The party's over: Interest rates, inflation, oversupply siphon COVID-fueled polymer demand

Hot global polymer demand that pushed prices to record highs since mid-2020 started cooling in 2022 amid rising interest rates, high inflation and less-than-stellar timing of new production startups.

As markets enter 2023, economic uncertainty looms, with producers and traders facing oversupply, thin margins and soft demand.

In early January, ExxonMobil warned that its Q4 2022 chemical operating earnings were expected to decline up to 74% from Q3 on lower margins.

Shell also said in January that its Q4 chemical earnings would be lower than its Q3 loss, in part because of depreciation stemming from its new petrochemical complex in southwestern Pennsylvania that began commissioning in August and aims to slowly ramp up to full output by mid-2023.

Dow Chemical in August 2022 announced plans to reduce global polyethylene output by 15%, and LyondellBasell by Q4 had reduced PE output to 60% in Europe and 75% in the US.

Westlake and NOVA Chemicals said in November that they had reduced production rates to better match softer demand.

And BASF CEO Martin Brudermuller in October said his company and the industry needs to permanently cut costs in Europe as the region's energy costs and EU legislation siphon global competitiveness.

Europe's outlook remains driven by recession concerns, fallout from the Russia-Ukraine war, and production rates governed by energy prices and slack demand.

All eyes continue to watch China for signs of a demand rebound after testing and quarantine restrictions were lifted in the wake of widespread protests fueled by years of its zero-COVID policies.

China stepped up polymer exports in 2022 as container freight rates plunged from record highs, restoring Asia's global competitiveness. US export polymer pricing fell hard to compete those Asian trade flows, particularly in Latin America, which increasingly looked to Asia as logistics logjams in the US continued to stymie outflows.

Before China started relaxing COVID policies in December, LyondellBasell CFO Michael McMurray said in late November that the industry needs China to reopen "for the overall demand environment to improve and hopefully for margins to start improving as well." He added that such improvement likely wouldn't emerge until the second half of 2023.

Global polyethylene demand seen lagging 2023 capacity additions

Polyethylene capacity additions in China and the US were seen pouring more PE into global markets amid subdued domestic demand. Up to 4 million mt/year of new PE capacity was slated to come online in Asia by the end of 2023, and another 2.675 million mt/year was expected to ramp up in North America in the first half of the year.

"New capacity will keep the Asian polyethylene markets oversupplied in 2023 and margins are expected to be close to zero," S&P Global Commodity Insights Analytics' latest short-term outlook said. "US PE prices and margins are expected to be depressed in 2023, largely due to increasing capacity."

The North American additions include Shell's Pennsylvania complex, with 1.6 million mt/year of PE capacity. The complex began starting up in November, but the ramp-up will be gradual, as Shell said the new PE units would reach full rates by mid-2023.

"Demand is not there to absorb even half of the new capacity," said Rob Stier, senior lead of petrochemical analytics for S&P Global.

PE demand tends to be more resilient amid economic uncertainty, as it is used to make many single-use plastics like milk jugs and shampoo bottles, as opposed to more durable plastics used in automotive or construction industries.

However, inflation has softened PE demand and consumers may reduce buying overall, according to market sources.

The S&P Global short-term outlook report also said PE imports into Europe has pressured prices with product availability despite production cuts, and that pressure is expected to keep pricing bearish through the first half of 2023 in addition to economic concerns and energy surcharges.

Polypropylene facing oversupply as well

Similar issues have subdued polypropylene and polyvinyl chloride demand going into 2023, though both are less resilient than PE given rising interest rates and high inflation. Both are tied to more durable plastics used in big-ticket items such as vehicles, major appliances and home construction.

"Single-use plastics demand remains reasonable while durable plastics demand into the housing and automotive industries rapidly decreased as global interest rates moved significantly higher" through 2022, S&P Global's short-term outlook said.

China alone is slated to add 4.3 million mt/year of PP capacity in 2023, and North America gained 975,000 mt/year of new PP capacity in 2022.

The outlook said PP oversupply "remains the key issue for the next 18 months," and startup delays for some plants would have limited impact through 2025.

China, interest rates key to PVC demand recovery

Global markets for construction staple PVC could see a slow recovery in 2023, with prices in Asia and the US having hit bottom in late 2022.

However, both regions are expected to remain dependent on export markets with domestic demand seen remaining sluggish and pressure to maintain reduced rates to avoid further price declines.

"We don't see anything in the next year that will have a sustainable margin recovery other than shutting down," Stier said. "If there is a recovery, it will be led by the US."

About 1.5 million mt/year of new global PVC capacity is slated to come online in 2023, with more than 80% of that in China. Those additions could solidify China's place as a PVC exporter, particularly after COVID-related lockdowns suppressed domestic demand in 2022.

Shintech, the US arm of Japan's Shin-Etsu, is building a new 380,000 mt/year PVC facility at one of its Louisiana complexes that is slated to start up in H2 2023.

The company brought a 290,000 mt/year PVC expansion online in late 2021 that was quickly absorbed by then-strong domestic demand. Market sources said Shintech could push startup to late-2023, depending on the state of domestic and global demand.

While China has relaxed COVID-19 policies, weakness in its housing market has kept domestic PVC demand muted, while demand in India has shown signs of moving up, the S&P Global outlook said. Domestic demand in the Americas and Europe were expected to remain soft in 2023 amid higher interest rates, and exporters can race to find pockets of demand in India and elsewhere.

Related special report: Chemical Trends H1 2023