A Temporary Update on Global Polymer Supply Dynamics
January 16, 2013
(Pac Advantage Consulting)
– I recently had the occasion to pull out a presentation I made almost 5 years ago for the 2008 IoPP Packaging Summit in which I described significant investments in polymer production in the Middle East.
With over 50% of the world’s proved oil reserves and 40% of the world’s proved natural gas reserves concentrated in Saudi Arabia, Iran, Iraq, Kuwait, United Arab Emirates and Qatar, huge cash flows into this region were being targeted towards massive investments in further processing and conversion.
Smart people in companies with heavy sovereign ownership, many in partnership with global petrochemical giants, understood that historically low cost, high quality oil and gas fields were not inexhaustible, and maximizing the long term value of these resources would require forward integration to upgrade crude oil and natural gas to more valuable commodities. In the case of natural gas, with limited LNG facilities in key consuming countries, readily transported gas-derived polymers also offered faster access to markets unable to be directly served by natural gas pipelines.
Published reports showed LDPE, LLDPE and HDPE projects in the region slated for 2008 startup alone totaled almost 10 billion pounds of resin. While my analysis was focused on the Middle East, parallel activity in India, China and Southeast Asia was underway, and together, these were forcing shifts in the supply dynamics for polymers. In particular, older, higher cost polyolefin resin plants in North America and Europe were being announced for consolidation or shutdown as these Middle East world-scale facilities with immediate proximity to low cost raw materials came on stream.
I’ve continued to keep an eye on the global market, and in particular the extraordinary impact of the major increase in North American gas production. After a 12 year roller coaster with peaks in mid-2008 over $10/1000 ft3, current US gas wellhead prices have returned to the $2.50-3.00 level of early 2000, which in turn were only slightly above the real pricing from 1985 to 2000. Current US prices are among the lowest in the global market. And the response?
In addition to reinforcing the shift in energy production to gas, we’ve seen multiple announcements for PE plants in the US and North America, as expected delivered resin costs for primarily natural gas-derived polymers look advantageous using lower priced domestic gas.
Note that easily transported crude hasn’t returned to the less than $30/bbl level of 2000, and in actual dollars prices have oscillated around $90 lately. Crude-derived polymer costs remain high globally, propping up packaging prices dependent on those materials. And perpetuating an unprecedented decoupling of energy content costs of gas and oil, with gas looking incredibly cheap as a fuel.
So where’re set for a while, right? Lots more gas coming on, domestic polymerization coming back at favorable economics….. But (and there always seems to be a But), pretty much all of the new gas supply is coming from non-conventional wells, with higher production costs than older wells. And as the proportion of total gas production from new wells increases, so will average production costs. If pricing doesn’t move up to reflect those costs, at the margin, producers will reduce supply.
Failing economic collapse or a miracle production technology, oil AND gas prices are destined to rise. I won’t venture to guess relative rates of price growth, except to observe that global commodities tend over time towards equilibrium. Too much cheap domestic gas for too long and US LNG facilities and exports will blossom, lowering gas prices somewhere else, and increasing them here.
Am I suggesting that the new polymer capacity announced and in process is bad strategy? Absolutely not! These will be state of the art plants, with improved efficiencies and operating costs, and the gas cost advantage isn’t disappearing tomorrow.
Just good to remember to keep testing the old assumptions against the new reality, and realize that all the conditions on which we base forecasts and conclusions are temporary. And certain to change. Figuring out what the changes mean is the trick.
Timothy Bohrer is the owner of Pac Advantage Consulting.