Electric vehicle projects increase; US-China dispute will disrupt plastics trade; Covestro adds TX site in investment plans

Our pick of the petrochemical news you need to know

Will Tesla continue to dominate EV market?

Tesla is arguably the most recognized company in the electric vehicle (EV) market segment. With investments by the traditional automakers growing and new start-up manufacturers continuing to enter the picture, can Tesla continue to lead the market and achieve profitability?

There are nine projects in the U.S. automotive sector, valued at more than $5.9 billion, involving the construction of new plants for electric vehicle (EV) production or the updating of existing plants to add capacity for EV production, according to Industrial Information Resources (Industrial Info).

Image and Data: Industrial Info

US-China dispute will disrupt polyolefins trade—Wood MacKenzie

U.S. polyolefins exports to China are expected to dip by 50% in 2019, following the escalation of trade tariff disputes between the world’s two largest economies, according to Wood Mackenzie Chemicals.

Instead, China will continue to import from the Middle East, South Korea, Thailand and Singapore for its supply. The new polyethylene investment volume will find markets in Europe, Latin America, Africa and Asian countries.

According to Wood Mackenzie Chemicals’ latest research, ‘The US-China trade dispute and its effect on the polyolefins industry’, tariffs will push export prices down in the U.S. and reduce margins for U.S. exporters shipping to China. Although better margins can be found in Latin America, Europe and African countries, the demand is low and fragmented.

“With the festive holiday shopping season about to begin, decreased supply for plastic finished goods in the U.S. will hit consumers in the pockets,” Wood Mackenzie Chemicals Principal Analyst Ashish Chitalia said in a statement. “Despite this, the recently strengthened dollar will alleviate some of the pricing pressure.”

“However, on a longer-term, the well-developed downstream plastics manufacturing industry can benefit. Tariffs on imported polyolefins finished goods from China, along with ample domestic resin production and lower-priced polymer, will support domestic producers. It will boost manufacturing, retail industries and create more jobs in the plastics manufacturing sector, encouraging more plastics to be ‘Made in America’."

The research also revealed that polyolefins resin and finished goods trade will be optimized at the next best price-point. The best netbacks, especially in the case of finished goods, will be offered by the higher price alternatives.

In the case of polyethylene resin, U.S. producers will be compelled to expedite the search for better netbacks. The tariff implications on polypropylene resin will be muted as the U.S. does not export much polypropylene resin to China.

“China is the fastest growing market for U.S. polyolefin resin exports. Domestic market growth in China is strong, and the level of investment in new capacity is insufficient to meet demand,” Chitalia continued. “The 25% tariff on HDPE and LLDPE will have the largest effect as the need for more imports will grow strongly for these resins.”

“Depending on the types and grades, China will source resin from the Middle East and Asia. As the majority of U.S. capacities are metallocene LLDPE and bi-modal HDPE, the sourcing of these products could be a challenge, and will depend on how US producers optimize their global assets/supply chains.

“We previously expected the U.S. to be the incremental supplier for China’s increasing import demand, but the introduction of tariffs will expedite US producers’ search for ‘better netback’ markets within North America, Latin America, Europe and Africa.

“Globally, numerous last-moment ship re-routing and swap agreements will impact logistical and financial arrangements, therefore squeezing the margins for global traders and suppliers. Additionally, several regions will start seeing unexpected volumes from the U.S. (resin) and China (finished goods), imparting downward pricing pressure for resin and plastic finished goods.”

The American Chemistry Council previously said that China's tariffs on nearly $11 billion in U.S. chemicals and plastics exports could jeopardize thousands of jobs. It estimated that chemicals industry has invested more than $200 billion in 333 new projects across the U.S.

Covestro to invest in Texas MDI plant

Covestro approved an investment of around EUR 1.5 billion to build a new world-scale Methylene diphenyl diisocyanate (MDI) plant at its existing site in Baytown, Texas. This investment is the largest single investment in the history of the company.

Total capacity of the new train will be 500 kilotons of MDI per year.

The start of production is expected in 2024. At the same time an older, less efficient MDI unit of 90 kilotons production capacity will be closed.

Total MDI capacities of Covestro in the NAFTA region will reach around 740 kilotons per year making Covestro the industry capacity leader in the region by 2024.

“Demand for innovative MDI materials will continue to grow for the foreseeable future and likewise promises attractive capacity utilization rates. We have already announced a significant increase in capital expenditures, now it’s time to put it into action,” said CEO Dr. Markus Steilemann in a statement. “With the new MDI train in Baytown, we will further strengthen our global leading position in Polyurethanes, even better serve our customers and create long-term shareholder value.”

The global MDI market is expected to grow by about 5% per year in the long-term, outgrowing the world’s global domestic product (GDP) by about 2 percentage points. Key MDI market drivers include the substitution of less performing and less sustainable materials as well as global megatrends such as an increasing demand for energy efficient insulation solutions.

Although Covestro is already doubling its MDI production capacity in Brunsbuettel (Germany) from 200 to 400 kilotons per year in the second half of 2019, the strong growth in demand creates further significant market opportunities, the company said.

Therefore, the investments – which are part of the already announced investment increase of up to EUR 1.2 billion per year for the next three years – will help Covestro to maintain and strengthen its leading position and support further profitable growth. Moreover, Covestro aims at further capitalizing on its technical and innovation capabilities as well as on its leading cost position.

Cost-effective CAPEX (capital expenditures) approach with superior return on investment

CFO Dr. Thomas Toepfer explained: “Even with all capacity increase announcements considered, the projected industry supply is not sufficient to fully balance the expected demand growth. We are therefore confident that we will reach high utilization rates of our new capacities soon after the start-up, making the investment highly efficient. Building on existing infrastructure and processes, it will be a prime example of our value creating investment approach.”

With its global MDI investment program Covestro follows a cost-effective CAPEX approach by leveraging existing infrastructure and supply networks to achieve lower specific investments and higher ROCE (Return on Capital Employed). The program also includes the continuation and expansion of Covestro’s Tarragona (Spain) and Caojing (China) sites as well as investments into the company’s production site in Antwerp (Belgium).

Baytown with ideal conditions

The decision to build the new world-scale plant in Baytown was taken following a thorough analysis of different options. Besides the attractiveness of the domestic market, main advantages of Baytown are leading cash costs as well as significant benefits in terms of available infrastructure and logistics.

The superior cost position is mainly driven by economies of scale and a high degree of vertical integration. Furthermore, low energy and shipping costs due to high domestic demand in North America add to the Baytown case. With the new plant, Covestro’s future MDI capacities in North America of 740 kilotons per year by 2024 will also catch up to the company’s future capacities in EMEA (820 kilotons per year by 2022) and APAC (670 kilotons per year by 2021).