AFPM '23

Joseph Chang

24-Mar-2023

NEW YORK (ICIS)–With the last wave of new capacity additions and easing of logistics constraints, the US petrochemical sector has a clear path to boosting exports to new records in 2023, heading into this year's International Petrochemical Conference (IPC).

Even with a recessionary global economic outlook dampening demand overseas and capacity surging in China, the US cost advantage is simply too great to hold back the floodgates.

The US exported a record 11m tonnes of polyethylene (PE) in 2022 as production from new crackers and derivative plants accelerated – up 25% from 2021 and surpassing the previous record in 2020, according to the ICIS Supply and Demand Database.

In chemicals and plastics, PE is the number one US export by far, and volumes should surge even higher in 2023 as Shell's Pennsylvania cracker and downstream PE capacity ramps up and as Bayport Polymers’ (Borealis/TotalEnergies) PE project in Texas comes online in Q2 2023.

In Canada, NOVA Chemicals’ linear low density polyethylene (LLDPE) project is also expected to start up in H2 2023.

US PE exports in January 2023 comprised 42.2% of total sales after reaching a record high of 46.7% in December and averaging 38.5% for all of 2022, according to data from the American Chemistry Council (ACC) and Vault Consulting.

"I suspect PE exports that averaged 39% of total sales in 2022 will jump up to 43-46% of total sales this year, which would be a new record in terms of volumes for the industry," said Brian Pruett, senior vice president, PE at Chemical Data (CDI), part of ICIS.

This will be driven by the second wave of new US and Canada PE capacity of around 9bn lb/year (4.1m tonnes/year) from Q4 2021 to Q3 2023 needing to find a home, weak domestic demand in H1, low natural gas-based feedstock costs that allow producers to boost exports into higher oil-based feedstock regions, additional warehouse capacity and the easing of logistics constraints that had held PE exports back, he added.

LOGISTICS CONSTRAINTS EASE The US must export around 45% of its total PE production to maintain operating rates at 90% following the latest wave of capacity expansions.

PE exports were constrained for much of 2022 by logistics challenges that resulted in frequent shipment delays stemming from shortages of truck drivers, warehouse space and container ship availability.

As demand for container ships receded in H2 2022, these logistics issues have also faded, resulting in exports as a percentage of total sales breaching the 40% threshold in August and remaining above that level for the remainder of the year.

It is not just US PE exports that are surging. US ethylene glycol (EG) exports shot up 33% in 2022 from 2021, while US polyvinyl chloride (PVC) exports rose 26% year on year, according to the ICIS Supply and Demand Database.

Increased US EG exports are expected to help plug the supply gap in northeast Asia during a heavy turnaround season in Q2.

EG buyers in northeast Asia expect the scheduled capacity loss in the region to be mitigated by an increased inflow of US cargoes. Over 75,000 tonnes have been fixed for delivery into China between the second half of April and early June.

On the PVC side, US exports may have plateaued for the moment at relatively high levels as prices have increased and China's market has been slow to awaken. Exports from China's oversupplied market continue to flow into global markets.

US petrochemical exports will run into a big headwind from a surge of new projects starting up in China. China will be adding record-breaking chemical and fertilizer capacity in 2023 of nearly 140m tonnes/year, dwarfing the previous record of over 90m tonnes/year in 2014 and driving global oversupply, according to an ICIS analysis.

China is the largest importer of PE by far, but accounted for less than 11% of US PE exports in 2022, with the wider northeast Asia region accounting for around 14%, according to the ICIS Supply and Demand Database.

US polymers exports to Brazil will also face a new headwind in the form of higher import duties announced in March. This will bring tariffs up for ethylene and propylene copolymers, PVC and polyethylene terephthalate (PET) to 11.2% from previous levels ranging from 3.3-4.4%.

TREMENDOUS COST ADVANTAGE Buoyed by low-cost and abundant supplies of natural gas liquids (NGLs), US ethylene and derivatives producers continue to experience a tremendous cost advantage from a global standpoint, enabling greater volumes of exports.

For LLDPE – the leading grade for US PE exports – US spot margins from ethane feedstock were close to $800/tonne as of late March. This compares to margins in the $100/tonne range in northeast Asia and the $200/tonne range in northwest Europe on a spot basis – both based on naphtha feedstock, according to ICIS Margin Analytics.

CDI forecasts US natural gas prices averaging close to $3/MMBtu in 2023 versus around $6/MMBtu in 2022 with prices gradually moving from the low $2/MMBtu level to the high $3/MMBtu range by the end of 2023.

"In response to the collapse in prices over the past month, producers have responded by cutting production, or slowing down completion rates for bringing new wells online. The market response to a price signal is up to six months," said Barin Wise, vice president – feedstocks and fuels at CDI.

On the demand side, the Freeport LNG export terminal which had been offline since a fire in June 2022 should be fully operational by early April. Low prices also ushered in some coal-to-gas fuel switching. This has moderately increased demand from utilities which is not expected to reverse over the next few months, he added.

"Easing production rates and greater demand tightens the balance, which leads to the forecasted price gains later this year and in 2024," said Wise.

Yet the US petrochemical feedstock cost advantage based on natural gas should remain firmly intact, as long as crude oil prices linger at relatively high levels. As a rule of thumb, US producers maintain an advantage as long as the oil/gas price ratio ($/bbl Brent/$MMBtu) is higher than 7x, according to Kevin Swift, ICIS senior economist for global chemicals.

DEMAND AND DESTOCKING On the US demand side, the near-term economic outlook is no doubt challenging with the ISM US Manufacturing Purchasing Managers’ Index (PMI) in contraction territory (under 50) for the fourth consecutive month in February.

Weakening demand in H2 2022 led to severe inventory destocking across chemical chains, which continues into Q1 2023. This is particularly being felt in housing and construction end markets, as well as markets closer to the consumer such as do-it-yourself (DIY) architectural coatings, electronics, appliances, kitchen and bakeware, and even personal care.

For the key US PE market, destocking largely continues but should come to an end by Q2.

"After pulling 1.2bn lb (544,000 tonnes) out of inventory in the last five months of 2022, there was a 270m lb build in January that puts producers at four days of supply above normal," said CDI's Pruett.

"Downstream from producers, 80% of buyers are still destocking, which should continue for another 1-2 months," he added.

Even when the PE destocking cycle ends, there is unlikely to be a V-shaped recovery as overcapacity will linger amid sluggish economic conditions.

"With more PE capacity in the second wave starting up in H1 2023 and ramping up to full rates by Q3, oversupply should last until Q4, but it will also depend on how hard or soft a recession the US has, and when it begins," said Pruett.

Dow CEO Jim Fitterling in mid-March said the new PE capacity coming on will "take about a year to absorb".

"You’ve got new supply coming on in the near term, some lower demand from destocking [and] some from durable goods reductions, and so that's put pressure there. While integrated margins are improving through the quarter, they’re certainly a long way from where they were in Q1 last year," said Fitterling at the JPMorgan Industrials Conference.

US REGIONAL BANKING CRISIS AND ECONOMIC OUTLOOKFor the US economic outlook, inflation has been the number one concern. But the US Federal Reserve's series of aggressive interest rate hikes to tame such inflation is now putting major stress on the country's regional banking system.

The failure of two sizeable banks (Silicon Valley Bank, Signature Bank) in the US and the crisis of confidence contagion spreading to other regional banks and European financial institutions threatens to significantly tighten lending conditions at the very least, further slowing economic growth and potentially tipping US and European economies into recession.

The implications for the economically sensitive chemical industry are huge, as a major step down in GDP growth or a contraction would crater demand in an already weak environment.

The US regional banking crisis reduces the odds of a soft landing, and the ICIS base case is still a mild recession lasting 2 to 3 quarters. Stabilising the financial system will be critical to keeping it mild.

ICIS projects US GDP growth will slow dramatically from 2.1% in 2022, to just 0.6% in 2023 with global GDP growth shrinking from 2.8% in 2022, to 1.8% in 2023.

US housing starts, highly sensitive to interest rates, are expected to plunge 19% to 1.26m in 2023. US light vehicle sales are projected to rebound 7% to 14.7m units in 2023 on easing supply chain constraints, but remain well below the pre-pandemic 2019 level of 17.0m.

"I still believe a recession is inevitable. That would be my base case," said ICIS senior economist Swift, pointing to leading indicators, the severely inverted yield curve, Fed tightening, declining monetary growth, the ISM Manufacturing PMI and the downturn in housing.

CHANGES IN BEHAVIOUR FROM COVID-19, GEOPOLITICAL TURMOIL The trauma on supply chains from the pandemic and geopolitical turmoil is fostering reshoring, which is supporting business investment at a time when interest rates are rising and margins are being squeezed.

"Normally higher interest rates or moderated cash flow would work to pause investment but it's not really happening this time. The need to boost productivity in light of labour shortages and diversify operations seems to be paramount," said Swift.

"Also, normally when economic uncertainty is in the air, we cut back on non-essential purchases such as dining out. But this isn't happening because we were cooped up for so long. Eventually it will, but it is taking longer," he added.

The pandemic also accelerated Baby Boomer retirement, condensing what would have taken place over an extended period into a couple of years.

"Hence, we have a labour shortage and all-time high job openings. Normally companies would be pausing hiring and getting ready for the downturn. They haven't yet," said Swift.

These structural changes are making the US labour market and fixed business investment much more resilient – or stubbornly high in the Fed's eyes.

US MANUFACTURING REVIVAL FROM CHIPS, IRAThe longer-term outlook is more favourable as long as stability in the banking system is restored, as near-shoring takes hold after disrupted supply chains from the pandemic and the Russia-Ukraine war, along with rising geopolitical tensions between the US and China.

The US is preparing to pump hundreds of billions of dollars into the local manufacturing sector to boost self-sufficiency and resilience in key manufacturing sectors, and companies are lining up for the largesse.

The $280bn US CHIPS and Science Act to build local semiconductor capabilities, and the $369bn US Inflation Reduction Act (IRA) to incentivise manufacturing of electric vehicle (EV) batteries, solar cells, wind turbines and infrastructure for hydrogen and carbon capture and storage (CCS) is set to spur a renaissance in high-tech US manufacturing which will require massive volumes of chemicals.

This includes high-purity solvents and acids for making semiconductors, epoxy resins for wind turbines, ethylene vinyl acetate (EVA) for solar panels, polypropylene (PP) for EV battery casings and polyolefins for wire and cable for EVs.

"Just think about [semiconductor] chip manufacturing, and all those new industries require good old-fashioned hazardous chemicals," said David Jukes, CEO of US-based chemical distributor Univar Solutions, in an interview with ICIS in February.

"Whether it's windmills, batteries, solar cells, chips – all of these things require chemistry, and a lot of that chemistry can be the old-fashioned hazardous kind," he added.

The Univar CEO is bullish on the re-industrialisation of North America and implications for long-term chemical demand. EV components made in Mexico and Canada will also benefit from the US IRA.

Germany-based Volkswagen is putting a planned EV battery project in Europe on hold while progressing plans for a similar facility in North America where it could receive over $10bn in incentives, according to a Financial Times article in early March.

EV battery cases use between 40kg and 105kg of PP per vehicle, according to an analysis by ICIS senior economist Swift. Other non-nylon engineering resins such as polyacetal (POM), polyphenylene, polysulfide, and thermoplastic polyester engineering resins also stand to benefit from use in electrical systems for EVs, he noted.

The CHIPS Act and the IRA passed in 2022 come on top of the $550bn Infrastructure Investment and Jobs Act signed into law in November 2021 to renew US infrastructure, specifically roads and bridges, public transit, high speed internet and water systems.

HYDROGEN AND CCS INVESTMENT TO ACCELERATE The IRA will also accelerate the development of hydrogen and CCS, which will help the US petrochemical sector and other energy-intensive industries decarbonise, providing a competitive advantage worldwide as customers increasingly seek lower carbon products.

ExxonMobil in January awarded a FEED (front end engineering and design) contract to build what it calls the world's largest low-carbon hydrogen facility at its site in Baytown, Texas. The project would produce 1bn cubic feet (bcf)/day of blue hydrogen (with carbon capture) and also offer CCS for third-party carbon dioxide (CO2) emitters. The CCS project would be able to store up to 10m tonnes/year of CO2.

For ExxonMobil's Baytown olefins complex, the project could cut CO2 emissions by 30% if hydrogen is used to fuel cracker furnaces instead of natural gas.

A final investment decision (FID) is expected in 2024 with start-up planned for 2027-2028.

The Baytown project would be an initial contribution to a cross-industry supported Houston CCS hub which could capture and store 50m tonnes/year of CO2 by 2030 and 100m tonnes by 2040.

UK-based BP sees increased incentives for CCS in the IRA supporting its greater use in the power sector, as well as in industry and to produce blue hydrogen.

With the IRA and other incentives, the company sees US CCS deployment reaching over 100m tonnes/year by 2035 and close to 400m tonnes/year by 2050, according to BP chief economist Spencer Dale, in BP's Energy Outlook 2023.

"What we start to see, with the IRA, is an increase in the price on CO2. That's been raised to $85/tonne for the CO2," said Dow CEO Jim Fitterling in an interview with ICIS in November.

The IRA increases the 45Q tax credits from up to $35/tonne for captured CO2 used in enhanced oil recovery (EOR) or in certain industrial applications, and up to $50/tonne for CO2 in secure geological storage, to $60/tonne and $85/tonne, respectively, according to US law firm Gibson Dunn.

"That actually helps quite a lot as an incentive to capture the CO2, but what we have to do now is build the carbon capture hubs and the hydrogen hubs to make that happen," said Fitterling.

The Dow CEO said it would take between 6-8 hydrogen/carbon capture hubs in strategic locations to decarbonise as much as 85% of the entire chemical industry in the US, citing an analysis done with the ACC.

"And in the IRA, both the funding and the price on carbon help us get there," he added.

ESG AND IMPACT ON CAPACITY While decarbonisation is a key theme in US petrochemicals with hydrogen/CCS and other technologies such as electric cracking (e-cracking) offering competitive advantages, implementation will take time.

US-based Dow's flagship net zero carbon cracker project will actually be built in Fort Saskatchewan, Canada, pending an FID expected by the end of 2023 with start-up targeted by 2027. Why Canada? There is existing CCS capacity in the Alberta Carbon Trunk Line to enable this, whereas no such capacity exists in the US – yet.

Therefore, it will be exceedingly challenging, if not impossible, for chemical companies with net zero carbon emissions targets for 2050 and aggressive intermediate goals for 2030 without employing CCS or e-cracking – neither of which exists at scale in the US today.

There has been no next wave of cracker projects planned for the US, even with its sizeable feedstock cost advantage. Rather, the bulk of new ethylene and derivatives capacity will come from Asia and the Middle East in the years through 2028, according to the ICIS Supply and Demand Database.

The only new cracker project being built in the US is the joint venture between Chevron Phillips Chemical and QatarEnergy.

The JV called Golden Triangle Polymers, announced in November an FID to build an $8.5bn integrated cracker complex in Orange, Texas, with capacities of 2.08m tonnes/year of ethylene and 2m tonnes/year of HDPE. Construction is already underway and the project is scheduled for start-up in 2026.

The majority of production from that project will be exported to key markets in Asia, Europe and Latin America, said Bruce Chinn, CEO of Chevron Phillips Chemical, in an interview with ICIS in November.

"Our investment decision is driven by long-term views on demand and access to reliable, affordable feedstock. We believe the current environment will improve, and this is just a great time for us to invest for the longer term," said Chinn.

The project is expected to have around 25% lower greenhouse gas (GHG) emissions than similar facilities in the US and Europe.

"The facility is designed using modern emissions reduction technology and processes, including using hydrogen fuel recycling for the ethylene furnaces to reduce emissions, and an advanced ethane refrigeration system which creates less emissions than typical units in the US and Europe," Chinn explained.

Hosted by the American Fuel & Petrochemical Manufacturers (AFPM), the IPC takes place on 26-28 March in San Antonio, Texas.

Graphics by Yashas Mudumbai

Additional contributions by Kevin Swift, Zachary Moore, Yeow Pei Lin, Bill Bowen, Al Greenwood, Will Beacham and John Richardson

Insight article by Joseph Chang

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