Spend Matters welcomes this guest article by Jo Allen of Mintec.
Polyethylene (PE) is the most commonly used plastic in the world, with a wide range of applications and uses. After several years of steadily increasing prices, the fall in the crude oil market last year spurred on price reductions in global ethylene and polyethylene prices, with the US market following suit. However, since February, prices have once again begun to climb back up following global supply shortages.
The main types are high density polyethylene (HDPE), low density polyethylene (LDPE) and linear low density polyethylene (LLDPE). Its diverseness makes it ideal for use in the packaging and industrial industries with applications from plastic bags, bottles and containers, to water and gas pipelines and even surgical implants.
The US is a major producer and exporter of PE, which over the last 10 or so years has increasingly been produced from ethane, a component of natural gas. Since around 2007, the US natural gas production has increased, due to the rise of fracking and shale gas production. In 2013 shale gas represented the largest share of all US natural gas production.
Outside of the US, global producers predominantly source their ethylene from naphtha derived from crude oil, which has a price premium over natural gas. This has, historically, given the US an advantage over other global producers. However, the last 6 months of volatility in the price of crude oil has caused the US plastic market dynamics to change considerably.
The fall in crude oil prices in the last quarter of 2014 spurred cost reductions in global PE feedstocks, which in turn fed through to the US market, where ethylene prices fell from $1,553.75 per tonne in September to $748 per tonne in March. The low crude oil prices have also increased the risks associated with plans for several new ethane crackers in the US.
The low price of PE has attracted increased demand, which has reduced global supplies, particularly in the EU, leading to higher prices. According to a recent expert report, US exports into the EU are estimated to increase by over 60% in the next 5 years, reaching 300,000 tonnes per year by 2020.
Supply shortages in the EU have been a result of long-term decreases in production due to increased competitiveness from the Middle Eastern, Asian and US markets. With cheaper PE coming from the US and Middle East, EU domestic production has been on the decline, leading to closures of several PE plants, which dropped production capacity by 645,000 tonnes in 2013. Now global demand has surged, the EU is dependent on imports. Exacerbating the situation is the fall in the EUR against the USD which has caused the European export market to become more attractive, meaning EU exports have actually risen year-over-year, despite severe supply shortages.
What all this means for the US, however, will depend on how the crude oil market advances in the next few years.