Market outlook: New PDH units may lead to US polypropylene resurgence

Proposed new propane dehydrogenation (PDH) units in the US may lead to a renaissance for this key polyolefin

In these times of wild propylene volatility, when prices are just as apt to swing up by 15 cents/lb ($331/tonne, €255/tonne) one month as they are to swing back down by 20 cents/lb the next, it is hard to imagine a future golden age for any of its derivatives – especially polypropylene (PP).

PDH plants will fill the propylene supply gap created by cracking lighter feedstocks Copyright: PetroLogistics

Yet, with recent announcements of eight PDH units to be built in the US over the next three to five years (see table) many market participants are banking on more pricing stability leading to a resurgence in demand for the commodity. It cannot come too soon for many buyers.

Since December 2012, US PP prices have followed feedstock propylene prices up by 31%, but in March, prices fell by 6 cents/lb – tracking lower propylene costs and kicking off what is expected to be a long slide down.

“Customers are constantly getting whipsawed,” said one PP distributor about current market dynamics. “They know that within 10 minutes of getting all filled up with high-priced resins, prices are going to go careering back down on them It’s no way to run a business.”

VOLATILITY IMPACT
Several years of this type of volatility has had a negative impact on market growth. In 2012, Phillips Sumika shuttered its 365,000 tonne/year PP plant in Pasadena, Texas, because of tough market conditions. Market participants speculated that other closures or consolidations might be on the horizon, though that has so far not proven to be the case.

For full year 2012, the US PP market saw sales growth of less than 1%, according to data from the American Chemistry Council (ACC). While domestic sales improved by slightly more than 1%, the overall figure brought down by an 11% drop in export sales. For the year, exports accounted for less than 5% of sales, according to the ACC.

Low demand growth is expected to continue for at least the next few years, until the PDH units are up and running and propylene becomes more available, sources said.

Stewart Hardy, the global manager for petrochemical market dynamics for Nexant Chemsystems, has said the planned PDH plants will cover the propylene lost as a result of a shift by US steam crackers to lighter feedstocks, in addition to providing for some growth.

EIGHT PROJECTS

The eight new projects announced by six different producers in North America could bring at least 4m tonnes/year of propylene capacity to market. On 18 March, US-based midstream company Williams said it plans to build and operate a 500,000 tonne/year PDH plant in Alberta, Canada, at a cost of $900m. The facility is scheduled to come on line in the second quarter of 2016 and capacity could double in the future.

The propylene will be sent to plants along the US Gulf Coast, Williams said. The company expects the polymer-grade propylene (PGP) will be among the lowest-cost PDH-sourced monomer in North America. Williams is also exploring new propylene markets in Alberta.

Some naysayers doubt all of the announced PDH units will be built. LyondellBasell CEO Jim Gallogly has said he is sceptical about a lasting US propane advantage because of possible of propane exports out of the US.

But for the most part, market participants and industry watchers see good times ahead, with the first benefit being less volatility for the PP market. A more stable source of propylene tied to natural gas will lead to less reliance on the refining sector, which will lead to fewer price swings during refinery turnaround season. “Anything that can reduce the volatility of polypropylene, or ultimately help with propylene prices is a good thing, because PP has been on a rollercoaster ride for a good part of the last couple of years,” said Phillip Karig, managing director of Mathelin Bay Associates, a US and European plastics industry consultancy.

It has been the volatility, more than higher resin prices, that has slowed demand in the PP market and caused processors to switch to polyethylene (PE), or, where not possible, to importing finished goods from Asia.

“The volatility is very hard to live with if you are making items for a big box retailer,” Karig said. “You can’t say, ‘You know that microwavable tray I sold to you for 20 cents last month, well I’m now going to sell it to you for 30 cents.’ It is just not going to work.” Once the volatility is gone, additional growth in the PP market, is possible sources said. “There will be buyers who switch back,” Karig said.

ROOM FOR MORE PP PLANTS
So far, there have not been any significant announcements about new PP capacity planned for the US. However, with US production rates running typically in the low-80% of capacity range, market participants say there is plenty of room for existing plants to increase production rates to absorb some of the extra propylene that will be produced.

And as with planned expansions in the US ethylene and PE markets, much of any additional capacity created will be targeted at the export market. “When propylene prices are too high, we export less PP, so a lot of additional propylene from PDH plants probably means that price is going to come down, which means it will make sense for the US to be able to export more,” said Dan Lippe, president of Petral Consulting Company.

With global PP demand growth estimated at 5% per year, and US PP demand growth significantly lower than that, it makes sense for US producers to eventually target global buyers.However, while it will lead to more stable demand, Lippe cautioned that increased exports will not necessarily mean significant profits for PP producers. “The people who build the PDH plants, they will make money. How they sell their propylene is another question, but my view is they will turn it into PP, because it is easier to ship,” he said. “I’m not saying there is going to be a golden age for PP. I don’t think there is.”

Additional reporting by Al Greenwood In Houston