Chemical Industry Summary
With the Q2 earnings season in sight, financial analysts are forecasting flat year-on-year earnings results from any chemical companies, with a relative balance of puts and takes from last year’s performance. However, it is likely that industry leaders will note some encouraging signs on the horizon, with several industries seeing modest improvement in pricing and demand, particularly for commodity chemicals. Macroeconomic tail winds are weak with only tepid global GDP growth in the developing economies, particularly in China, and in Europe. But there is mounting evidence that certain industries are coming off bottom of the business cycle, particularly for the inorganic chemicals such as chlor-alkali and TiO2. Improvement is expected to be modest in the near term and in the form of self-help from industry consolidation, company restructuring, and cost savings efforts. These will continue to be the primary drivers of earnings growth in the absence of a strong global economic growth environment.
Macroeconomics and Geopolitics
Americas
In late June, the third official US estimate for Q1 GDP growth was raised to 1.1%, up from the initial estimate of 0.5%. The Atlanta FED forecasts Q2 GDP for the US at 2.4%, down from its prior estimate of 2.6%. If this result is achieved, this will be the third consecutive year of a weak Q1 result, followed by a rebound in Q2. Consumer spending is the largest segment of the economy, which is expected to grow 4.3%, incrementally below initial expectations.
In a surprise result, the June US jobs report showed an addition of 287,000 jobs, well above the May result of only 38,000 jobs added. Many of the jobs added were in the areas of leisure and hospitality. As a result, it is more widely speculated that the US FED may return to its program raising US interest rates sooner than anticipated. In mid-July, the S&P 500 index hit an all-time high of over 2,150 after a year of struggling to overcome two market corrections.
In June, the US manufacturing PMI index ticked up slightly to a level of 51.4, up from a level of 50.7 in May. This result, the highest level in three months, was volume-driven with increases in orders. Previously, the US PMI index had declined five of the last seven months. Together with the greatly improved jobs report, these could signal a mild inflection point in the US economy. In June, US auto sales of light cars and trucks were 16.61 million vehicles on a seasonally-adjusted annual basis, down 3% from a year ago and 4.4% below the May result. On, a year-to-date basis, US auto sales in during the first half of 2016 were flat with 2015.
In the US, both new housing construction and existing home sales are healthy. In May, US housing starts totaled 1.164 million on a seasonally-adjusted annual basis, up 9.5% from last year’s result. New home sales were up sharply at 619,000 annualized rate, up 22% year-on-year. The NAR (National Association of Realtors)continues to forecast housing starts at an annual rate of 1.2 million for 2016. Sales of existing US houses in May were at a seasonally adjusted rate of 5.53 million, representing a multi-year high. Average prices for existing home sales was $239,700 up 4% from last year. In its July forecast, the NAR (National Association of Realtors) estimates 2016 housing starts at 1.214 million (down 1% from the May forecast, but up 10.3% from 2015). For 2017, the NAR is forecasting 1.31 million starts (up 6.5% from the 2016 forecast).
Ahead of the Olympic Games to begin in August, Brazil’s manufacturing sector remains in strong contraction territory, with the May result of 43.2 slightly ahead of the 87-month low of 41.6 recorded in April. The IMF expects Brazil’s GPD to fall about 4% in 2016, near the same result as 2015. The economy reflects the current political crisis in with President Dilma Rousseff and other major governmental officials caught up in a corruption scandal.
Europe
The surprise Brexit vote on June 23 rattled global markets for a few days, but it is unclear just what specific impacts the UK’s leaving the European Union will have. It may take months, if not years to sort out trade impacts that could impact the UK’s chemical industry. In the near term, the devaluation of the British pound will favor exports.
European GDP growth came in 1to1.5% in the first quarter, similar to the results seen in the previous three quarters. Germany showed surprising strength in Q1 with fixed investment up 1.8%, the strongest increase in two years. Current forecasts for European GDP growth for 2016 and 2017 are in the 1.6% to 1.7% area. Unemployment in Europe fell 63,000 in April following March’s decline of 212,000. Unemployment in April was 10.2%, the lowest level since 2011.
The reported June PMI index for the Eurozone was reported at 52.8, up from 51.5 in May. Germany is finally showing signs of improvement with registering a PMI of 54.5 in June, a 28-month high. Even Greece broke into modest expansion territory with a June PMI of 50.4. France (the second largest economy) was the worst performer registering a PMI of 48.3.
Manufacturing activity in Eastern Europe is a mixed bag. After a 18 months of manufacturing contraction, Russia’s PMI moved up in June to a level of 51.5, barely in expansion territory. The Czech Republic’s growth has continued to cool, registering a level of 51.3 compared to an index of 53.3 in May that represented a 3-year low. Poland’s PMI remains flat, registering a PMI of 51.8 in June, down from 52.1 in May.
Asia
China’s manufacturing sector remained in contraction with a PMI of 48.6 in June, down from a result of 49.2 in May. This was down slightly from April’s result of49.4. This was the 16thconsecutive month for the PMI to be in contraction territory. As part officials attempt to re-balance the economy away from exports and investment-related growth and towards domestic consumption and consumer demand, calls for stimulus spending represent a return to the old approach.
China’s auto production, including commercial vehicles, is up 5.8% through May 2016 on a year-to-date basis. Production and sales have been steady at around two million vehicles per month. In 2015, production and sales down-shifted for a growth level that was in the mid-teens as China’s economy has slowed.
Feedstock – Crude Oil
During July, the global oil price rally stalled with current WTI prices down about 10% from the beginning of the month to a level of near US$45.00 per barrel for WTI. In early July, WTI crude oil prices had topped $50.00/Bbl, but macroeconomic concerns, among others, have cooled this rally that some observers had seen as moving ahead of industry fundamentals. For the US, both oil production and inventories have eased. For the week ending July 1, US crude inventories not in the SPR (Strategic Petroleum Reserve) totaled 524 million barrels, up 13% from last year, but down 3.5% from peak levels seen in April of 2016. Similarly, on July1, US crude production as estimated by the DOE was 8.4 million barrels per day, down 12% from the same period in 2015, a period that saw US production peak at near 9.6 million barrels per day.
For the week ending July 8, Baker Hughes reported oil-directed rigs increased 10 on a weekly basis to 351. The total rig count of 440 is up incrementally from the May 2016 low of 404, a number that represented the lowest count since this indicator was started in 1991. The latest rig count is about half of the level seen at this time in 2015.
Feedstock – Natural Gas & NGLs
As of mid-June, US natural gas prices have continued to rally on incrementally improving fundamentals. On July 11, Henry Hub spot gas prices traded at US$2.85 per million BTU, up about 10% from last month and up 60% from lows seen as recently as May. On July 1, US underground natural gas volumes of 3,179 billion SCF were 2% above the prior 5-year maximum average for this time of year. The weekly storage addition rate of 39 B SCF/week has slowed due to warm weather trends in the US. Spot prices for gas in the over supplied Marcellus area are currently flat and are near US$1.40 per million BTU. NYMEX future gas prices for January 2017 are near US$3.3/MM BTU, flat from a month ago.
The widely watched oil-to-gas price ratio has continued to drop and is currently near 16:1, down from 20:1 seen at the beginning of the summer. A reduction of this ratio negatively impacts US competitiveness.
Natural gas sets the floor pricing level for ethane and strengthening gas prices have incrementally lifted ethane. Spot ethane prices in the US had been range-bound in 2016 to a level below US$0.20/gallon. However, in June prices have eased up a few cents per gallon with near month future prices in the area of US$0.24/gallon. Enterprise’s new ethane export terminal is expected to be completed by the late Q3 of this year and will ship approximately 200,000 Bpd of ethane at full capacity. These quantities are well below the currently rejected ethane volumes of 500-600,000 Bpd, but cumulatively should put upwards pricing pressure on this cracker feedstock.
For the week ending July 1, the EIA reports that US propane/propylene inventories have increased to 84.8million barrels, up 12% from last month, but down1% from a year ago. Inventories are down 20%from the all-time record of 106 million barrels set last November due to increased industry export capacity. Spot prices near US$0.50/gallon are up 20%from last year levels.
US Olefins & Polyolefins
The second quarter maintenance outage season for US crackers is coming to a close. During this quarter, CMR estimates that 8.5% of industry capacity was unavailable. The two remaining outages, LyondellBasell’s Corpus Christi cracker and Westlake Chemicals Petro 1 cracker, are both being expanded and should return to operation this summer.
US contract ethylene prices for June settled up one-quarter of a cent/lb to 26.75cents/lb on a net transaction price basis. This is up 5.5cents/lb from the January price of 21.25cents/lb that was at a 13-year low. Spot ethylene prices have recently been relatively flat in the area of 25.0cents/lb. In addition to the normal heavy turnaround season in Q2, the Westlake Petro #1 and the LyondellBasell Corpus Christi ethylene crackers are undergoing expansions. Barring additional unplanned outages, it appears that US cracker unavailability will average about 8.5% in Q2.
US propylene prices settled up one-half cent per pound in June with contract pricing at 31.5cents/lb for chem grade and 33cents/lb for polymer grade. Coupled with a drop in polypropylene resin prices, margins for PP polymer have softened under to pressure of increased competition with imports.
In July, US contract butadiene prices have settled flat at35.5cents/lb.
US polyethylene producers were pushing for a 4-5cents/lb increase in June on the strength of lower inventories and reasonable demand. However, PE market prices have settled flat in June with the proposed price increases pushed to July. March and April saw cumulative increases of 9cents/lb. With several US crackers returning to service, a softening feedstock pricing environment will make further increases difficult to achieve short of additional unplanned outages or a crude price run-up.
On a year-to-date basis through May, US PE exports of 2.4 million metric tons (MT)are 22% ahead of last year’s total. At an average of 475,000 MT per month, exports are equivalent to 28% of US capacity. Import volumes for all PE grades are down 3% on average from 2015. On a net export basis, exports are up 70% from 2015 and 69% over 2014.
In June, US contract PP prices were down 6cents/lb, making the total price reduction in the last three months of 13cents/lb or US$285 per MT. One producer had proactively announced a decrease for PP prices in June of5cents/lb, so that the final result was slightly lower than this benchmark. As a result of strong regional pricing, polypropylene import volumes are up 160% on a year-on-year basis from 2015. With propylene monomer prices up 1.5cents/lb in the last three months, and polypropylene prices down a cumulative 13cents/lb in the same period, US polypropylene margins are down about 15cents/lb.
After flat pricing in May, US contract PVC prices were up 2cents/lb in June. This followed a cumulative 6cents/lb increase for March and April. The recent firming of prices reflects normal seasonal demand improvement as well as stabilization of ethylene prices. June saw US polystyrene prices flat again with contract benchmark near US$0.90/lb. Prices for US contract benzene for July are up US$0.14/gallon to US$2.14/gallon. Benzene prices in the last 12 months have been relatively stable following a period of high volatility linked to crude pricing.
European Olefins & Polyolefins
For July, despite a softer market for feedstock prices, European contract ethylene price increased by €10/metric ton (MT) to a level of €945/MT. For European propylene increased by the identical amount seen in May of €17/MT to a total of €670/MT. Similarly, European contact butadiene was up €15/MT to €665/MT. Polyethylene prices in Europe continue to weaken, driven by low feedstock prices and increased pressure from imports. In the first quarter of 2016, imports of all grades of PE increased by about 150,000 MT per month, roughly doubling the level of imports seen in 2015. Domestic demand is somewhat soft and customers are holding off purchase decisions and utilizing inventories as they see prices fall. Prices for LLDPE are now near €1,200/MT, down from last summer’s peak levels of €1,600/MT when prices were driven by shortages. These pricing levels represent a 15-month low.
Global Chlor-alkali
The Chlorine Institute reported that effective operating rates for US chlor-alkali in May averaged 85%, up from 81% in April. The average daily production rate, was up 4% from April, reflecting completed shutdowns. The Q2 turnaround season tightened supply and reduced availability resulted in higher domestic caustic prices in each month in Q2. In total, caustic pricing was up about US$50/short ton (ST). For the second quarter, producers had announced three successive caustic price increases for April, May and June that total US$85/ST. For chlorine, a US$20/ST increase was proposed for April. The upcoming earnings season will provide a view as to how successful these increases have been.
European chlor-alkali operating rates in May were 75.4% of industry capacity, and improvement of 5% from May due to lower plant outages. As the end of 2017 deadline for mercury cell technology approaches, more producers are announcing intentions to either convert existing plants to membrane technology or to exit production. Mercury cell technology constitutes about one-quarter of installed European capacity. Thus far, about half of the plants are scheduled to be converted, 20% will be closed and for the remaining30%, decisions are pending. In any event, the cumulative number of permanent shutdowns and long-duration conversions should considerably tightened the market in 2017.
AMERICAS
San Francisco to expand PS foam ban
The city of San Francisco has enacted a new law which bans the use of polystyrene foam products beyond food packaging. The expanded ban is set to be effective on January 1, 2017. The new restriction will not only ban disposable PS foam food containers but also other PS foam products or packaging given or sold by retailers.
Comments: San Francisco is one of several cities in the United States to implement bans on single use expanded polystyrene foam products. Now, San Francisco takes the banone step further to prohibit polystyrene foam from being used in non-food packaging and disposable products with an intent to achieve “Zero Waste” by 2020. The expanded ban will further negatively impact the growth rate of polystyrene in the foam packaging segment, but in turn will help converters and resin producers of substitutable materials open up new market opportunities. For example, High melt strength (HMS-PP) polypropylene growth is expected to benefit from further banson PS foam. HMS-PP, due to foamability, excellent heat resistance and recyclability, has been used as alternative raw materials to making foam products.
Axiall, Lotte begin construction of Louisiana ethylene project
In mid-June, Axiall and Lotte Chemical broke ground on US$3 billion ethane cracker with capacity of 1,000KTA in Lake Charles, Louisiana. The complex is scheduled to become operational in early 2019. Once the cracker comes on-stream, ethylene output will be partially delivered to Axiall’s nearby chloralkali plant and partially fed into Lotte’s adjacent monoethylene facility.
Comments: The Shale gas boom has changed the competitive landscape to ethylene derivative producers in the North America. Ethylene is an important raw material for manufacturing vinyl chloride, which is the monomer of PVC polymer. PVC producers in this region have announced several shale gas fed cracker projects that will be built mainly in Louisiana. Shintech has a US$1.4 billion ethane cracker project in Iberville Parrish, Louisiana. Occidental Petroleum has a 544KTA ethane cracker in Ingleside, Texas being constructed to be complete by 2017 and Formosa Plastic is currently conducting a feasibility study for an ethylene facility in Baton Rouge, Louisiana. These shale gas fed ethylene projects allow US PVC players to take advantages of cheap resources and stay competitive or advantaged over other global players.
BASF postpones final decision on methanol-to-propylene(MTP)project in Texas
BASF has deferred its final decision of building an on-purpose propylene unit in Freeport, Texas. The combination of the raw material price volatility and current economic environment. In announcing the delay, BASF mentioned that it will continue to monitor raw material prices and market conditions to determine the appropriate timing to continue with this project.
Comments: The delay in final investment decision is a result of uncertain crude oil prices and decreases in expected profit margins. Following the path of several other major petrochemicals producers in the region, BASF announced the on-purpose propylene plant to take advantage of abundant and low-cost shale gas feedstock in North America. At the announcement time, the company had projected higher profit margins as compared to other competitors that primarily use crude oil as feedstock. The drop in crude oil prices lowered profit margins of shale gas-based petrochemicals producers and elevated the competitive edge for crude oil-based competitors. If this project had continued as scheduled, the plant would have been the first MTP project in North America.
EUROPE
Borealis to upgrade Finland cracker
Borealis announced its plan to modernize its stream cracker in Poryoo, Finland with investment of US$45 million. The upgrading will expand propylene output by 30KTA and crude C4 by 10KTA. The project is scheduled to be completed by Q3 2017.
Comments: European propylene supply has decreased over the past two years due to higher natural gas liquids usage by steam crackers. The region relieson imports and has experienced price spikes during cracker and refinery outages. Poland’s Grupa Azoty was the firstcompany to decide to increase propylene capacity with a new plant on the Baltic coast mainly targeting exports to Western Europe. Borealis’ much smaller investment will increase propylene output and quality, adding further flexibility to the company’s vertically integrated polyolefins business.
Crzch’s Unipetrol breaks ground on PE3 project
Czech-headquartered Unipetrol has officially begun expansion work at its existing Litvinov PE complex. The new facility will produce 270KTA of polyethylene using INEOS’Innovene®S technology has a scheduled start-up in 2018.
Comments: Unipetrol is a strategic subsidiary of Polish-based refiner PKN Orlen, the largest oil processor in Central Europe. The company has combined HDPE capacity of 320KTA at Litvinov complex, of which 120KTA is from the PE1 plant and 200KTAfromthePE2 facility. The new unit named PE3 is to replace the oldest on-site HDPE line (PE1) with anticipated improvement of the utilization efficiency of ethylene. With HDPE capacity increased to 470KTA, the company can better serve European HDPE market where supply is historically tight. Also, INEOS’ Innovene®S will allow Unipetrol to develop a production portfolio of other value-added segments such as cosmetic and packaging.
MIDDLE EAST & AFRICA
Iran’s NPC to complete 300KTA PE facility by the year end
NPC’s Kordestan PE facility is 98% complete with an expected completion in next two months.
Comments: The Kordestan Petrochemical Plant is one of the numerous petrochemical plants constructed along West Ethylene Pipeline. The plant is being constructed at a cost of €228Million. Initiated in 2002, the pipeline is to carry ethylene from Assaluyeh, which is in south Iran, to the western provinces of Khuzestan, Lorestan, Chaharmahal-Bakhtiari, Kohguiluyeh-Boyer Ahmad, Kermanshah, Kordestan and West Azerbaijan. The second phase of West Ethylene Pipeline, which extends 585 kilometers from Kermanshah to Mahabad, is expected to come on-stream in 2016. The West Ethylene Pipeline has the capacity to carry 3.5 million MTof ethylene. At the moment, there are 67 developmental projects in the country which are under construction, adding 61 million MT of total production and estimated to 2018completion.
Petro Rabigh awards construction contract to Saipem for Rabigh II expansion
After a 9 months delay, Petro Rabigh, a JV between Saudi Aramco and Sumitomo, finally signed a US$208 million construction contract with Italian Saipem to complete the expansion work. Under Rabigh Phase II expansion, Petro Rabigh will be able to process 30 million standard cubic feet per dayof ethane and 2,700KTA of naphtha to produce various high value-added petrochemical products.
Comments: Saudi Aramco has started strategically developing manufacturing capabilities toward the downstream through cooperation with foreign entities, such as Petro Rabigh with Sumitomo, SadaraChemical Company with Dow and Arlanxeo with Lanxess. As Saudi Aramco integrates into the downstream businesses, the Saudi Government perceives a conflict withSABIC, which is Saudi Arabian state-controlled. The Saudi Government has encouraged the two Saudi Arabian giants to strategically create synergies between them via collaborate and cooperation to avoid duplication of downstream projects.
ASIA PACIFIC
Philippines’ JG Summit to expand ethylene capacity
Philippines’ JG Summit Holding Inc. plans to expand ethylene capacity at Batangas site by 56% to 500KTA with expected completion in 2019. The total capital expenditure of the expansion is estimated to be up to US$600 million.
Comments: JG Summit Holdings started up the first naphtha cracker in the Philippines in 2015, which allowed the company to back integrate into feedstocks for existing polyethylene and polypropylene plants. Despite the plant starting up at a time when oil and naphtha prices were falling, the plant is profitable according to sources close to the operations. Both olefins and polyolefins production is in excess of domestic demand and is being exported. The expansion will target increased revenues from additional petrochemical exports. Currently, exports account for about half of total segment revenue. Since most of the supporting infrastructure has already been built, the expansion will only increase cost effectiveness. New downstream plants for aromatics and butadiene will target import substitution in the domestic market.
Japan’s JX Nippon Oil to expand PIB capacity by late 2019
JX Nippon Oil & Energy Corp plans to build a 5KTA polyisbutylene (PIB) unit at its existing PIB facility of 70KTA in Kawasaki, Japan. The project is at the front end engineering design (FEED) stage and plans to begin construction in Q1 2017 with scheduled start-up in October 2019.
Comments: JX Nippon Oil planned to increase PIB capacity by 3KTA when the expansion was initially announced in 2012. Then, the company adjusted capacity addition to 5KTA in response to strong demand for PIB in Asia. In past few years, Asia has seen increasing usage of PIB in the automotive, medical packaging and photovoltaic sealantsapplications.Exporting materials to China accounts for majority of the demand. The capacity expansion will allow JX Nippon to capitalize on growing demand for PIB in base materials, such as chewing guns and medical adhesives.
Saudi Aramco withdraws from Vietnam petrochemical project
Saudi Aramco has decided to exit its JV petrochemical project with PTT in Vietnam that was designed to process 400,000 bpd of crude oil and produce 12,000KTA of refined products and 5,000KTA of petrochemical products. PTT will be transferring the project to its affiliate IRPC for further development.
Comments: Vietnam has become magnet for petrochemical projects with intent to catch up growing demand in Southeast Asia. Vietnam’s strategic location has favorabledomestic and export markets because ofseveral FTAs (Free TradeAgreements) with ASEAN, Russiaand Asia-Pacific economies. This hotspot attracted more than fiveproposed mega petrochemical projects to be built, including Victory Nhou Hoi project, Long Son project (by PetroVietnam, SCGand Qatar), Vung Ro project (by PetroVietnam), Nam Van Phong refinery project (by Petrolimex and JX Nippon)and the Nghi Sob refinery (by PetroVietnam, KPI, Idemitsu and Mitsui). However, low oil prices coupled with political uncertainty have triggered a domino effect withforeign investors for petrochemical projectsthat slowed project development. The bright side of the current market conditions, Vietnam can review all projects toavoid potential production capacity redundancy that resulted from rapid but unconsidered development. Vietnam has recently called for consumption plan for Nghi Sob project, which is expected to be operational in 2017.
COAL-TO-CHEMICAL
Zhongtian Hechuang launches Coal-to-chemical complex in Q3 2016
Zhongtian Hechuang Energy has completed phase I of its coal-to-chemical complex in Inner Mongolia and some downstream units of phase II. These completed facilities include one 3,600KTA coal-to-methanol unit, two 1,800KTA MTO units, a 200KTA Olefins Catalytic Cracking unit, a 10KTA MTBE facility, a 30KTA 1-butene unit, a 300KTA LLDPE plant and a 350KTA PP plant. The company plans to begin commercial operation of these units in late September. One 350KTA PP facility, one 120KTA LDPE unit, and one 250KTA facility are still under construction with no expected completion date disclosed.
Comments: Zhongtian Hechuang Energy is majority owned by state-owned giant China Coal and Sinopec. ZHE was formed in 2007 in response to China’s national plan of coal-to-chemical industry. The coal-to-chemical complex is part of Coal Deep Processing Demonstrative Project supported by government and has two associated coal mines with total output of 25,000KTA. The project is by far the largest vertically integrated coal-to-olefins complex in China, which starts with coal and ends with polyolefin products. Currently, development of China’s coal-to-chemical has slowed due to a combination of environmental concerns and the lack of downstream product competitiveness. The start-up of the complex will not only increase China’s self-sufficiency on polyolefins but also encourage coal-to-chemical players to further integrate toward high value-added products. Although there has been an argument that China’s PE and PP market might soon to be oversupplied. The oversupply situation has not yet materialized because delayed start-up of several projects and replacement of imports.