Supply drivers key for latex makers

Fairlawn, Ohio — Bill Hyde had to give some "tough love" to attendees at the recent International Latex Conference in Fairlawn.

While the latex industry has a specialized and complex value chain focusing on ethylene, butadiene, styrene and propylene, the executive director of olefins and elastomers at IHS Markit said the latex sector isn't critical to its main suppliers.

For example, the biggest consuming market for butadiene accounts for 25% of supply, with the number at 35% for styrene, while latex makes up a much smaller percentage. "So you are trend takers," he told the conference.

"You're not going to drive your feedstock markets. It is important for you to know what is driving their markets if you're going to position yourself to be economically successful."

Price volatility has been one thing those in the latex industry have had to deal with in the past several years, with butadiene showing the biggest swings in 2017, with price swings of 50% up and down in a short period of time. "It's difficult to adjust to those sorts of things, and frankly, some of those things are a little difficult to see coming," Hyde said.

For the near term, he said the fundamentals for the latex market will focus on energy and the economy. "I'd say we're cautiously optimistic," Hyde said, "but we're less optimistic and more cautious than we have been."

Global GDP growth has been slowing, mostly driven by some negative impact from industrial production, according to the IHS Markit analyst. Some of the large industrial producers around the world actually are seeing a recession in their portion of the economy.

He said that's the case in China, where some of the nation's industrial sector actually is contracting. One of the biggest drivers for that is the increased trade tension, especially between the US and China, but not exclusively.

"In our view that has reduced the GDP growth by somewhere between 0.2% and 0.3%," Hyde said. "So it's not insignificant. It's something that is manageable at this point, but the tension is ratcheting up. If it continues, this will certainly increase the damage to global GDP growth."

Risk of recession

IHS Markit indicators show that the economic risk of a recession is increasing. He said the group isn't to where it is predicting a recession this year or even in 2020, but by 2021 or 2022 the firm forecasts the likelihood of a recession at more than 50 percent.

"Now that's not necessarily the end of the world," Hyde said. "We're not forecasting the Great Recession to return. And recessions are a normal part of the economic cycle. In fact, we've been a little spoiled. The current period of economic expansion globally just became the longest one in the history since they started keeping data."

In addition, global crude oil demand growth has been slower than expected. He said a lot of that has to do with the uncertainty of trade policy, along with a market dynamic that is causing friction between what he calls "OPEC Plus"—which includes Russian oil interests—and the unconventional oil that is becoming common in the US.

The Opec Plus group is trying to target a per-barrel price of oil in the mid-$70's range, while the new breed of oil producers in the U.S. can make money when the price in the mid-$50's a barrel.

"A price that's acceptable to the OPEC Plus group delivers a strong incentive to U.S. unconventional producers to increase product rates," Hyde said. "This is the friction that is going to set the market as we move through the next several years."

He added that automotive markets also are slowing, with some major regions actually shrinking, including China's auto numbers down 6% so far this year from 2018.

Ethylene sets pace

When it comes to the petrochemicals market, ethylene clearly dominates the supply chain. The sector has a number of multibillion dollar investments going on, and while there is varied feedstock, Hyde said it really all comes back to oil and gas. World-scale ethylene plants being built today typically can produce 1.5 million metric tons a year.

"A number of industries such as propylene and butadiene are heavily influenced by trends on the ethylene side, but don't really influence what's going on in the ethylene crackers," he said.

About 80% of the new ethylene capacity coming on stream over the next five years will come from either the U.S. or China. With all the shale gas-based investment, there is 16 million tons a year starting up in the US from 2017-22, which he said is significant because prior to this rush of activity, the last new domestic ethylene cracker opened in 2000.

The start-up process for the new US facilities has been a bit shaky, Hyde said, with some not starting up as quickly as expected. "The ethylene market has been demand limited," he said. "Actual ethylene capacity has started up ahead of the ability to actually do something with it, whether that means shipping it or converting it to derivatives and shipping that. This will continue through the rest of this year."

Ethylene prices started going down some about March 2018, and this trend is expected to carry on through 2019 and possibly into the first quarter of 2020. But the analyst said the US price eventually will come up some as the ethylene market outside the U.S. has been a bit tight.

In China, there are 16 ethylene crackers projected to start operating in 2022 based on naptha, LPG and imported ethane. Those projects are expected to have capacity to produce 14 million tons a year of ethylene, and there are another 11 projects under consideration that could mean another 13 million tons a year. "Not all of those will be built, but a lot of them will be," he said.

Friction in the ethylene industry will be caused by how much material the various producers will be able to sell and where, or whether there is just too much capacity being brought online.

"The driver, in our view, is if gasoline demand peaks somewhere around 2025 to 2030," Hyde said.

If that happens and demand for oil-producing countries' product starts to fall, he said those nations will look for other things to do. "You get into chemicals, and the scale at which they are going to get into chemicals is likely to overwhelm the markets by the late 2020s and early 2030s."

Looking at other materials, he said there are several technologies to get propylene, including on-purpose propylene. With a bit more capacity being added than growth in demand, he said there is some possibility for over-supply in the market.

"If you look at on-purpose as a percentage of the overall market, by 2028 it will account for up to about 30% of the propylene capacity. That's what will define the pricing," he said.

As for butadiene, Hyde projects users of the feedstock will see more stable pricing. The vast majority of butadiene comes as a co-product of ethylene, so the market is at the mercy of activity on the ethylene side.

"The view is that the contained butadiene in the C4 stream that comes out of ethylene crackers will grow at about 3.5% a year, which is must faster than butadiene demand," Hyde said. "And if you look at the larger butadiene consumers, really only ABS is growing faster than the feedstock supply.

"Right now things are working for you and it looks like the macro trends over time are going to continue to work for you."