New polypropylene plant in Texas to relieve momentary shortage but later add to glut

Braskem announced on Sep. 10 the start of its new one-billion-pounds-per-year Texas polypropylene (PP) line that while it will relieve momentary tightness in the North American market, may aggravate longer-term conditions of oversupply and negative demand growth.

View of Braskem's new polypropylene line in La Porte, Texas. Image courtesy of Braskem America

"The startup of our new production line comes at a time when the North American polypropylene industry needs it most,” said Alexandre Elias, Braskem’s vice president, PP North America, citing demand recovery from Covid-19 lockdowns.

“This demand, coupled with recent operating challenges in the industry, has created a situation where clients in North America need our support,” Elias added.

A combination of factors suddenly turned around a market in just a couple of months with excess supply turning to sudden tightness and price hikes, according to a market source.

Polypropylene price increases

Polypropylene’s applications including packaging, carpets and multiple parts for consumer products. It is the most common plastic in automotive, badly hit early in the pandemic.

“To understand PP you have to understand the feedstock PGP (polymer grade propylene) as it drives prices. We hit a low in feedstock pricing in June and July. Then feedstock started to go back up and that drove PP significantly higher,” a market source, who asked to not be named, said.

“We started at 26 cents/pound PGP and we’re now at 36 cents/pound. On top of that producers, because the market tightened up quite a bit as demand improved and we had this Hurricane Laura two weeks ago, will try to push through a margin expansion as well,” he added.

Laura hit Lake Charles, Louisiana on Aug. 27 disrupting production at several petrochemical plants. LyondellBasell, a leading PP producer, has 3 billion pounds PP capacity in Lake Charles.

In addition, decreased fuel demand related to Covid-19 led refineries to run at lower rates, just over 80%, so naphtha production fell. Cracking naphtha yields propylene (PGP) as a byproduct.

Irregularity in some propane de-hydrogenator (PDH) units has been “more of a longer term” issue, the source added. PDH units are a relatively newer technology that turns propane into propylene as its main product.

Some “PDH units have not been running very well since March or April. They had some issues and that finally caught on to the markets in July,” the source said.

Also, with U.S. PGP monomer prices approaching the low 20 cents/pound early in the summer, monomer exports started and this reduced North American feedstock inventories.

“So look at the feedstock as one pocket, we got margin enhancement on the other, between the two PP customers have seen from 13 to 20 cents/pound price increases depending on whether buying on contract or spot,” he added.

The PP spot market has climbed faster. “From a low of PP prices in the upper 30s to low 40s now prices are well into the 50s, in some cases approaching 60 cents/pound,” he said.

“When there was a lot of material earlier in the year nobody needed it, and now that business is improving they need more product and they can’t find it,” he added.

New PP unit will help partially

Prior to the La Porte, Texas one billion pounds/year new line, Braskem had three PP plants in Texas, one in Pennsylvania, and a fifth in West Virginia, totaling 3.3 billion pounds annually.

The Texas startup is “the largest polypropylene production line in the Americas, and the first new polypropylene plant in North America since 2008,” said Mark Nikolich, Braskem America CEO.

Yet markets may not feel the impact of the new production translating to lower prices anytime soon.

“Producers have a lot of leverage right now because the market is so tight. They’ll keep the market fairly tight between now and the end of the year trying to use that to fill the contracts for next year at better economics than they agreed to earlier this year,” the source said.

Braskem has a turnaround planned in West Virginia “scheduled to start anytime” for at least a month so there may not be a net supply gain, he added.

Oversupply to hang over the market

Besides Braskem, other leading PP producers include Ineos, LyondellBasell and ExxonMobil.

PP “production with this new plant is gone over 21 billion pounds and demand is somewhere around 18 billion, 17 and a half billion, so we’re going to have two to two and a half billion pounds additional supply,” the source said.

That excess supply is set to “hang over the market unless U.S. producers just want to run at 75% to 80%.” That would make it difficult to make a profit.

“The only two years of the last five that you had any demand growth were 2015, and I believe 2018,” he added.

“Last year was negative 4%. This year so far is negative 4 to 5%,” he said.

Demand growth has been negative in part because high price volatility made cost planning difficult for downstream converters.

Some consumer goods producers moved from PP to materials with more predictable pricing like glass or metal. Others became more efficient in resin use or tapped recycled resin.

Export possibilities

The new line will not just sell to North America “but also to international clients," said Mark Nikolich, Braskem America CEO. Braskem has an export hub in Houston and a new in Charleston, South Carolina.

Exporting PP, unlike polyethylene (PE), has not been an alternative for U.S. producers. Naphtha doesn’t offer North Americans the cost advantage that ethane does.

“We export PP from time to time only under duress. We exported a whole lot of material back in May, June which we could have used now,” the source said.

Yet exports went “at prices that would have made no sense domestically” as inventory was basically pushed outside of North America to get it out of the way, he added.

“But you can’t really have a strategy out of the U.S. PP exports,” he added.

“With polyethylene, half of it goes out the door every month. There’s no way you could export half the polypropylene every month,” he said.

By Renzo Pipoli