Demand worldwide for North American resins would be threatened if the Covid-19 virus spread were to turn into a pandemic.
Resin makers saw an improvement in polyethylene plastics in January that came after several months of margin deterioration but question marks including the Covid-19 spread make the outlook for the rest of the year uncertain.
In addition to price direction uncertainty, the rest of the year may also mark a break in which different types of polyethylene prices may stop moving in tandem as they had in the past.
Producers managed to get higher prices for polyethylene delivered in the United States in January compared with December.
Inflection point seen near in early 2020
Petrochemical companies had seen margins for plastic resins deteriorate in 2019, particularly in the second half, after new production came online in past years, with more expected to continue in early 2020 and beyond.
“Many of our key product lines were challenged throughout 2019,” said Dow Chemical’s CEO Jim Fitterling during the 2019 earnings discussion on Jan. 29.
“The dynamic is now beginning to shift. As macro conditions weakened into the end of 2019, third-party industry reports indicated that high cost producers in mini chains were struggling with breakeven or negative cash margins,” he added.
“For example, in polyethylene, capacity in Europe and Asia that utilizes naphtha feedstock, which represents a significant amount of global capacity, was at zero or negative margins for much of the fourth quarter,” he said.
“We are seeing early signs that support gradual improvement in the near term from the lows that we reached at the end of 2019,” Fitterling said, according to a Motley Fool transcript of the call.
“What we’ve seen out of the third-party reports is that you had some fairly significant deltas on cash margins for some, especially naphtha producers in Asia and a little bit in Europe too,” he added
“In fact, we got to a couple of periods in the last several weeks where it was a negative to as much as $0.10 to $0.12. So that’s a lot to absorb,” Fitterling added.
“All the investments we made over the last five to seven years really brought us down on the cost position, feedstock flexibility as well as just the lower cost of the crackers,” Fitterling said.
“It is still too early to claim sustainable improvement. And in fact, it could take some time for the dynamics to play out. That said, we are seeing early signs that support gradual improvement in the near term from the lows that we reached at the end of 2019,” he said.
Polyethylene price spreads in the fourth quarter had been at near 10-year lows.
January price increase in polyethylene
Other large resin producers have confirmed price improvements in January for polyethylene. Price settlements normally occur about a month after delivery.
“An agreement between the US, Mexico and Canada as well as the Phase 1 agreement with China was positive for global demand,” said Albert Chao, president and CEO at Westlake Chemicals, which posted its earnings on Feb. 4.
Separately, Bhavesh Patel, CEO of LyondellBasell, also confirmed the January price increase in a discussion of the company’s latest earnings release.
“We saw improvements in domestic and export prices for PVC and U.S. polyethylene spot prices in January,” he said. Polyethylene prices have “moved up on a posted basis, $0.03 to $0.04,” he added.
Current indications of low inventories, including those of converters, should help demand for plastic resins in the first quarter while an expected heavy turnaround season may also support prices, he added.
According to Dow’s Fitterling, in the case of ethylene, which is polymerized into polyethylene, “typically at the end of this quarter there is usually about 8% of capacity offline for turnarounds. But his year we are expecting that number to be as much as 15%.”
Covid-19 spread raises questions on future demand
“With the outbreak of the coronavirus, we are taking a conservative view of 2020. (The) potential impact on global industrial demand (…) will be dependent on the time period it takes for the Chinese and global economy to recover from this contagion,” said Albert Chao, Westlake’s CEO.
Dow’s Fitterling said during an interview with MSNBC on Jan. 29 that his company is responding to rising demand for some chemical products following the spread of the virus.
“I haven’t seen a massive negative impact from the coronavirus. On the contrary we’ve seen some demand pull from the coronavirus on things like cleaning materials” and nonwovens for masks. He said he expected “a pull on packaging as well.”
Other concerns relate to potential trade impacts on the longer term.
According to a blog article by Wood Mackenzie’s vice chair Gavin Thompson, “the coronavirus has re-energized the decoupling lobby.”
“Covid-19 has shone the spotlight on U.S. dependence on China’s production of medicines and other medical supplies. Earlier this month, trade hawk Pete Navarro stressed that the Covid-19 outbreak was a ‘wake-up call’ over U.S. supply chain dependence on China,” he said.
Will HDPE, LDPE and LLDPE start to move differently?
A question mark for 2020 is whether different grades of polyethylene, which are low-density polyethylene (LDPE), linear low-density polyethylene (LLDPE) and high-density polyethylene (HDPE), will start showing different pricing dynamics.
Much of the new capacity that has come online in recent years, and continues to come online, is mostly for HDPE and LLDPE.
“The dynamics supply demand for each of the products are quite different,” Westlake’s Chao said.
“And also the LDPE added in the US are all tubular, which are more of the commodity grades,” said Chao.
“Time will tell whether the industry would have bifurcate or trifurcate,” he added.
By Renzo Pipoli