In late August, Hurricane Harvey’s flooding rains shut down more than 50% of the US production and nearly one quarter of global production of linear alpha olefins (LAOs), a group of chemicals essential to the production of most polyethylene (PE), according to analysis from IHS Markit.
Polyethylene is the world’s most-used plastic. PE is essential for the production of numerous materials ranging from film for packaging and grocery bags, to detergent bottles and pipe for construction. As a result, numerous major chemical producers that rely on the Houston-area LAO co-monomer (butene, hexene and octene) production are scrambling to secure supply, and impacts will be felt down the supply chain, IHS Markit says.
“During the recent hurricane that hit Texas, one of the world’s largest facilities for LAO production was flooded and its production of linear alpha olefins was shut down completely,” says Mark Wegenka, director of chemical consulting for IHS Markit. “As a result, half of U.S LAO co-monomer production and a sixth of total global LAO production is offline and will be for weeks to come, which is creating a serious supply chain challenge for numerous other major chemical producers that are dependent upon this source for LAOs.
“Current US LAO production exceeds 90% capacity and capacity utilization outside the U.S. is much the same, which means there is very little spare capacity in the market, so the impacts are going to be significant.”
Rather than playing a lead role on the chemical stage, linear alpha olefins have long been accustomed to serving as best supporting actor, Wegenka said, but now these critical components to the polyethylene production process are getting much more attention.
“For many PE producers, this issue is now taking center stage in terms of priority. Securing adequate supply to meet rapidly expanding polyethylene production was already an issue for chemical producers, and now the situation is even more challenging,” Wegenka says. “LAO production was already lagging in some segments.”
To address this specialszed chemical market, Wegenka, as well as Mark Morgan, PhD, and Andrea Borruso, both directors of chemical consulting at IHS Markit, wrote the IHS Markit Light Linear Alpha Olefins Market Study. The report provides supply/demand balances for the LAO products and applications for the 2015 through 2025 period, with a geographic breakdown by region.
According to the report, the global market for linear alpha olefins exceeded 5-million metric tons (MMT) at the end of 2016. The lower-range products (C4-C6-C8 carbon bonds) that form the basis for this project, account for around 70% of the total LAO demand today, IHS Markit says.
“Growth in the linear alpha olefins market overall suggests the potential for three to four large-scale, full-range LAO investments during the medium term, not including the current INEOS and Shell projects in North America,” Borruso says. “Margins and pricing supports reinvestment, and demand growth overall is ahead of average GDP. However, on-purpose LAO technology will be vital in meeting the polyethylene co-monomer supply gap that will continue to grow, given the divergence in growth rate between polyethylene co-monomers, poly alpha olefins, and more specialty polymer applications.”
Further on-purpose technology may decouple the supply of lower alpha olefins from the higher C10+ supply, reducing the traditional volatility and swings of the market due to the start of broad-range units, Borruso says.
“However, the short-term impact of the hurricane, together with the delay in the startup of some broad-range units in the U.S., has and will create a ripple effect on the C8, as well as C6 supply of linear alpha olefins,” Borruso says. “Given the inertia of response within the global supply system, this may create a short-term economic effect on allocation and prices relative to C4 cuts.”
As 2017 comes to a close, current global demand for PE is just under 95-million metric tons (MMT), but according to the IHS Markit report entitled IHS Chemical: 2018 Polyethylene World Analysis, PE demand growth will increase 22 MMT by 2022, to 118 MMT. That translates to an average annual growth rate of 4,3% or 1.4 times GDP during 2017 to 2022, according to IHS Markit.
“The global polyethylene market is experiencing very strong growth and that’s for good reason, since, in terms of global plastic demand, there is nothing bigger than PE when it comes to packaging materials,” says Joel Morales, senior director, polyolefins Americas at IHS Markit, and one of the authors of the PE report. “PE is a very versatile, durable material – it is the workhorse of the plastics industry, and the world’s largest-volume plastic.”
PE is the material of choice, Morales said, for both food and consumer packaging around the world, and as more and more people see incomes rising globally, they become consumers of more goods that are made of plastic or wrapped in plastic film. Film and sheet applications, which is key to the packaging sector, is the most important plastics use segment globally, according to the IHS Markit report, representing more than 60% of plastics demand.
“A shortage in LAOs to produce PE is likely to lead to price increases for the short-term, which will impact not only the PE producers, but also others down the supply chain, including manufacturers of the plastics packaging, films and bottles, for example,” Morales says. “These plastics enable foods, detergents, and other goods to be delivered safely and conveniently to consumers. Ultimately, the consumer may see a slight increase in prices for some goods, due to this LAO shortage, but often, it is the PE manufacturers that are going to absorb much of this increased cost.”
Other market impacts are likely to be felt in the construction, automotive and electronics industries, in particular, IHS Markit said, since they depend heavily upon PE for plastics components for their products.
The North America ethylene-cost advantage will remain a key driver in interregional LAO price differentials, with prices linked to ethylene, IHS Markit said. Inter-regional trade flows are likely to remain a key factor in determining inter-regional pricing and arbitrage opportunities, and as a result, North America and the Middle East will remain major exporters of lower-range LAOs.
“Iran and China remain two of the potential game changers in the LAO chemical sector,” Borruso says. “The slow reemergence of Iran as a contributor to the global chemical market implies that the nation could revisit its original LAO and downstream projects as part of reinvigorating the masterplan for its petrochemicals industry. The rising demand for LAOs across many carbon numbers, including the mid-range, could, in time, lead to local Iranian investment.”
A full-range LAO project possibly could be built in the Asia-Pacific region, provided a competitive source of ethylene can be secured as well as a commercially reliable technology identified, according to IHS Markit.