American plants running at reduced rates in second quarter

The running rates reduction comes amid a sharp decline in resin prices like polyethylene (PE). Experts believe the ongoing weakness may linger for an undetermined period.

Polymer molecules. Image courtesy of Zeeshan Ahmad/Pixabay

Petrochemical plants in the Americas are running at reduced rates, or in some cases idled, to try to balance out the erosion of downstream resin consumption caused by the Covid-19 pandemic.

Domestic prices for resins have declined and export markets for North American resin have contracted.

Some chemical plants cut rates not just due to the decline in resins demand but because of their integration with refineries that in turn had to cut production after seeing fuel demand plunge.

Experts estimate most petrochemical plants may be running at rates anywhere from 60% to 80%.

Integrated fuel-petrochemical complexes

Petrochemical plants “are feeling the impacts of what’s happening on the refining industry which is a big point of integration for petrochemicals,” said Patrick Kirby, polyolefins analyst at WoodMcKenzie, a consulting company that covers industries including energy and chemicals.

Jet fuel and gasoline demand contracted, so refiners cut that production. “That’s having a knock-on effect in the petrochemical industry,” Kirby said in a telephone interview.

This is happening “because these assets are either physically located next to each other, or they are integrated at the same site, or there is a dependency between the production of one and the consumption of the other,” he added.

“it’s kind of a domino effect coming from that as well and really the end to that is when the refining industry adjusts back to a new normal almost around transportation fuels picking up,” he added.

Reduced demand linked to global economy contraction

Demand for North American resin depends largely on gross domestic product growth worldwide.

According to the latest revision in April by the International Monetary Fund, the world economy is likely to contract 3.3% in 2020, “a downgrade of 6.3 percentage points” from its January forecast.

“The recovery of the economy is also obviously a little uncertain as well at this time but is expected at least 2020 and likely 2021 would be impacted in terms of growth,” Kirby added.

“As the economy becomes more challenging in all parts of the world, the average consumer will reduce spending on discretionary products, on new vehicles or household appliances and that ultimately feeds back into the consumption side of the petrochemical industry,” Kirby said.

“Many of those projects in North America are looking to export a large portion of the volumes into other markets as well so it’s not just for the North American region itself,” he added.

LyondellBasell running in U.S. at 70% rate

“In our case, we're running our assets in olefins and polyolefins in the U.S. at about 70% today. So a pretty decent rate given the kind of environment we're in,” said LyondellBasell CEO Bhavesh Patel during the first quarter earnings call on May 1.

“We temporarily idled production at several small plants in our Advanced Polymer Solutions segment serving automotive end-markets and appropriately decreased production rates and other plants,” he added, according to a transcript of the call by Motley Fool.

“Industry consultants estimate that petrochemical and refining assets in various parts of the world are running at 60% to 80% of nameplate capacity. We expect that the majority of LyondellBasell's capacity will also operate within that range during the second quarter,” he added.

The export market from North America for polyethylene won’t likely recover “until China starts producing for the rest of the world again,” added Michael McMurray, CFO at LyondelBasell.

Lower resin prices and margin challenges

According to a question on the May 1 LyondellBasell earnings discussion call posed by David Begleiter, analyst at Deutsche Bank, polyethylene prices saw a sharp decline in April.

“Consultants said they fell $0.04 in April,” he said, referring to per pound prices and according to the transcript of the LyondellBasell first quarter earnings by Motley Fool.

“And they're calling for another $0.06 in May and June for combined $0.10 decline in the second quarter,” he added.

Such a drop is proportionally very significant. Polyethylene prices were trading at under half a dollar per pound earlier in the year.

Margins had already suffered in 2019 amid new production coming online.

Low-density PE running rates also reduced

“If you look at some of the industry consultants, IHS (Markit) and CDI (Chemical Data), for LDPE (low density polyethylene), the first quarter was a 91% operating rate. Second quarter, they're looking at 84% to 77% operating rate,” Westlake Chemical CEO Albert Chao said.

“For linear low, first quarter was 99% to 95% operating rates and second quarter is 84% to 83% operating rate,” he added on the May 2 earnings discussion call, according to a Motley Fool transcript.

“So again, second quarter operating rates are expected to come down sharply as well,” he added.

He said this reduction is “partially due to the lack of demand globally, or reduced demand and two, with the competitive nature of naphtha-based ethylene that overseas production costs are quite low.”

Dow idles 10% of global capacity

James Fitterling, CEO at Dow Inc., said on April 30, also during a first quarter earnings discussion, that the company is idling some plants “to balance production to current demand.”

“We are temporarily idling three polyethylene and two elastomers production units for at least 30 days. The plants have an aggregate annualized capacity of approximately two billion pounds and are located on the U.S. Gulf Coast and in Argentina,” he said

“This equates to approximately 10% of the business' global annual capacity,” he added.

“The reality is there's been a pretty significant amount of industrial capacity shutdown on the downstream,” he said according to a transcript of the first quarter earnings call by Motley Fool.

“And so we don't feel like, in this environment, really plowing a lot of material into inventory is the right thing to do,” Fitterling added.

By Renzo Pipoli