By John Richardson
WHEN you have spent several billion dollars building a brand new US steam cracker complex, you will of course do everything to maximise operating rates to pay back your debts, even if it means pricing off your advantaged raw-material supply. So why not new US polyethylene (PE) supply priced-off ethane, rather than naphtha, costs? Might these US prices then set global price levels?
Outlandish, out of the question? So was the extent of the slowdown taking place in China today, and the idea that oil could fall below $30/bbl.
It is essential that we therefore challenge what history could one day tell us was another wrong piece of conventional wisdom: That the amount of PE supplied globally is via ethane is so small relative to total demand that ethane producers will never set the price. This will always give them the luxury, as the conceptual graph above explains, of always being price followers rather than price leaders. Given that naphtha, and so oil, is always so much more expensive than ethane (?), this guarantees the ethane producers fantastic margins.
But today we know that:
- The global economy is on the verge of a new global economic crisis. First came the US-led sub-prime crisis, which of course was a debt issue. Now it is emerging market debt, which has risen from $5.4n to $24.4tn. This is equivalent to 90% of emerging market GDP.
- If we could inflate-away this debt, this wouldn’t be so bad. But the challenge today is instead deflation, meaning that the real value of debt is set to rise rather than fall.
- In such a global environment, demand growth for PE will of course be much, much lower than just about all analysts had anticipated.
- It has dawned on the US petrochemicals business that European cracker complexes are not going to shut down in the numbers that they had expected. This will of course leave global PE supply longer than anticipated. Why shut a refinery and its associated petrochemicals complex down when they are the bedrock of a local European economy? And why even think about it over the next few years with oil, and so naphtha costs, remaining very low?
- China’s decision to move very aggressively towards ethylene equivalent self-sufficiency, which has been outlined in its 13th Five-Year-Plan (2016-20202), will also mean a lot more PE capacity additions than the consensus view. Under the plan China’s self-sufficiency ratio is due to rise from 49% in 2014 to 62.9% in 2020. It is China’s ability to absorb US surpluses that matters most of all, as it is only China that is capable of absorbing these surpluses.
- And returning to the subject of demand, what if China decides to ban disposable supermarket plastic bags as part of its environmental drive? Packaging is some 60% of global linear-low density PE consumption.
Sure, you can say this is going too far. But you said it was going to far to say that oil would fall below $30/bbl. The better response would instead be to ask yourself this question: What do I do next?