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www.platts.com/petrochemicals Petrochemicals special report July 2017 Americas petrochemical outlook H2 2017 CONTENTS Downstream capacity additions to tighten US ethylene market 2 US propylene market faces long H2 as new capacity comes online 3 US butadiene slides into second half amid soft demand 4 US toluene, MX limp along amid muted chemical, blend demand 5 Crude price direction tames US benzene’s reaction to styrene 6 US methanol bearish ahead of capacity expansion in Texas 7 US PE buyers expect new resin to come with lower prices 8 US polypropylene market eyes push for margin expansion 9 Political, economic woes loom large for Latin American polymer markets 11
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Page 1: Americas petrochemical outlook H2 2017 - Platts · PDF fileAmericas petrochemical outlook H2 2017 CONTENTS Downstream capacity additions to tighten US ethylene market 2 ... Ethylene

www.platts.com/petrochemicals

Petrochemicals special report

July 2017

Americas petrochemical outlook H2 2017

CONTENTSDownstream capacity additions to tighten US ethylene market 2

US propylene market faces long H2 as new capacity comes online 3

US butadiene slides into second half amid soft demand 4

US toluene, MX limp along amid muted chemical, blend demand 5

Crude price direction tames US benzene’s reaction to styrene 6

US methanol bearish ahead of capacity expansion in Texas 7

US PE buyers expect new resin to come with lower prices 8

US polypropylene market eyes push for margin expansion 9

Political, economic woes loom large for Latin American polymer markets 11

Page 2: Americas petrochemical outlook H2 2017 - Platts · PDF fileAmericas petrochemical outlook H2 2017 CONTENTS Downstream capacity additions to tighten US ethylene market 2 ... Ethylene

Special report: Petrochemicals Americas petrochemical outlook H2 2017

2© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.

After a strong start to 2017, key petrochemicals markets in the Americas enter the second half of the year with subdued expectations amid sub-$50/barrel oil, renewed political instability in key economies and capacity expansions in the US Gulf Coast region that stand to impact supply/demand balances.

Some markets, such as methanol, met participants’ expectations in terms of pricing and behavior, while others, including toluene and mixed xylenes, stumbled amid lackluster demand and softer-than-anticipated energy.

US olefins markets enjoyed fast starts to the year. Butadiene flirted with five-year highs in March on the back of production issues and a surging Asia market before fizzling out in Q2.

Ethylene and propylene also saw strong gains in Q1 fueled by turnaround season in the USGC region but hit July on a down note, with the latter expected bearish for the remainder of the year ahead of a major capacity expansion.

In Latin America, after opening 2017 with renewed optimism, polymer market participants find themselves stuck with some of the same issues they had hoped to shed, including poor demand and renewed political and currency concerns in Brazil, leading to a pessimistic outlook for the second half.

This report highlights the key themes that stand to shape petrochemicals markets in the Americas during the second half of 2017.

These include the arrival of major polyethylene capacity expansions in the US, the short-term support they could lend to ethylene prices, and the possible impact a new propylene plant could have on polypropylene prices in the US and beyond.

On the aromatics side, crude pricing could further dampen expectations in aromatics markets, particularly benzene, while methanol participants see bearish pricing for the rest of the year as additional capacity comes online.

DOWNSTREAM CAPACITY ADDITIONS TO TIGHTEN US ETHYLENE MARKET

The US ethylene market will tighten during the second half of the year as downstream capacity additions begin to come online ahead of steam cracker startups, contributing to a bullish pricing outlook for the period.

That is the consensus among market participants, even as prices fell to 16-month lows to close H1 2017 on continued length in the market.

Seven polyethylene lines totaling more than 3.8 million mt/year of additional capacity are scheduled to commence operations during the second half of the year in the US Gulf Coast region.

And while nearly 5.5 million mt/year of additional ethylene capacity was programmed to come online in the USGC region this year — part of the first wave of US petrochemical projects driven by shale gas development — much of it has been delayed to Q4 and into next year.

Chevron Phillips Chemical, Dow Chemical and ExxonMobil Chemical all have world-scale steam cracker and polyethylene capacities in the works in Texas, but only Dow expects to start ethylene production around the same time as its PE capacities in Q3.

ExxonMobil and Chevron Phillips also plan to start PE production in Q3. However, their respective 1.5 million mt/year ethylene-capacity crackers are not expected to start until Q4 and Q1 2018, respectively.

The mismatch in timing could result in a sizable pull of ethylene inventories in the US Gulf Coast region and more specifically at the Mont Belvieu, Texas, hub, resulting in stronger pricing, multiple market players have said.

Market long ahead of expansionsSupply length was again an overriding theme in H1 2017, when spot ethylene averaged 28.99 cents/lb ($639.11/mt) FD USG basis. By contrast, Asian ethylene averaged $1,153.68/mt for the period on a CFR Northeast Asia basis, while Northwest European pricing averaged $1,104.94 FD basis, according to S&P Global Platts data.

Since a Q1 spike, when pricing rose 40% to 37.75 cents/lb on the back of turnaround season in the USGC, spot shed its gains and then some, losing 44% of its value, with the prompt-month closing June at 21 cents/lb.

How much pricing could rebound — and for how long — remains up for debate.

That’s because over the past four years more than 2 million mt/year of capacity has been added through

UPCOMING ETHYLENE CRACKER STARTUPSCompany Location Capacity Product Start up (‘000 mt/yr) Dow Chemical Freeport, Texas 1,500 Ethylene Q3-17ExxonMobil Chemical Baytown, TX 1,500 Ethylene Q4-17Indorama Westlake, LA 440 Ethylene Q4-17Chevron Phillips Baytown, TX 1,500 Ethylene Q1-18Sasol Lake Charles, LA 1,500 Ethylene H2-18Lotte-Axiall Westlake, LA 907 Ethylene Q1-19Source: Platts

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Special report: Petrochemicals Americas petrochemical outlook H2 2017

3© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.

brownfield expansions alone, with another 620,000 mt/year coming online this year.

Greenfield capacity expansions in Texas and Louisiana alone will total more than 3.5 million mt/year in 2017 and 3 million mt/year in 2018, the latter including Chevron Phillips’ startup as well as Sasol’s 1.5 million mt/year project in Lake Charles, Louisiana.

North America’s ethylene production during the next decade is expected to rise nearly 38% from about 32.2 million mt in 2016 to nearly 44.6 million mt in 2026.

Most of the added capacities will feed polyethylene production, as well as as ethylene oxide and monoethylene glycol. But even with the growing demand, ethylene is expected to remain long, and some market players are looking outward for a home for US ethylene.

Exports could prove keyCurrently, the US ethylene market counts on only one export terminal, which is located along the Houston Ship Channel. The 300,000 mt/year facility is contracted to Mitsubishi Chemical and operated by Targa Resources.

Two companies, Enterprise Products Partners and Odfjell Terminals, have expressed interest in building ethylene export facilities. Enterprise, which in 2016 inaugurated the world’s largest ethane export terminal along the Houston Ship Channel, recently announced it is partnering with Navigator Gas to develop an export terminal at its Morgan’s Point complex.

Enterprise also plans to repurpose a high-capacity ethylene storage well at its Mont Belvieu complex and build a 12-inch ethylene pipeline from Mont Belvieu to producing and consuming sites south of the Houston Ship Channel.

Odfjell, meanwhile, has continued the development of the first dedicated ethylene export terminal at its facilities in Seabrook, Texas, recently awarding the basic engineering contract for the project to JGC Corporation of Japan. A final investment decision has not been made.

The logistical constraints of having one terminal have kept US exports at 69,990 mt/year through April, the most recent month for which data is available, according to the US International Trade Commission.

But growing global demand has made cheap US-origin ethylene very attractive. Exports from the US through April were 3% higher than the same period in 2016, and 98% higher than during the same time in 2015, ITC data showed.

—Nida Qureshi, [email protected] —Edited by Annie Siebert, [email protected]

US PROPYLENE MARKET FACES LONG H2 AS NEW CAPACITY COMES ONLINE

The US propylene market is looking bearish for the second half of 2017 as a major capacity addition in the US Gulf Coast is expected to further lengthen supply and lead to more exports, which have already been on the rise.

From January to April, the most recent month for which data is available, the US exported 143,324 mt of propylene, a 15% increase over the same period last year, according to the US International Trade Commission.

Startup of Enterprise Product Partners’ 750,000 mt/year propylene-capacity unit in Mont Belvieu, Texas is expected sometime during Q3.

Completion of the propane dehydrogenation unit, only the third of its kind in North America, has suffered repeated delays. It was originally scheduled for completion in Q3 2015.

In fact, some trader sources pointed to these delays earlier in the year to explain, at least in part, why spot and contract pricing shot up on tightness resulting from planned and unplanned outages in the US Gulf Coast region during Q1.

Roller-coaster rideSpot refinery-grade propylene rose nearly 180% from January to a 27-month high of 46 cents/lb ($1,014.11/mt) on a delivered basis in early March; polymer-grade propylene, a higher-purity grade that typically commands a 10-12 cent/lb premium over RGP, jumped nearly 61% for the period to a near 27-month high of 54.25 cents/lb, also on a delivered basis, according to S&P Global Platts data.

Contract pricing, which is driven by spot, followed suit, with March’s 52 cents/lb settlement the highest since December 2014, when contracts were assessed at 61.50 cents/lb.

SPOT PROPYLENE UPS AND DOWNS

10

20

30

40

50

60

Jul-17Mar-17Nov-16Jul-16Mar-16

Source: Platts

(¢/lb)

Polymer Grade FD USG

Re�nery Grade FD USG

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Special report: Petrochemicals Americas petrochemical outlook H2 2017

4© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.

The gains were short-lived, however, with the market falling steeply in April as turnaround season in the US Gulf Coast region wrapped up before stabilizing in May and June.

Propylene markets have seen little support from crude oil pricing, which struggled amid persistent oversupply.

Spot RGP averaged 30.66 cents/lb during H1 2017, closing the period at 25 cents/lb. Spot PGP averaged 43.18 cents/lb, ending June at 38 cents/lb.

The relative strength during H1 versus the year-ago period — spot RGP’s average was nearly 60% higher than H1 2016 while spot PGP’s was 43% higher — caught some in the market by surprise.

This is because US propylene markets have switched from tight to long over the past couple of years amid strong refinery output and more on-purpose production. Heading into the new year, some expected the bearish sentiment to prevail for much of the year.

The startup of Dow Chemical’s 750,000 mt/year PDH unit in Freeport, Texas in late 2015 was a significant capacity addition, even though its production is meant for captive use.

Strong refinery utilization rates in recent years have increased output and also pressured prices lower, sources said. Refinery run rates averaged 90.41% through mid-June this year, according to US Energy Information Administration data, even as Q1 production weakened when compared to Q1 2016.

Total US propylene production in Q1 — including chemical sources and refinery sources — decreased nearly 6%, totaling 7.882 million lb against 8.381 million lb in Q1 2016, data from the American Fuel and Petrochemical Manufacturers showed.

Market tightens on turnaroundsThe lower production levels during Q1 came amid planned and unplanned steam cracker and refinery outages in the US. Eight steam crackers, one PDH unit, and two splitter outages in Q1 contributed to lower output.

Spot PGP fell 19.25 cents from March 7 to May 12, hitting a four-month low at 35 cents/lb FD USG, Platts data showed.

Spot RGP also fell to a three-month low on June 6 at 21.5 cents/lb FD USG, having shed 24.5 cents from March 8.

Downstream demand, mainly from polypropylene and acrylonitrile markets, started weak in 2017 as the propylene prices shot up, but quickly picked back up once monomer began its descent.

In the polypropylene market, the biggest demand pull for propylene, domestic business was affected by a long dry spell with some producers heard having reduced rates to match the lack of demand.

North American PP production hit a four-month low in April, falling more than 11% since the beginning of the year, American Chemistry Council data showed.

But as monomer pricing began to fall, PP business began to pick up, with orders for May and June being sold out quickly. PP buyers wanted to buy their contract volumes plus 20%-50% more on top, sources said.

Even with demand from the resin side strong, no major expansions are scheduled online for at least the next two years to absorb the recent and upcoming additions on the propylene side, further feeding the bearish outlook, sources said.

—Nida Qureshi, [email protected] —Edited by Alisdair Bowles, [email protected]

US BUTADIENE SLIDES INTO SECOND HALF AMID SOFT DEMAND

After flirting with five-year highs earlier this year, the US butadiene market entered the second half of 2017 with downward momentum and a bearish pricing outlook.

A slowdown in domestic demand; weaker global pricing, particularly in Asia; a low-priced crude environment; and even nominal capacity additions in the US Gulf Coast region were contributing to the downbeat outlook, sources said.

“The short-term outlook would definitely be bearish,” an analyst source said.

US butadiene spot pricing closed the first half of the year at 10-month lows, assessed June 30 at 41.50 cents/lb ($914.91/mt) CIF, according to S&P Global Platts data.

ASIAN VOLATILITY FELT IN US

500

1,000

1,500

2,000

2,500

3,000

3,500

Jun-17May-17Apr-17Mar-17Feb-17Jan-17

Source: Platts

Butadiene CFR China ($/mt) Butadiene CIF USG (¢/lb)

40

60

80

100

120

140

160

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Special report: Petrochemicals Americas petrochemical outlook H2 2017

5© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.

The level was in stark contrast to just four months prior, when US butadiene prices hit 57-month highs at 132.50 cents/lb CIF basis on February 24 and again March 3. Several factors, both domestically and in global markets, influenced the sharp change in US spot pricing, which jumped 130% in the first quarter.

Not only was domestic production enduring planned and unplanned outages during the first quarter, but Asia was experiencing a price surge of its own due to a supply shortage and increased demand.

The US market is particularly susceptible to global pricing dynamics, as it is structurally a net-short market. Typically, imports from Asia are used to balance demand in the US, market sources said.

US contract pricing, which is directly tied to spot behavior, reacted accordingly, and by March, pricing settled at 110 cents/lb, the highest level since June 2012 and roughly 112% higher than December 2016.

Increases fail to stickThe sharp gains proved short-lived, however, as by the second quarter, production disruptions were alleviated while downstream demand, particularly on the acrylonitrile-butadiene-styrene side, was limited, which led to improved supply in a short period of time.

The Asian region, meanwhile, was experiencing a similar scenario that caused its pricing to significantly decline during those months, as well. Both US and Asia markers shed more than 60% of their values since their February and March peak levels, according to Platts data.

Moving into the second half of the year, the majority of market participants believed pricing in the US market will continue to trend lower, even as Asian pricing appeared to recover after hitting a 16-month low of $875/mt CFR China on June 22.

Additional capacity to be limitedSupply in the USGC region could improve, if nominally, as two world-scale steam crackers are slated to commence operations in Q4 and another in Q1 2018. The majority of butadiene produced in the world is a byproduct of cracking feedstocks for ethylene.

While these plants will be fed ethane, which yields little butadiene as a co-product, they are expected to increase butadiene production capabilities by 100,000 mt/year once fully operational, a trader source said.

Storage concerns were also raised by market players.

“I expect prices will decline, as the butadiene suppliers will need to move their product due to limited storage,” a distributor source said.

Along with additional supply is the notion that feedstocks and crude oil will remain relatively cheap throughout the second half, removing any upward pressure these might pose.

“I have confidence that butadiene feedstocks will be plentiful and cheap for the next year,” the distributor source said. “Only a geopolitical incident would cause this to change.”

This sentiment was echoed by many other market participants.

“About eight years ago, butadiene was in the low 20s [cents/lb],” the analyst source said. “That level is again a possibility.”

—Anthony Garcia, [email protected] —Edited by Annie Siebert, [email protected]

US TOLUENE, MX LIMP ALONG AMID MUTED CHEMICAL, BLEND DEMAND

After opening the year with expectations of increased demand from gasoline blenders, US toluene and mixed xylene markets limped into the second half of 2017, with pricing near eight-month lows and no clear drivers to count on.

Even as the Energy Information Administration’s Short-term Energy Outlook forecasts a 4% increase in gasoline consumption during the 2017 driving season, demand from gasoline blenders for high-octane blendstocks such as toluene and MX appears to be muted in the face of uncertain energy prices.

“It’s a market to get rid of excess material,” a source with a US refiner said, referencing the nature of the market and lack of activity.

The year began with a fair amount of discussion surrounding new low-sulfur content standards for US gasoline and their possible impact on US toluene and MX markets.

Effective January 1, all gasoline sold in the US must contain less than 10 ppm of sulfur, down from 30 ppm, according to the Tier 3 rule. Aromatics markets participants expected its implementation to result in an octane shortage and serve as a boon to the toluene and xylene markets. Spot pricing for both aromatics surged to 16-month highs by early February. But the demand failed to materialize, partly because other blendstocks, such as alkylate and reformate, turned out to be more competitive, sources have said.

Spot pricing fell more than 20% since then, with prompt-month assessments for toluene closing H1 at 197 cents/gal FOB USG, with MX at 198 cents/gal FOB USG.

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6© 2017 S&P Global Platts, a division of S&P Global Inc. All rights reserved.

A softening energy complex through Q2 and muted chemical demand have contributed to the downward pressure being exerted on aromatics prices.

Demand expectations fizzleWhile refinery utilization rates have been strong, hovering between 92.5% and 94.4% of operable capacity through May and June, and the belief is that year-on-year gasoline consumption will improve, the expectations surrounding aromatics as preferred blendstocks have failed to materialize.

“It seems that producers will blend it at their own refineries as opposed to selling it into the blend market — me included,” a source with a second refiner said.

Entering July, octane demand was indeed limited, another refining source said, adding that whatever limited trade is taking place is happening at blend value.

The softer pricing in toluene and mixed xylene has narrowed the spread between the aromatics and reformate pricing and has disincentivized extraction, sources said.

In June, the average premium of toluene over reformate was 17.90 cents/gal, while the average premium for mixed xylenes over reformate was 19.68 cents/gal, according to S&P Global Platts data.

For reference, a premium of 20 cents/gal over reformate is considered an attractive level for extraction.

Chemical margins improveLooking at demand from the chemical segment, the lower toluene prices have proven a boon to toluene-fed chemical production margins. In early June, at the time when toluene values began their descent, hydrodealkylation, toluene disproportionation and Mobil selective toluene disproportionation margins surged.

HDA margins jumped from -0.43 cent/mt on June 2 to as high as $85.06/mt on June 14, according to Platts data. TDP margins went from $59.92/mt to $161.26/mt. MSTDP

margins moved from $61.19/mt to $121.48/mt. These gains were welcome by operators, some of whom had been running units at reduced rates due to poor economics.

The sustainability of these margins, however, is questionable. This because TDP and MSTDP margins are heavily influenced by benzene prices and July benzene contracts in the US settled 19-20 cents lower to 251 cents/gal. Benzene could see some support from derivative styrene, which gained ground in early July on a Styrolution outage in the US and a force majeure declaration by Ellba in Europe. But reduced benzene consumption, coupled with increased benzene imports into the US, which jumped from near 43,000 mt in May to over 100,000 mt in June, could pressure prices lower.

As market participants look back to H1 2017, they point to unfulfilled expectations regarding demand as well as a soft energy complex in explaining weak prices for toluene and MX. Natural disasters and geopolitical events notwithstanding, more of the same is likely to be in store during the second half of the year, sources said.

—Kevin Allen, [email protected] —Edited by Richard Rubin, [email protected]

CRUDE PRICE DIRECTION TAMES US BENZENE’S REACTION TO STYRENE

After US benzene and derivative styrene markets lived up to expectations during to first half of the year amid low inventories and turnarounds in global styrene markets, the second half could have a different turnout, according to market participants.

Low derivative styrene inventories in other regions could impact benzene pricing, but crude oil behavior stands to be key to the equation and US benzene pricing, sources said.

“Recent dynamics have proved that benzene will react more to crude price direction instead of styrene developments,” a trader source said.

US styrene saw an uptrend in pricing from May 11 to June 30, when spot pricing rose 6.6 cents/lb ($145.50/mt) to 50.35 cents/lb FOB US Gulf Coast, based on S&P Global Platts data, because of shrinking Asian inventories, domestic production issues, and a major styrene outage in Europe.

Feeling crude’s pullHowever, over a similar time frame, US benzene prices saw a downward trend in pricing from May 19 to June 30, falling 34 cents/gal ($101/mt) to $2.48/gal FOB USG, based on Platts data, because of weak demand and declines in crude pricing. WTI crude fell $5.43/b from May 23 to June 30 due to high stocks.

US EXTRACTION ECONOMICS SOFTEN

-10

0

10

20

30

40

50

60

Jul-17Jan-17Jul-16Jan-16Jul-15

Source: Platts

(¢/gal) MX-reformate spread Toluene-reformate spread

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The benzene-to-crude ratio reflected a higher average during the first half of the year at 2.40 than the average of 2016 at 2.14.

That is typically used as an indication to whether benzene is overvalued or undervalued, but this ratio has been accepted at higher levels this year amid benzene reacting to both styrene and crude markets.

“Styrene has lessened the impact of crude’s pull on benzene recently and several times already this year,” a source said.

The styrene-benzene spread averaged $402/mt during the first half of 2017, based on Platts data. The spread gives an indication to whether styrene production from benzene is profitable.

Margins have been healthy, as a spread at or above $200/mt is desirable, sources said.

This spread will likely remain mostly healthy during the second half of 2017 as benzene prices stay tamed by crude pricing and Asia and Europe continue to buy styrene off and on from the US, sources said.

“US benzene still has a lot more room to come off given the higher benzene-to-crude ratio, but there is not much concern about the ratio being at higher levels lately,” another source said.

Crude has won the battle of influencing benzene price levels because of balanced supply and demand, sources said.

Balanced despite closed arbitragesAlthough arbitrages for Asia and Europe to send benzene to the typically net-short US region have been closed, the US has found balance in inventories.

The US depends on benzene imports, primarily from Asia. Europe has been atypically at a premium to both the US for most of 2017, while Asia has been cheaper than both Europe and the US.

Arbitrage economics for Asia to send benzene to the US have been poor during the first half of 2017 and this has kept market participants bullish at times in forward months for benzene pricing.

The price-spread between US and Korea benzene pricing averaged $16.83/mt as of June 30. This dynamic was expected to change during the second half because of the net-short production in the US, sources said.

Market participants in the styrene market were not anticipating any major events during the second half of 2017.

Houston-based Westlake has a turnaround late in the third quarter or during the fourth quarter. But, other than that, it will be similar fundamentals, sources said, adding Asian and European arbitrage opportunities will continue to shift pricing.

“There will be upticks in China buying as we typically see when inventories get low in that region and the US will react,” a source said.

As long as there is a healthy spread between styrene and benzene and margins remain strong, production will keep on going, sources said.

Recent developments of the Ellba outage in Europe could mean more US styrene to that region in the short term, but Asia buying will be main driver in the long term, sources said.

—John Calton, [email protected] —Edited by Dan Lalor, [email protected]

US METHANOL BEARISH AHEAD OF CAPACITY EXPANSION IN TEXAS

The expected startup of new methanol capacity during the second half of the year is prompting a bearish outlook for some market participants heading into the third quarter.

US capacity is set to hit 7.5 million/mt with the startup of a 1.75 million mt/year methanol plant in Beaumont, Texas. The OCI Natgasoline venture, owned jointly by OCI and G2X Energy, was slated to begin production in the July-August period, but sources have suggested startup may not happen until late Q4.

The impact on pricing may not be immediate, however, as some market participants believe the new methanol will balance the market, meaning global demand will remain the key driver on domestic prices.

“Only bearish global demand would greatly affect the domestic price,” a source said.

US BENZENE�TO�CRUDE RATIO

1.5

2.0

2.5

3.0

Jul-17Jan-17Jul-16Jan-16Jul-15

Source: Platts

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H1 spot pricing meets expectationsUS spot methanol prices averaged 102.95 cents/gal FOB USG through the first six months of 2017, an 89% increase from the average price of 54.41 cents/gal FOB USG during the year-ago period, per S&P Global Platts data.

The spot average was in line with expectations by market participants in late 2016 that called for pricing to remain around 100 cents/gal during H1. US exports are poised to rise with the additional capacity, with one source noting that more product will likely move to Europe and Asia once the new plant is running.

US exports of methanol reached 430,587 mt during the first four months of 2017, according to the most recent US International Trade Commission data. US exports continue on a record pace in 2017, possibly surpassing the 1.1 million mt mark in 2016, per ITC data. However, exports through April were 12.6% lower than in the same period in 2016, per ITC data.

Trade flows will be an important factor, with sources indicating there will be adjustments of shipments due to increased volumes. Cargoes from Venezuela have been seen shipping to China, and at least one US buyer was heard sourcing from other regions including Asia Pacific and the Middle East. These deals represent the “new normal,” a source said.

“We will see things changing because of the change in trading behavior sourcing product from other regions,” a source said.

Trinidad production impactedOnce US production sees further gains, traditional trade flows from Trinidad and Venezuela will likely be altered, with both countries expected to look to Asia for product placement.

This change comes as Trinidad and Tobago’s Methanol Holdings Trinidad Limited has seen a decrease in methanol production due to curtailments of feedstock natural gas.

Natural gas production in Trinidad and Tobago during the first four months of 2017 reached 13,127 MMcf/d, down 987 MMcf/d — or 7 % — over the same period from 2016. Methanol production, meanwhile, reached 1,527,628 mt over the first four months of 2017, dipping 182,082 mt — or 10.8% — compared with the year-ago period. Production reached 4,655,029 mt in 2016, based on data from Trinidad and Tobago’s Ministry of Energy and Energy Industries.

Crude prices also are expected to continue to have a strong impact on methanol pricing — particularly when prices trend lower — even though the US is considered a supply-driven market, sources said.

“Price offers get influenced by energy markets,” a source said. “When the oil price comes down, the price of methanol offers come down. But that does not reflect the fundamentals.”

Methanol-to-olefins economics in Asia are expected to remain positive through the second half of the year, with a modest rise in Asian methanol prices expected late in Q3, industry sources said.

A price increase likely would be a result of turnarounds in Southeast Asia that would coincide with an increase in demand from the startup of new MTO plants.

—Daria Campbell, [email protected] —Edited by Jason Lindquist, jason.lindquist@spglobal.

com

US PE BUYERS EXPECT NEW RESIN TO COME WITH LOWER PRICES

As a spate of new ethane-fed steam crackers and associated polyethylene expansions were announced in North America earlier in the decade, the phrase “game changer” was routinely tossed around throughout the petrochemical industry.

By the end of 2017, the first phase of game-changing assets are slated to be up and running. And the big question for buyers — particularly in the domestic US market — is how quickly this altered landscape will result in new, lower pricing levels.

Beginning in the third quarter, new PE capacity from Dow Chemical, Chevron Phillips Chemical, ExxonMobil Chemical and Ineos/Sasol is expected to start up, bringing the next wave of pellets — and an additional 3.8 million mt/year of capacity — to the US, and the world.

These startups come on the heels of Nova Chemical’s 431,000 mt/year Joffre polyethylene expansion project in Alberta earlier this year. In 2018, Formosa Plastics USA and Sasol are slated to come online with additional capacity in the US Gulf Coast.

While the export market has long been the target of new capacity, an abundance of new supply is expected to eventually be felt in the US domestic market.

NEW PE PRODUCTION FOR 2017Company Location Product Capacity Start up (‘000 mt/yr)Nova Joffre, Canada LLD 431 Q4-16CP Chem Sweeny, US HD, LLD 500, 500 Q3-17Dow Chemical Freeport, US LD, LLD 400, 650 Q3-17ExxonMobil Mont Belvieu, US LLD, HD 650, 650 Q3-17Ineos/Sasol LaPorte, US HD 460 Q4-17Source: Platts, company announcements

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As the first half of the year came to a close, S&P Global Platts assessed domestic polyethylene contracts at 61-62 cents/lb ($1,345-$1,367/mt) delivered rail car basis for blowmolding; 61-62 cents/lb ($1,345-$1,367/mt) for injection grade; and 64-65 cents/lb ($1,411-$1,433/mt) for HMW film. Linear low-density butene contracts were assessed at 59-60 cents/lb ($1,301-$1,323/mt), while low-density contracts were assessed at 71-72 cents/lb ($1,565-$1,587/mt).

Bracing for impactSome market participants have suggested domestic pricing could begin to feel the impact of the new resin as soon as late Q3, while others have suggested delays for some of the new units — as well as the lag between new PE and corresponding crackers coming online — could mean buyers won’t see a significant impact until Q4, or even early 2018.

“I really think they are going to hold on to these prices at least until everything is going,” a US distributor source said.

Talk of a proposed August price increase by producers has begun to surface.

Even without new capacity, domestic contract prices have moved lower during Q4 in five of the past six years, with 2013 standing as the lone exception, according to Platts data.

Domestic contracts were assessed 5 cents/lb lower in January than June, due in part to downward pressure amid weak demand in Q4 2016 — as well as talk of non-market adjustments for some buyers, fueled in part by pushes to adjust base pricing levels ahead of new capacity in 2017.

Contract prices increased a total of 8 cents/lb through April before producers gave back 3 cents/lb in May. Stronger domestic sales reflected in the most recent American Chemistry Council data for May and smaller-than-anticipated builds in inventories were keys that led to June domestic prices rolling over.

Producers have managed to maintain comfortable inventory levels — even with three consecutive monthly stock builds in March, April and May — sources have said. This has been a key factor in maintaining domestic pricing and avoiding a stronger reliance on moving lower-priced resin into the export market, where weaker pricing in Asia has made exports to the key region tough, sources said.

Exports set to growThe influx of new polyethylene could make both of those difficult to maintain.

Even without the additional pellets, total exports from the US and Canada have increased the past two years, rising almost 33% year on year in 2015 and by 5.3% in 2016, ACC data showed.

By comparison, domestic sales in the US and Canada have been mostly stable over the past three years, increasing 1.5% in 2014 and 0.15% in 2015 and regressing by 0.5% in 2016.

While increased exports always have been part of the master plan for the new US PE capacity, exporting an even larger piece of the pie at a significant discount to domestic prices will only intensify pressure from US buyers.

As the second half of 2016 showed, a drop in domestic buying and subsequent inventory build can translate to lower prices. Domestic sales in each of the final three months of 2016 were below the monthly average, industry data showed.

“I think July and August are a real transition period,” a buyer source said. “In August, if Exxon and the others crank up, that’s a real game changer. If we’re going to get new pounds after August, people will wait to buy.”

—Chris Ferrell, [email protected] —Edited by Annie Siebert, [email protected]

US POLYPROPYLENE MARKET EYES PUSH FOR MARGIN EXPANSION

North American polypropylene markets stand to see a renewed push by producers for margin expansions during the second half of 2017 as expectations of lower costs on the feedstock side collide with tight supply on the resin side.

Producers LyondellBasell and Pinnacle Polymers said they intend to increase domestic pricing by 3 cents/lb ($66/mt) in August, in addition to any change in feedstock polymer-grade propylene contract pricing for the month.

US PE DOMESTIC CP VERSUS EXPORT PRICING

500

1,000

1,500

2,000

Jul-17Jul-16Jul-15Jul-14Jul-13

Source: Platts

($/mt) (¢/lb)

40

60

80

100

HDPE BM FAS Houston(left)

LDPE FAS Houston (left)

LDPE CP (right)

HDPE BM CP(right)

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Braskem America, North America’s largest producer by capacity, announced plans to increase August pricing by 5 cents/lb, in addition to any change in PGP pricing.

The announcements, made at the end of June and the start of July, are not likely to be the last attempt by producers to increase premiums over the course of H2 2017, sources said.

“I believe the margin expansion push will begin in August and last through the fourth quarter,” a source close to a major North American producer said. “Spot pricing has increased and the market has tightened, and I think producers will expand margins, although not sure if by 3 cents/lb.”

With a significant portion of domestic polypropylene pricing tied to PGP contract pricing through monomer-plus agreements, any weakness in feedstocks could drag resin prices down regardless of market dynamics.

So far this year, market participants have talked the premium of PP over PGP at 14-18 cents/lb for contracted volumes. S&P Global Platts assessed PP pricing each week in June at 54.50 cents/lb ($1,201.50/mt) delivered basis for homopolymer grades, unchanged since mid-May and down nearly 20% since it hit a 27-month high of 68 cents/lb ($1,499/mt) in March.

Upward trend to open Q3Domestic PP pricing was already expected to see a small feedstock-driven increase in July, as PGP contract price expectations centered on a flat-to-plus 1 cent/lb settlement to June given stronger spot pricing, sources said.

The North American PP market has seen its share of margin expansions over the past four years.

Domestic pricing, which averaged a 12-cent/lb premium over monomer in 2014, according to Platts data, saw aggressive margin expansions in H2 2015 and into 2016.

The premium over monomer rose to as much as 30 cents/lb over PGP by February 2016 before producers walked much of those gains back, although not before opening the floodgates to imports.

With PGP contracts settled at 38.50 cents/lb for this June, domestic PP commanded a 16-cent/lb premium over monomer, as assessed by Platts.

The upward trend on the feedstock side could be short-lived, however, as the outlook for PGP is bearish for H2 2017 because the startup of Enterprise Product Partners’ 750,000 mt/year propane dehydrogenation unit in Mont Belvieu, Texas, is expected sometime during the third quarter.

The capacity addition comes as US propylene markets have switched from tight to long over the past couple of years amid strong refinery output and more on-purpose production.

Supply tightens on outagesMeanwhile on the PP side, strong demand during the second quarter and unplanned outages in June in the US Gulf Coast region made for a tight market to close H1, sources said.

Ineos Olefins & Polymers USA issued a force majeure June 28 on the supply of impact copolymer PP products because of a production issue.

Formosa Plastics Corporation USA on June 27 declared force majeure on all grades of polyethylene and PP produced at its Point Comfort, Texas, plant following an unplanned outage June 24.

Exports of US-origin material were also stronger, with Mexico, a major import market, boasting healthy demand to open the second half of the year.

“[Mexico] demand has been strong, with May and June two very good months,” a source close to Mexican polypropylene producer Indelpro said. “Demand in July might not be as strong, but it will be good, nonetheless.”

Strong North American demand was reflected in export pricing, which in the first half of 2017 averaged $1,187.14/mt, or just under 54 cents/lb, on an FAS Houston basis, down 3.3% from the same period in 2016 but well above key import regions.

FAS Houston pricing factors in additional bagging and transportation-to-port costs of around $66/mt, or 3 cents/lb, to spot prices for bulk material destined for export.

Players in the export market said options beyond Mexico were limited, given the relative strength in US pricing and limited availability.

US PP TRACKS PROPYLENE

600

800

1,000

1,200

1,400

1,600

Jul-17May-17Mar-17Jan-17Nov-16Sep-16

Source: Platts

($/mt)

PP domestic dlvd

PGP CP

PP FAS Houston

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Asia import prices averaged $1,004.23/mt CFR Far East Asia for the period, according to Platts data, while pricing along the West Coast of South America averaged $1,168.85/mt CFR.

“US export pricing is too high,” a US-based trader source said, echoing the sentiments of other players. “At these levels, you can’t even send [product] to Central America.”

—Bernardo Fallas, [email protected] —Nida Qureshi, [email protected]

—Edited by Lisa Miller, [email protected]

POLITICAL, ECONOMIC WOES LOOM LARGE FOR LATIN AMERICAN POLYMER MARKETS

After opening 2017 with renewed optimism amid signs of economic recovery and an improved political landscape, Latin American polymer market participants now find themselves stuck with some of the same issues they had hoped to shed as they enter the second half of the year.

Lackluster demand in key markets has persisted, and renewed political and currency concerns in Brazil are leading to a pessimistic outlook for the region, sources said.

“Nobody is investing; foreign companies are holding back, and there are no lines of credit for local businesses,” a Brazil-based trader said. “The public is buying less, and with every new scandal things just get worse; negativity spreads.”

South America’s overall financial health is influenced by Brazil’s economy. With the impeachment of President Dilma Rousseff coinciding with 2016’s economic rock bottom, Brazil finished that year on a high note thanks to improving consumer confidence, a strengthening real and new president Michel Temer’s aggressive austerity package.

But halfway through 2017, Temer is embroiled in a bribery scandal and fending off calls for resignation, while the real has given back all of this year’s gains as consumer confidence has plummeted and the financial sector has seen lending tighten. The real has gone from 3.0604 per US dollar on February 15 to 3.3092 on June 28 — a weakening of 8.1%.

Even steep decreases in polyethylene prices from the US — Brazilian importers’ preferred supplier in recent months — have failed to spark demand in South America’s largest resin market, with importers buying minimal quantities and opting for regionally produced resins, sources have said.

And although prices in the US are primed for further reductions stemming from capacity expansions set to come online in the third and fourth quarters, some Brazilian market sources think it will just be more of the same to close out the year.

“Hopefully the rest of this year is better, but nobody believes that here or in other regions [around the world],” the Brazil-based trader said.

Import prices trending downImport polyethylene pricing along both coasts of South America fell 13.8-17.6% from March to June. Import polypropylene pricing shed 7-12% in the period, while import PVC assessments fell as much as 11-12% before rebounding in late June, according to S&P Global Platts data.

The trends were far removed from the bullish nature of the markets at the start of the year, when seasonal turnarounds in the US, a key supplier of resin to South America, lent support to higher prices in the region.

Low-density PE assessments, for example, rose 10% from late December to a 20-month high of $1,410/mt CFR Brazil on March 1 and 8. But since then the assessment has fallen 15% to close H1 at $1,200/mt CFR basis, for an average price of $1,325/mt for the full first half, according to Platts data.

The LDPE market saw a bump in regional supply as Dow Chemical’s Argentina operations restarted production at Bahia Blanca and Colombia’s Ecopetrol parlayed last year’s record production into ambitious goals for 2017.

Argentina’s only source of domestic LDPE production, Dow restarted its 90,000 mt/year line following a nearly 14-month shutdown and was producing on-spec by early March, a source close to the company said.

Ecopetrol, Colombia’s state-controlled energy company and the sole producer of LDPE in that country, expects to produce between 65,000-70,000 mt in 2017 after

LATIN PE MARKETS TRACKING US

1,100

1,200

1,300

1,400

1,500

Jun-17May-17Apr-17Mar-17Feb-17Jan-17

Source: Platts

($/mt)

LDPE CFR WCSA

LDPE FAS Houston

LDPE CFR Brazil

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producing more than 61,000 mt in 2016, a company source said. Ecopetrol credits improved feedstock and ethylene production for the uptick in PE output.

Colombian buyers are the target for Ecopetrol’s increased output, a company source said earlier this year, adding that 2016 saw just 7,800 mt of its LDPE sold in foreign markets.

Regional pricing affectedIn Brazil, local producer Braskem reduced prices in the domestic market accordingly, resulting in a similar movement for the delivered Sao Paulo assessment, Platts’ recently launched domestic marker.

Domestic pricing for LDPE peaked at Real 6,200/mt ($1,893.65/mt) in early March, but has since shed Real 600/mt (9.7%), bringing the 2017 average to Real 5,905/mt, according to Platts data.

Pacific Coast markets have seen similar trends, with LDPE import pricing peaking at $1,415/mt CFR West Coast South America in early March. The import assessment marker fell 13.8% to close June, assessed at $1,220/mt CFR basis.

On the PP side, homopolymer assessments along the Pacific coast averaged $1,168.85/mt CFR West Coast South America in the first half of the year, up $94.22/mt compared with the same period in 2016. Brazilian pricing averaged $1,189.62/mt CFR basis, $92.03/mt higher versus H1 2016 as antidumping measures limited the impact of cheaper US-origin product.

South America’s PVC markets saw higher pricing in H1 2017 on average. Import pricing in Brazil averaged $930.96/mt CFR through the middle of June, an increase of $146.54/mt from the same period in 2016. Pricing along the Pacific Coast averaged $920.77/mt, up $170.58/mt versus H1 2016.

Elsewhere in South America, economic and political instability also have rocked Venezuela as inflation surges and keeps international markets at bay. The IMF has said it does not see the situation improving, and projects Venezuela’s real GDP will fall by 7.4% in 2017. This compares with the IMF’s overall outlook for Latin America and the Caribbean, which calls for growth of 1.1% in 2017.

It is worth mentioning that weak demand contributed to weak pricing in the region in 2016. Import assessments in 2016 for PE, PP and PVC in Brazil and South America’s Pacific Coast posted their lowest yearly averages since Platts began tracking these markets in 2010-2011.

This year, flooding in April and May wreaked havoc on logistics and in turn dampened already weak demand in parts of Peru and Colombia, sources said. Add to that issues with credit and repayment in Peru, and some international traders spent much of the first half on the sidelines, sources said.

—Phillipe Craig, [email protected] —Edited by Lisa Miller, [email protected]

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