Petrochemical Outlook for 2018: Final Conclusions
APLA Consultant’s Panel
Rio de Janeiro November 13, 2017
Polymer Consulting
International, Inc.
• Hurricane Harvey (and other events)
• Oil and Gas Prices
• Shale Gas Crackers: The Arrival
– Polyethylene exports
• Divergence of Polyethylene and Polypropylene
• China’s New Policies
• President Trump
There are some key issues for 2018
PCI
• Essentially every coastal and off-shore production facility in
the area of landfall was shut down
• More than 60 percent of US ethylene, polyethylene and
polypropylene capacity was shut down due to the hurricane
• While some plants have sustained only minimum damage,
some have been hit harder than others
• The damage to infrastructure (roads, rail, power, etc.) will
lengthen the impact/problem
• As a result, production was reduced and prices increased
• As of the end of October most plants are operating with some
operating at reduced rates
• By mid-to-late December, all plants are expected to be
operating at capacity; some logistics issues may still exist
• Some plants still under construction will be delayed
PCI
Harvey – the worst hurricane to hit Houston
and surroundings in history
• The recovery from Harvey, the other hurricanes and the
California fires will result in an increased demand for
polymers (homes, businesses, furnishings, cars, etc.) for the
next six to twelve months (possibly longer)
• This applies to the other countries/islands as well which will
need to import finished products and food
PCI
Harvey – the worst hurricane to hit Houston
and surroundings in history (continued)
A report from the Dallas Federal Reserve Bank (10/17)
estimated damage to Texas at 75-100 billion dollars.
Other estimates exceed $150 billion
• Oil price forecasts range from $45 to $75 for 2018. PCI believes
$50-$60 is more reasonable for 2018 unless OPEC makes a
more drastic production cut
• Recent prices above $60 would likely come down due to
increased US shale oil production
• Production of shale oil and gas has increased in 2017 with
further increases expected for 2018
• Natural gas prices (consensus) are expected to be between
$2.50-$3.50/MM BTU for 2018
• Gas production is increasing faster than demand promoting
increased exports
Oil and gas prices
Low oil (naphtha) prices reduce the competitive advantage
of shale gas ethane – but it is still therePCI
In spite of the low oil price, North American
competitiveness remains strong
Oil price, $/bbl
Gas price, $/MMBTU
North America is the second lowest cost
producer of ethylene and ethylene derivatives
Brent Oil:
$63.91 on
11/9/17
Henry Hub
Gas: $3.18
on 11/9/17
Ratio: 20.1
Source: ACC
The ratio has only been below 15 for a few days (2014-17)
Advantaged
above 7; highly
advantaged above
15
PCI
0
10
20
30
40
50
60
70
Ratio of Oil (Brent)-to-Natural Gas (Henry Hub) Price
Ratio of Oil and Natural Gas PricesProxy for Gulf Coast Based Petrochemicals
Source: ACC,
Platts
Gestation periods (from inception to birth)
PCI
Humans: 9 months
Elephants: 23 months
Ethylene crackers: 65 months
For some companies, their 65th month is in
the fourth quarter, 2017
It has finally arrived: The rebirth of the US
petrochemical industry
PCI
The Oxychem/Mexichem
cracker for EDC/VCM was
the first US cracker to
arrive and is doing well
Dow recently started up its
cracker with two new
polyethylene plants
But the delivery room is about to become crowded
PCI
Chevron Philips
ExxonMobil
Formosa Plastics
Sasol
Shin-etsu
201820182018/19
All of the polyethylene plants will start up before the crackers
There are also nine ethylene expansions still to hatch
PCI
DowDuPont
ExxonMobil
Indorama
Ineos/SasolLyondellBasell
NOVA
Shell (LA)
Westlake
Six will produce
polyethylene
• More than $180 billion is being invested in the chemical sector
(ACC study)
• Ethylene and its derivatives (primarily polyethylene) are the main
focus due to the abundant supply of low-cost ethane
• Propane had an initial push for on-purpose propylene but the
sharp drop in oil prices and changes in propylene supply
dynamics stopped all projects that were not already under
construction
• Current high propane prices may delay decisions in 2018 on new
PDH investments
• Is spite of low oil prices, there will be a second wave of ethylene
crackers and derivatives
• Gas (NGLs, ethane, ethylene, propane, propylene) will be
increasingly exported
Shale gas has created an unprecedented
level of petrochemical investments
PCI
First wave 2016-19: seven new cracker complexes.…
………and eleven ethylene expansions………
……..totaling 13 million tons per year (+30%)
New Company Location KTA Target Products
1 Braskem IDESA Mexico 1,000 1Q16 HDPE/LDPE
2 Chevron Phillips TX 1,500 2017 HDPE
3 Dow TX 1,500 2017 LDPE/LLDPE, other
4 ExxonMobil TX 1,500 2017 LLDPE
5 Formosa Plastics TX 1,750 2018 LDPE/HDPE. EO/EG
6 Oxychem/Mexichem TX 550 2017 EDC/VCM
7 Sasol LA 1,500 2019 LDPE/LLDPE,EO/EG, other
Total 9,300
PCI
Exp. Company Location KTA Target Products
1 Dow TX 500 2019 LLDPE, other PE
2 DuPont* TX 80 2017 LDPE
3 Indorama LA 370 2018 EO/EG
4 Ineos/Sasol TX 470 2016 HDPE
5 LyondellBasell TX 250 2018 HDPE
6 LyondellBasell TX 360 3Q16 HDPE
7 NOVA W.Canada 550 4Q16 LLDPE
8 NOVA E. Canada 100 2017 LDPE/LLDPE
9 Shell* LA 250 2017 Alpha olefins
10 Westlake LA 110 2017 Replace merchant purchases
11 Williams LA 650 2016 Merchant
*estimated capacity 3,690
Total 12,990
Polyethylene will have the largest share of the
new derivative capacity
Polyethylene, 76.6
EDC/VCM, 4.9
EO/EG, 9.0
α-olefins, 3.4
Other, 6.1
Share, %
There will be a LOT OF POLYETHYLENE!
9 MM tons/year of
new polyethylene
capacity
PCI
LLDPE will have the largest share (44.5%)
1,335
2,105
4,000
1,550
Capacity: 8,990 KTA
HDPE
HMW HDPE
LLDPE
LDPE
Source: PCI estimates
Capacity Share, %
HDPE 14.8
HMW HD 23.4
total HD 38.2
LLDPE 44.5
LDPE 17.3
PCI
Potential production based on projected startups
0
500
1000
1500
2000
2500
3000
3500
4000
2015 2016 2017 2018 2019 2020
LDPE
LLDPE
HDPE
2018 will be severe but 2019 will be worse
KTA Total capacity: 8,690 KTA
PCI
The second wave could almost be as
big as the first wave
PCI
At least four will proceed – so far
Polyethylene will be the main product with
about 6 million/tons per year – so far
Company Location KTA Timing Products
1 Formosa Plastics Baton Rouge, LA 1,500 2021 HDPE, EDC/VCM/PVC
2 PTT/Marubeni Belmont County, OH 1,000 2020/21 LLDPE/HDPE
3 SABIC/ExxonMobil Corpus Christi, TX 1,800 2021/22 polyethylene, other
4 Shell Potter Township, PA 1,500 2020/21 LLDPE/HDPE
5 Total/NOVA Port Arthur, TX 650 2020 HDPE
6 Westlake/Lotte Lake Charles, LA 1,000 2019/20 EDC/VCM/PVC, EO/EG, HDPE
Total 7,450
Mexico, Central and South America will be targets
• Mexico will be a battlefield due to favorable logistics (rail and
truck), market size and proximity. Prices could be the lowest in
North America
• US suppliers will likely have 95% of the market in Central
America due to logistics. All ports are on the Caribbean side
• South America has been the identified target of every US
producer – but PCI believes that hey are grossly overestimating
their success
• Demand growth for the past few years has been poor
• US producers already dominate the market and some Middle
East producers, such as SABIC, are strategically committed to
the region and are likely to try to increase their market share
• Brazil could impose anti-dumping duties which would wipe out
any net gain in the rest of the region
• High cost Asian suppliers will lose share but other geographies
will be neededPCI
Asia will be the main target – and it will not be easy
Short-term outlook: Polyethylene
• By the first quarter of 2018, all of the polyethylene capacity
affected by Hurricane Harvey should be fully operational but
full rail service may take longer
• More than 3 million tons/year of polyethylene starting up in the
fourth quarter with an additional 1.6 million tons/year starting
up in 2018
• HDPE and LLDPE will be substantially over supplied
• Domestic and export prices could drop substantially
depending upon the actions of the individual producers (e.g.,
reduce other capacity/production/maintenance or fight for
market share)
• Export logistics will be an issue
PCI
More than 90 percent of the new polyethylene
production will have to be exported
There is a major divergence in the North
American polyolefins arena
PCI
EDC/VCM
No polypropylene plants (no PVC or PS plants either
and one potential PET plant)Polyethylene
Where will this road go?
• While there will be too much polyethylene, there will not be
enough polypropylene
• Polypropylene producers are operating at high rates and there
are no new polypropylene plants under construction
• Polypropylene demand could surge in 2018 due to effects of the
hurricanes and fires (cars, furnishings, etc.)
• This will result in a tight supply and put upward pressure on
prices
• At best, it will be late-2019 before a new plant will startup
• So, in 2018
– US exports of polypropylene will decrease as prices increase
– US imports of polypropylene will increase
Divergence of polyethylene and polypropylene
PCI
• Propylene will be oversupplied when the Enterprise 750 KTA
PDH plant starts up (currently commissioning)
• This will put downward pressure on propylene prices and
similarly impact polypropylene prices – for a while
• Once polypropylene prices adjust for the low propylene price,
polypropylene prices are likely to increase (by mid-2018?)
In spite of the tight market, US polypropylene
prices could decrease in the short term
PCI
• Reduce bad/risky debt
• Improve the quality of life (health and safety)
• Emphasize consumerism and services
• Improve its import value chain (import feedstocks rather than
products)
• Increase exports of higher value products (e.g., cars)
• Invest globally through organic investments and acquisitions
China is making dramatic changes
PCI
Environmental action is a major focus. It is estimated that 1.6
million people die each year from poor environmental controls
Consumerism: The new family (status)
Removal of the one child rule in 2016: highest birthrate
in 2017 since 2000 (45% estimated to be a second child) PCI
Cars lined up in Lianyungang Port, Jiangsu
province to be shipped to Brazil
Photo: China Daily, January 2016PCI
• Small petrochemical plants with poor environmental controls are
being permanently shutdown
• Fines and forced shut-downs are occurring throughout the
production chain (including transformers) until environmental
controls are implemented
• There is a moratorium on new coal-based petrochemical
investments with greater accountability and controls for existing
ones
• A ban will take effect effective January 1, 2018 eliminating the
imports of post-consumer plastics due to repeated contamination
problems
China is taking drastic measures to improve
its environment
PCI
China could be the savior in the export market
• China imported 7.4 million tons of recycled plastics in 2016 and
has imported 3.7 million tons during the first six months of 2017
• Polyethylene accounted for 2.5 million tons in 2016 and 1.2
million tons for the first six months of 2017
• About 75 percent was HDPE with the remainder being
LDPE/LLDPE/copolymers (not reported separately)
• Polypropylene scrap imports are about 700 KT
• Virgin resin imports will be needed to replace some of the
imported scrap
– HDPE would benefit the most (about 2 MM tons) which could
significantly reduce the oversupply
– LDPE/LLDPE would also benefit to a lesser extent (~500 KT)
– Polypropylene (homopolymer) would benefit as well (~700 KT)
• Many countries will be competing for this volume
PCI
However, all of the recycled polyethylene currently being
exported will have to find another home which could
impact domestic prices and could force recyclers to close
China imports more than 20 MM tons of virgin
polymers, KT
PCI
5128 5277
3151
2178 2052
1105
2560 2614
1375
892 941
506
10758 10884
6137
0
5000
10000
15000
20000
25000
2015 2016 H1. 2017
Others Plastics
EVA
LLDPE
LDPE
HDPE
Source: Sinodata Consulting
About 11 million tons is polyethylene
China imports more than 7 MM tons of
recycle/scrap plastics (2.5 MM tons polyethylene)
PCI
3568
2532
1218
91
92
59
236
446
176
2046
2533
1391
14131744
865
0
1000
2000
3000
4000
5000
6000
7000
8000
2015 2016 H1. 2017
Others
PET
PVC
Styrenics
PE
Source: Sinodata Consulting
Post-industrial scrap imports may not be affected
so virgin resin import requirements may be lower
25% of total imports
is scrap/recycled
polymer
PCI
What will he do?
Frankly, nobody really knows
He has made many campaign
promises but as we all know,
promising and fulfilling them are
quite a different story
However, the economy and stock
market continues to strengthen
The stock market (Dow-Jones) has been
extremely strong (record highs)
PCI
Some key reasons:
• Lower unemployment
• Deregulation
• Infrastructure development
• Military spending
• Potential tax cuts
Source: CNN Money
GDP growth for 2018 is expected to be
between 2 and 3 percent
President Trump is pro-energy
Strong moves for increasing domestic energy
supply: infrastructure/pipelines, reduce legal
restrictions, deregulation, open federal lands
Revitalizing the coal industry could be problematic
but could be accomplished with subsidies for using
coal and for improving its environmental footprint –
but, so far, nothing has been done
However, higher domestic oil production will keep oil
prices low which is good for consumers (voters) but not
for oil and petrochemical companies
PCI
There are some serious problems going forward
• Most divisive administration with multiple resignations and firings
• Still battling the “Russian Election Involvement”
• Ad lib comments during speeches viewed as highly negative
• Confidence level below 40%
• In spite of the Republican majority in Congress, some
Republicans may no longer support him which will make it harder
to fulfill his campaign promises
• There are some key international conflict issues
– North Korea (escalating)
– ISIS (apparently losing ground)
– Afghanistan (committing more US troops)
– Syria civil war (conflict with Russia)
PCI
He often uses Twitter to announce his next
moves/policies before letting his staff know about them
Survival of the fittest
PCI
Unfortunately, all the training in the world will not make a
difference – there is only one critical factor for success
COST!
Feedstock cost is the only competitive advantage
Naphtha (market price) Asia, Brazil and Europe
Middle East ethane
Mexico/Argentina/Brazil ethane (referenced)
US Northeast ethane
Middle East liquids/naphtha (discounted)
Ethane is the lowest cost feedstock – but it may still not
be low enough to displace higher cost producers
China coal-based ethylene?
Western Canada ethane
US Gulf Coast ethane
US naphtha
Ethane imports
PCI
Conclusions and recommendations
• 2018 could be the start of one of the worst financial performance
periods in history for polyethylene
• However, if producers can keep ethylene operating rates high
enough to maintain a good margin, there can be some chain
profitability – but this may be wishful thinking
• Polyethylene financial performance in 2018 could affect the
decisions to actually going forward with second wave
investments and the timing
• US polypropylene and PVC demand growth will be stronger due
to the rebuilding and replacement of homes, businesses,
infrastructure and vehicles destroyed by the hurricane and fires
• US PVC prices will increase and exports will decrease but
domestic capacity can easily meet the increased demand
PCI
President Trump in 2018
• Subscribe to Trump’s twitter and you will find out his next move
before his staff and congress know it (or at least at the same time)
• The “Wall” – construction is likely to start using US taxpayer’s
money
• Tax reform will pass reducing taxes and significantly increasing
the deficit
• NAFTA is not likely to change – too many US companies benefit
from it (business decision)
• If relations with Venezuela deteriorate further, he could ban oil
imports
• Expect more white house staff problems
• Congressional cooperation will be an issue
PCI