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BofA: Global Energy Weekly: Great Wall of Plastic Meets Covid-19
Key takeaways 
•        Covid has not been all bad news for plastics demand. Packaging which accounts for >1/3rd of plastics use has benefitted...
•        ...yet the plastics market faces a wave of new capacity, which should keep pressure on margins up and down the PE value chain
•        Declining NGL supply, cheap oil dented the US NGL feedstock advantage. An oil rally could help US NGLs regain their edge
United Arab Emirates, August 11, 2020:
Covid has been both boon and bane for plastics demand…
The pandemic's impact on plastic demand has been sector-dependent thus far. The rapid shift to online shopping boosted demand for plastic packaging, which represents >1/3rd of total plastic demand. Hygiene product demand is also on the rise. Conversely, the manufacturing and construction slowdown has softened demand for durable plastics used by those sectors. These trends appear to favor polyethylene (PE) based plastics like HDPE and LDPE, which are primarily used in packaging, and some consultants believe PE demand may actually hold flat YoY in 2020 as the economy shrinks at a record pace.
…yet overcapacity should weigh on PE, ethylene margins…
Last year, before the pandemic lead to a major recession, we highlighted the wave of ethylene capacity that was set to hit the petrochemicals market in 2020+, just as demand was starting to slow (see Testing plastic's durability in a downturn). Now, the recession makes the ethylene imbalance even worse. Capacity is likely to rise by more than 5% on average YoY during 2020-22 while demand stumbles along at just over 2%, according to our Chemicals equity research team. Further downstream, PE supply growth is also set to overwhelm demand, as China adds significant new capacity. 
…and squeeze Europe, Asia (ex-China), and US producers
China's petchem capacity growth during 2020-22 is likely to pressure imports, which means US and Middle Eastern PE exports may need to find new buyers. China's desire for self-sufficiency means that import displacement could occur even if PE import economics are superior. Major exporters likely won't go quietly and may chase market share elsewhere in Asia and European markets, which should pressure pricing and force regional suppliers to curb output. If it comes to down to Middle East and US PE suppliers, Middle Eastern suppliers would likely win out due to advantaged economics and also deeper integration than their North American competition.
US feedstock advantage dented by lost supply, cheap oil
This spring, production shut-ins and demand shifts caused US NGLs to trade at a premium to naphtha, an abnormal event in the shale era. This reshuffling pushed integrated US ethane petchem margins below Chinese naphtha margins for a brief period (see Reshuffling the NGL deck). Since then, shifting crude slates, recovering gasoline demand, and stronger demand from the petchem sector have pushed up the price of naphtha, making it look less attractive as a feedstock. Even so, US NGLs may not fully reclaim their competitive advantage until the oil market experiences a more meaningful rally, which will help lift naphtha further and encourage US E&Ps to grow NGL output again. Both of these developments would favor the US petchem sector.

Posted by : Dubai PR Network Editorial Team
Viewed 2190 times
PR Category : Banking & Investments
Posted on : Tuesday, August 11, 2020  1:57:00 PM UAE local time (GMT+4)
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