Will a surge in capacity squeeze PP profits

- Jul 09, 2019-

Rapid capacity expansion in Asia is balancing the polypropylene (PP) market and narrowing margins for producers, while reducing the risk of substitution for alternative materials.

While demand growth is slowing, it is still strong.

"We are really shocked by the speed and competitiveness of our Asian PP plants," said Joe morales, director of IHSMarkit's U.S. polyolefin business *.

In all regions, PP industry margins now seem to have peaked."


Many sets of PP devices in China will be put into production within 3 years


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According to IHSMarkit data, global PP demand grew at an average annual rate of 5.5% from 2015 to 2018, higher than 3.8% from 2011 to 2014.

In 2014, the world low oil price significantly reduced the production cost of propylene and downstream PP, which stimulated the enthusiasm of increasing PP capacity.

In addition, driven by the strong growth of the world economy, the auto industry, which accounts for about 10% of PP demand, is also accelerating.

By contrast, the annual growth rate of global PP capacity in 2014-2018 was 4.2%, higher than the growth rate of 3.8% in 2011-2014.

In addition, Borouge's two PP plants in ABU dhabi with a capacity of 480,000 tons per year have been gradually increasing since 2017.


"The world PP market has been tight and stable for six years, so margins have been high," Morales said.

"By 2020, however, that could change."

IHSMarkit expects world PP capacity to increase by 5.5 million tons per year, or 6.5 percent, in 2020, while demand is expected to increase by only 3.4 million tons per year, or 4.3 percent.

In 2019 alone, Chinese PP producers will add nearly 3 million tons of capacity per year, which are not downstream facilities for naphtha cracking units.

Their feedstock comes from propane dehydrogenation (PDH), oil refineries, olefin from methanol (MTO) and coal (CTO), and their production costs vary.


A number of manufacturers are accelerating capacity building to grab market share before the end of the industry cycle.

In China, PDH/PP factories purchase compressors, distillation towers and cold boxes, which have been made in China, and the price is cheap and the delivery is fast.

Historically, when you enter a profit cycle, there is usually a good profit period three to five years ago, waiting for the rest of the world to catch up.

Chinese producers can now enter the market within two to three years, as long as they are profitable, which has become the theme of the PP and polyethylene industries.


Outside China, Sibur of Russia and Hyosung of South Korea will each complete their respective PP projects in a year and a half.

Sipur's 500,000 mt/y PP installation in topolsk, Russia is now scheduled to begin commercial production in the second half of 2019, while xiaoxing group's 600,000 mt/y PP installation in baria-vungtau, Vietnam, is expected to begin production in the second half of 2020.


Other firms are also expanding their capacity.

Later this year, PP Philippines will expand the capacity of its 160,000 ton/year PP installation in limayo Philippines by 65,000 ton/year.

BasellOrlen polyolefin has completed an expansion of its PP plant in Plock, Poland of 400,000 tons/year to 80,000 tons/year.

In early 2020, Borealis will expand the capacity of its PP plant in Antwerp by 80,000 tons per year.

De-bottoming is a quick way to enter the market, and capital expenditure is low.

Although 65,000 to 80,000 tonnes of capacity a year may not seem like much, 20 expansion projects around the world combined are equivalent to several generations of factories.


Weaker prices will support demand growth


So far, China is the PP market in the world, and the demand for PP in China is expected to grow by 6% in 2019.

Although the PP industry profit margins will show a downward trend, but not as steep as the polyethylene industry.

In fact, integrated PDH profits are expected to remain close to $200 a tonne."


However, markets will have to face unpredictable headwinds.

For example, the current economic turmoil remains unsolvable, car and appliance sales are falling in Asia and in Western Europe, while sustainability measures will continue to drag on demand.

Sustainability is also becoming a public concern in India, and instability in the Middle East is hampering investment in projects, limiting the region's consumption potential.


PP prices in Western Europe and Asia will remain relatively stable.

PP prices in North America have fallen sharply from last year's highs, but the respite may be short.

IHSMarkit expects ethane to gain further market share in cracking feedstocks in North America later this year, cutting propylene production and driving PP prices back up.


Overall, global PP prices will keep it competitive with other plastics and non-plastics, so PP demand will continue to grow strongly in the future.

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