Normal seasonal strength missing in Q2, including in PE

Joseph Chang

08-Jun-2023

NEW YORK (ICIS)–Seasonal strength in Q2 versus Q1 is missing in action, including in polyethylene (PE), LyondellBasell's chief financial officer (CFO) said on Thursday.

"Durables broadly speaking are weak, and then we haven't seen the normal seasonality, even in the consumer space around PE," said Michael McMurray, CFO of LyondellBasell, during an update at the Deutsche Bank Global Industrials, Materials & Building Products Conference.

"China just hasn't bounced back at the speed and pace we anticipated, and so that creates a bit of uncertainty as we think about H2 as well," he added.

Overall, LyondellBasell expects Q2 earnings will be weaker than in Q1, running counter to seasonal trends.

DESTOCKING AND INVENTORIES

Destocking largely concluded in Q4, according to the executive.

"We don't have great visibility but we think that our customers and our customers’ customers are being very cautious because of all the macro uncertainty, and so we think their inventories are probably rather low," said McMurray.

Looking at PE and polypropylene (PP) in North America, inventories are "a smidge elevated" in the low-to-mid 40s in terms of days of supply – a figure that is "not problematic", he added.

For all PE grades, days of sales (DOS) in North America were 51.4 on 1 May versus an average of 43.8, or 17% above normal, pointed out Brian Pruett, senior vice president, PE at Chemical Data (CDI), part of ICIS.

DOS for linear low density PE (LLDPE) at 70.3 are 26% above normal and for low density PE (LDPE) at 48.9 are 27% above normal. High density PE (HDPE) was at 34.1, or just slightly above average. June data may show HDPE inventories rising and LLDPE falling, with overall DOS expected to rise, he added.

LyondellBasell's PE capacity is predominantly HDPE.

EXTREME WEAKNESS IN CHINA/ASIA

Meanwhile, "the inventory situation in Asia is out of control," said Pruett.

"The fact that China and India are buying Russian crude at $20/bbl below the rest of the world is keeping their naphtha/ethylene/PE resin prices very low, which is limiting US exports," he added.

In response to the combination of high inventories and lower costs in China and India, many other countries in Asia have cut back significantly on operating rates, Pruett noted.

In China, the LyondellBasell CFO pointed to record low PE margins persisting for a historically extended period.

"Spreads in PE have been at record lows for approaching 2 years. Historically when you got to those levels of spreads, it typically lasted 2, 3, 4 months at most," said McMurray.

While LyondellBasell's direct exposure to China is minor at about 5% of sales, China plays an outsized role for the entire petrochemicals and plastics industry as the largest consumer. It imports around 40% of its PE requirements, he added.

NEARING END OF US CAPACITY BUILDS

One positive for PE is that the new capacities in the US have largely been built, the CFO pointed out.

"The fact that the Shell facility in Pennsylvania has been having a bit of trouble has been helpful, in particular given that the demand environment hasn't materialised like we thought, and the industry thought," said McMurray.

"Once the Shell facility comes back online, there may be a bit of a period where we have to absorb it, but I’m confident we will ultimately work our way through it," he added.

On 26 May, ICIS reported that Shell was in the process of resuming operations at its ethylene and PE complex in Potter Township, Pennsylvania, after the complex went down for repairs in late March. Capacities at the site include 1.5m tonnes/year of ethylene, 550,000 tonnes/year of HDPE and 550,000 tonnes/year of LLDPE.

Focus article by Joseph Chang

Thumbnail shows polyethylene. Image by Shutterstock.

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