During the recent FPA Fall Executive Conference, Joel Morales, Jr., Senior Director, Polyolefins Americas, IHS Markit, provided an update on the polypropylene (PP) market, and IHS Markit wrote a follow-up report based on Joel’s presentation.
The report covers key issues that are expected to drive the evolution of the industry in the near future. IHS Markit’s recently updated economy and energy reports from IHS’s Economic (Global Insight) and Energy (CERA) groups are also included in the first few sections of the report.
The report focuses on key aspects of the PP industry including propylene feedstocks, PP markets, capacity and new planned projects, pricing trends, and expanded insight on economic and energy issues that directly impact the raw materials used in the flexible packaging industry.
World economic growth since 2014 has been matching the long-term historical average of 2.9 percent per year. IHS Markit’s forecast anticipates global GDP growth will advance at 2.7 percent in 2019 and then average around 2.9 percent from 2020–2024.
By 2024, world GDP is projected to exceed $96 trillion, resulting in a calculated average compound annual growth rate of 2.9 percent over the next five years. This solid growth rate matches the pace of global GDP over the past five years. An important factor in determining the speed of world GDP growth is the growing impact of the rapidly emerging market economies, while the weight of the slower advancing developed countries is slowly declining.
The combined share of North America, Western Europe, and Japan which was estimated to have amounted to just below 70 percent in 2000 is forecast to decrease to around 50 percent by 2024.
A comparison of the GDP forecast shows a visible downward adjustment for the years 2018 to 2022. Growth expectations in 2019 were lowered due to the adverse impact of tariffs and trade tensions as well as declines in capital spending and manufacturing.
China, now accounting for an estimated 17 percent of world GDP (constant 2015 U.S. dollar basis), continues to contribute to the economic momentum, with growth rates well above 6 percent. Recent data suggests some softening in economic activity in response to U.S. tariffs and a pronounced slowdown in industry and construction.
IHS Markit does not anticipate any severe decline in China’s growth and envisions there will be a gradual moderation in activity accompanied by rebalancing as the economy shifts from over reliance on exports and trial expansion to increasing reliance on household sectors and high-tech markets.
Global Energy Overview
Demand for crude oil and condensate will increase from approximately 83 MMb/d in 2018 to a peak of around 92 MMb/d by the mid-2030s. Efficiency trends, fuel switching, government policies, and changing demographics will outweigh economic growth and cause an eventual flattening of global oil demand growth, before beginning a descent. The decline will be gradual, however — aggregate world crude and condensate demand by 2050 is still over 4 MMb/d higher than 2018 levels. Aggregate non-OPEC supply growth over the next decade is expected to plateau and is highly leveraged to five countries: the U.S., Canada, Russia, Brazil, and Kazakhstan.
Outside of these countries, reserve bases generally will either not support supply growth or a longer time horizon will be required to discover yet-to-be found resources. This trend means a longer-term increased reliance on the Middle East. Saudi Arabia, Kuwait, the United Arab Emirates (UAE), Iraq, and Iran are expected to contribute the majority of long-term supply growth once non-OPEC and tight oil stops growing.
Global Polypropylene Market
Last year’s report focused on how strong polypropylene (PP) markets looked due to insufficient supply and too much demand. The concern was whether PP pricing would have to elevate and destroy demand. This is no longer the case.
The trade war and its impact on global economies for declining GDP hurt PP demand. PP resin buyers purchase bare minimum volumes in times of economic uncertainty, so they can focus on working capital and keep inventory low. The global automotive industry was not as robust in 2018, and since approximately 10 percent of global PP demand goes into the automotive industry, an industry slowdown hurts PP demand overall.
PP margins in all regions are now on a downward trend with North America and Western Europe trying to hold on to margins before the upcoming 2020 PP oversupply hits the market (assuming China builds its plants on schedule).
China built more new PP capacity than the world needs — in 2020 they are building 5.7 MMT of new nameplate capacity (4.8 MMT of the capacity is expected to be in service in 2020 per IHS Markit’s capacity database). This new China PP capacity will exceed the global PP growth of 3.2 MMT.
With the new growth assumptions for demand and the accelerated base of global capacity additions in several regions, the world appears to be well balanced for PP through the near, medium, and long-term forecast.
North American Polypropylene Market
North American PP production was up in 2019 over 2018 due to debottlenecked capacity and improved propylene supplies. Production would be even higher if demand were performing better for 2019.
Current August 2019 production is up by 2.3 percent, or 260 million pounds, compared with the same period in 2018 and domestic demand with imports was 2 percent lower for the same period of 2018. Much of the decline can be attributed to inventory destocking and slow PP product manufacturing as a result of a weaker economy. According to Global Trade Atlas data through July 2019, current PP exports are up 40 percent over the same period last year. Imports have not fallen as fast as expected (+2.6 percent). IHS Markit expects that the Q3 2019 planned turnarounds of polypropylene units by Braskem and LyondellBasell will reduce resin inventories and oversupply pressure in the market. No additional margin declines are expected until 2020.
Recently, Formosa’s new PP plant startup was moved to 2021 due to delays in the project. LyondellBasell is now looking at a new project in the ten-year horizon and has abandoned ideas about a PDH investment, instead partnering with Enterprise on an offtake agreement for propylene purchases sometime late 2023 or 2024.
The full IHS Markit Polypropylene Report is available to FPA members in the “Members Only” section of the FPA website, www.flexpack.org