Demand for North American resins seen growing over the long term

New resin supply tightens margins and earnings but CEOs remain positive about the long term demand outlook.

James Fitterling, CEO at Dow Chemical, sees the global polyethylene market expanding up to 4.5% annually. Photo courtesy of Dow.

The North American resin market has finally seen most of the announced new capacity come online after several plants recently opened, CEOs of some of North America’s top petrochemical businesses said in their most recent earnings discussions.

This added supply of resin following the recent start of operations at several plants has quickly eroded margins and slashed earnings during the first nine months of 2019.

However, CEOs remain optimist about the long-term demand outlook for the most consumed resins like polyethylene and polypropylene, even as the short-term is clearly challenging.

Some petrochemical companies increased volumes of resin sold in the third quarter to try to offset weaker prices and improve quarterly earnings, adding more product to the market. More resin will reach the market into the end of the year, as companies seasonally clear inventories.

If weak resin margins continue or worsen, and trade uncertainties keep the outlook unpredictable, some of the announced resin projects for the United States could see cancelations or delays. 

U.S. petrochemical companies are expected to add over 12 million tonnes of resin capacity by 2022, with more than half of that projected to be completed before the end of 2019.

Softness in the immediate term

Westlake Chemical said that for the first nine months of 2019 its income from olefin operations was $211 million, less than half of the $483 million earned during the first nine months of last year.

"We are experiencing slower global economic growth in 2019," CEO Albert Chao said on Nov.5, according to a company news release.

Separately, Phillips 66, which owns half of Chevron Phillips Chemical (CP Chem) in an equal venture with Chevron owning the other half, posted third-quarter income from olefins and polyolefins at $251 million, $9 million less than in the previous quarter.

“We have seen some softness in the immediate term,” said Greg Garland, chairman and CEO at Phillips 66, during a third-quarter earnings discussion on Oct. 25, according to a transcript by Motley Fool Transcribers.

Yet for the longer term, “we continue to expect to see polyethylene demand grow at a faster pace than global GDP growth,” Garland added.

Exxon Mobil, one of the world’s biggest oil and gas companies, posted chemical earnings of $241 million for the third quarter, significantly down from $713 million in the third quarter of 2018, due to “weaker margins with supply length.”

Separately, James Fitterling, CEO at Dow Chemical, said on Oct. 24 that “as new capacities came up, you saw some inventories build up.”

“On the industrial side, it has been a little bit slower than what we had anticipated,” Dow’s Fitterling said regarding demand for resin this year.

He noted that comparing this year’s results with 2018 results is challenging because last year was “very, very strong.”

“I don't think there's any reason to think there's been a fundamental change in the 1.4 times GDP projection for resin demand globally. Our outlook for GDP next year is still around 3% globally and so I believe that you're going to continue to see about 4%, 4.5% type of growth rates out of polyethylene,” Fitterling said.

LyondellBasell also sees global growth of polyethylene at over 4% annually

LyondellBasell CEO Bhavesh Patel separately said on Nov. 1 in the company’s earnings discussion that he sees the polyethylene market continuing to expand at about 4% annually.

The new capacity will only create some short-term fluctuations in regional markets but will be eventually fully absorbed, he added.

Patel said that over the past five years polyethylene has grown 4% to 4.5%. “And this year, it's still growing kind of in that range, maybe a little bit lower,” he said, according a call transcription by Motley Fool Transcribers.

“With approximately 80% of the new US polyethylene capacity now in the market, this is an opportune time to review the impact of new capacity and polyethylene pricing,” he said.

“Increasing exports, decreasing inventories, and muted pricing responses all imply that the new capacity is meeting demand in the global market,” he said.

“On polypropylene, there is some new capacity that's starting up next year. As demand grows it’s likely this new capacity will be absorbed and polypropylene growth rates have been pretty strong,” Patel added.

Long-term outlook for plastics demand

According to the Paris-based International Energy Agency, “petrochemicals are set to account for more than a third of the growth in world oil demand to 2030, and nearly half the growth to 2050.”

Petrochemicals “will have a greater influence on the future of oil demand than cars, trucks and aviation,” said Fatih Birol, the IEA’s executive director, when the study was presented late last year.

Advanced economies currently use up to 20 times more plastic than developing economies “underscoring the huge potential for global growth,” he said. 

While substantial recycling and efforts to curb single-use plastics are underway, especially in Europe, Japan and South Korea, sharply increasing plastic consumption in emerging economies outweighs any potential demand reduction, the agency said.

In North America, the construction industry, one of the main consumers of petrochemicals for applications including pipes and insulation, may not support future growth of U.S. petrochemical demand as it did in the past decade.

Dodge Data & Analytics predicted in a report issued in October that total U.S. housing construction starts will slip to $776 billion in 2020, a 4% decline from the estimated level of activity in 2019.

“The recovery in construction starts that began during 2010 in the aftermath of the Great Recession is coming to an end,” stated Richard Branch, Chief Economist for Dodge Data & Analytics.

An ongoing trade dispute between Beijing and Washington may separately challenge demand from the packaging business, another key consumer of plastics. China and the U.S. represent the world’s biggest consumer markets.

By Renzo Pipoli