2010, equivalent to more than 15 per cent of the present supply base.

Some analysts believe high prices will persist in the long term, however.

“Prices and margins may drop in the near future due to market fundamentals but we believe they will not dip near the historical lows that some plastics consumers and end users are expecting and rather will range at high and volatile levels,” says Sebastian Castelli, plastics specialist at Société Générale.

“The marginal cost of producing plastics, that ultimately defines the lower price limit, will remain high due to expected high energy prices,” he adds.

Overall, views about the future remain deeply divided. Optimists believe capacity additions will be curtailed. Pessimists fear supply will swamp demand. The truth will probably be somewhere in between.

Nigel Davis
LME Ringsider eNewsletter
Spring 2008