NEW YORK CITY (ICIS)–With the last wave of brand-new
capability additions and relieving of logistics
restraints, the United States petrochemical sector has actually a
clear course to improving exports to brand-new records
in 2023, heading into this year’s International
Petrochemical Conference (IPC).
Even with a recessionary worldwide financial
outlook moistening need overseas and capability
rising in China, the United States cost benefit is
merely undue to keep back the floodgates.
The United States exported a record 11m tonnes of
polyethylene (PE) in 2022 as production from
brand-new crackers and acquired plants sped up
– up 25% from 2021 and exceeding the previous
record in 2020, according to the ICIS Supply
and Demand Database.
In chemicals and plastics, PE is the top
United States export without a doubt, and volumes ought to rise even
greater in 2023 as Shell’s Pennsylvania cracker
and downstream PE capability increases and as
Bayport Polymers’ (Borealis/TotalEnergies) PE
job in Texas comes online in Q2 2023.
In Canada, NOVA Chemicals’ direct low density
polyethylene (LLDPE) job is likewise anticipated
to start up in H2 2023.
United States PE exports in January 2023 consisted of 42.2%
of overall sales after reaching a record high of
46.7% in December and balancing 38.5% for all
of 2022, according to information from the American
Chemistry Council (ACC) and Vault Consulting.
“I think PE exports that balanced 39% of
overall sales in 2022 will leap up to 43-46% of
overall sales this year, which would be a brand-new
record in regards to volumes for the market,”
said Brian Pruett, senior vice president, PE at
Chemical Data (CDI), part of ICIS.
This will be driven by the 2nd wave of brand-new
United States and Canada PE capability of around 9bn lb/year
(4.1m tonnes/year) from Q4 2021 to Q3 2023
requiring to discover a home, weak domestic need in
H1, low natural gas-based feedstock expenses that
permit manufacturers to improve exports into greater
oil-based feedstock areas, extra
storage facility capability and the easing of logistics
restraints that had actually held PE exports back, he
included.
LOGISTICS RESTRAINTS
RELIEVE
The US need to export around 45% of its overall PE
production to keep operating rates at 90%
following the latest wave of capability
growths.
PE exports were constrained for much of 2022 by
logistics obstacles that led to regular
delivery hold-ups originating from lacks of
truck drivers, storage facility space and container
ship schedule.
As need for container ships declined in H2
2022, these logistics problems have actually likewise faded,
leading to exports as a portion of overall
sales breaching the 40% limit in August and
staying above that level for the rest of
the year.
It is not simply United States PE exports that are rising.
United States ethylene glycol (EG) exports soared 33% in
2022 from 2021, while United States polyvinyl chloride
(PVC) exports increased 26% year on year, according
to the ICIS Supply and Demand Database.
Increased United States EG exports are anticipated to
help plug
the supply gap in northeast Asia
throughout a heavy turn-around season in Q2.
EG purchasers in northeast Asia anticipate the
scheduled capability loss in the area to be
alleviated by an increased inflow of United States freights.
Over 75,000 tonnes have actually been repaired for shipment
into China in between the 2nd half of April and
early June.
On the PVC side, United States exports may
have plateaued for
the minute at reasonably high levels as costs
have actually increased and China’s market has actually been sluggish
to awaken. Exports from China’s oversupplied
market continue to stream into worldwide markets.
United States petrochemical exports will encounter a huge
headwind from a rise of brand-new jobs beginning
up in China. China will be including record-breaking chemical
and fertilizer capability in 2023 of almost 140m
tonnes/year, overshadowing the previous record of
over 90m tonnes/year in 2014 and driving worldwide
oversupply, according to an ICIS analysis.
China is the biggest importer of PE without a doubt, however
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
OUTLOOK
For 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,
IRA
The 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 biggest
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 United States 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 United States 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
brand-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
United States 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 United States 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 United States and Europe,” Chinn explained.
Hosted by economic downturn American Fuel & Petrochemical
Manufacturers (AFPM), the IPC
takes location 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 short article by Joseph
Chang
