Key takeaways
- Global production shifting to newer, more efficient plants
- Outages, upstream add support for price increase hopes
- Packaging sector ‘resilient’ despite changing consumer behaviors
For the past three years, virgin PE resin has caused severe headaches for North American recyclers who are unable to compete with pricing pushed down by vast oversupply amid a steady stream of new capacity amid lower-than-expected demand.
In recent quarterly investor calls, several major PE producers provided a survey of the current landscape for virgin resin and gave a glimpse at what the near future may hold.
To help balance supply and demand, a great deal of global PE capacity must be rationalized – the industry term for closing less efficient plants.
Dow CEO Jim Fitterling said Oct. 23 that plant rationalization has “exceeded the majority of consultant projections, paving the way for improved operating rates,” indicating that newer plants would produce greater volumes than they do currently. Dow is the biggest producer of PE globally.
He added, “The prolonged down cycle continues to weigh on our entire industry, but we’re starting to see some encouraging actions in response, most notably around addressing industry oversupply.”
On Oct. 31, LyondellBasell CEO Peter Vanacker noted that regulatory requirements, persistently high operating costs and weak margins are driving “massive reductions” in chemical capacity including in PE and feedstock ethylene.
“Announced rationalizations total approximately 20% of regional capacity and we expect more announcements will follow,” Vanacker said. “About 30% of all global closures have been announced in just the past 12 months, underscoring the speed and magnitude of this shift.”
Even so, amid the persistent imbalance between supply and demand, “low-cost delivered assets are running at very high capacity” because they are competitive, Vanacker said, referring to ethylene and polyethylene production fed by cost-advantaged ethane instead of crude oil. He added that European and Chinese capacity, which mostly uses more expensive and less-efficient feedstocks such as oil-derived naphtha, is likely “running at minimum technical capacity,” which he suggested was 70-80% of nameplate capacity.
Support for price increases
With virgin resin priced at levels far from recycled PE, recyclers’ eyes are on the potential for the price gap to narrow. Vanacker noted that LyondellBasell has proposed price increases for PE, citing firming demand and “robust” exports from the US. Pricing for PE reflects supply and demand fundamentals, as well as upstream indicators.
For example, idled domestic capacity could help support efforts to raise prices in North America. Shell is conducting planned maintenance at its Monaca PE plant in Pennsylvania during the fourth quarter. For that plant, Shell CEO Wael Sawan said Oct. 30 the company had “more work to do to really get ourselves to the point where we are running at full capacity in that asset.”
And although Dow recently experienced a fire that will keep one of its PE units in Texas offline through the end of the year, the newest unit was unaffected.
Other support could come from ethane, a natural gas liquid extracted from shale plays that provides an efficient and cheap feedstock to make PE and other chemicals. Fitterling said, “The other wildcard to watch is, ‘does ethane get in the middle of a trade negotiation between the US and China?’ It did in the previous round,” he said, noting that China “is a big receiver of ethane exports.”
As such, Vanacker said, LyondellBasell will continue to push for price increases “because we believe it is appropriate that polyethylene prices go up. Too early to say if we will be successful, but it gets a lot of attention, of course.”
Too early for ‘green shoots’
Vanacker described “encouraging” trends in PE markets, with demand in North America and Europe at its strongest since the downturn began in third-quarter 2022, despite the “recent volatility in US exports caused by shifting trade and tariff policies.”
In addition, “this demand growth is not negatively impacted by circularity. In fact, we are seeing growth shifting toward innovation, efficiency and circularity in these markets,” Vanacker said, noting that LyondellBasell continues to invest in “innovative” feedstock sourcing to help control costs.
Both Vanacker and Fitterling noted that demand in consumer packaging remained resilient despite changing consumer behavior, while Vanacker added that “investments in durable goods to support trends in energy, digitalization and infrastructure are also driving demand growth.” He specifically cited renewable energy and data center applications requiring wire and cable jacketing, conduits and water piping.
Looking ahead, Dow noted that US August building permits – a key indicator of impending demand – fell by 11% on the year to their lowest level since May 2020, as consumer confidence for October was at a six-month low, “driving value-seeking behaviors,” Fitterling said. And while key end markets including construction continue to feature a “cautious operating environment,” Fitterling said recent shifts in monetary policy and interest rate reductions could begin to support demand.
Vanacker also said that during the past several decades, “even after recessionary downturns and pandemic-related spikes, polyethylene demand quickly returns to its long-term trajectory.”
However, he added, “Let me be clear, these are not yet green shoots for our financial results. Markets will need to absorb new capacity and operating rates will need further improvement before suppliers develop meaningful pricing power. But these inflections in demand trends are encouraging and could be the early indicators of a market recovery.”
