European Petrochemical Makers Realize Margin Reversals

11 May 1998 00:00  [Source: ICB Americas]

By Sean Milmo

Petrochemical companies in Europe have benefited from improved margins in the first quarter as the prices of feedstocks fell faster than those of polymers.

But there has been a reversal of fortune in the second quarter with the prices of some polymers, like polypropylene, plummeting while the decline in feedstocks costs has started to level out.

The Northwest European spot price for naphtha has jumped nearly 10 percent since the end of last month to around $145 per metric ton on May 6.

Rising naphtha costs are likely to boost European ethylene prices, which have decreased, partly in response to falling naphtha prices, during the last six months. The European ethylene contract price dropped 7 percent in the second quarter to DM 860 ($488) per ton.

Between January and April, polyethylene and PVC prices have gone down by around 5 to 10 percent, while polypropylene prices have dropped by more than 10 percent. But over the last month, the decline in PP, PVC and low-density PE has accelerated.

Some analysts believe that while feedstock prices may strengthen, polymer prices will continue to fall for several more months. This will be because of overcapacity in Europe and the rest of the world, as well as European prices being out of line with those of other major global markets.

"The supply-demand position can only lead to a decline in polymer prices through the rest of the year and probably into the next," says Michael Fell, polyolefins consultant at CMAI Europe, London. "There is nothing wrong with demand levels. It is the supply side which is the problem. There is oversupply everywhere.

"Also, Europe cannot expect to get away with higher prices than elsewhere in the world. Prices are coming down in the US, while they are low in the Far East. There has to be a correction in the European prices."

Both polymer producers and processors appear to agree that with most polymers, prices will go on falling for the next few weeks. But they could then start to creep up again.

"Decreases in PE and PP prices are likely to continue for the rest of the second quarter," says a DSM spokesman. "Margins have been shrinking because of lower prices. It is expected that there will be a reaction to this so that producers will try to put up prices from June. With polypropylene, there may even be a substantial rise."

Converters, however, reckon that weak seasonal demand in July and August will prevent producers from pushing up prices until after the summer.

"Prices may start to firm up in September when demand strengthens after the holiday period," says a commercial manager of one UK-based PE processor. "Producers may want to talk about price rises in June, but they will be in a weak bargaining position because there is so much material available at the moment in Europe from many sources.

"European prices should start to bottom out over the next month or two as they drop to the global level. There will be less product coming in from areas like the Middle East, but we still do not think there will be a rapid recovery in prices."

Borealis, Europe's largest polyolefins producer, reported last week that while sales rose by 4 percent in the first quarter to DKr 4.4 billion ($656 million), operating profit went up by 32 percent to DKr 585 million. The higher margins helped push up the return on capital employed from 17 percent a year ago to 21 percent.

DSM earlier announced a 25 percent rise to FL 1.7 billion ($855 million) in sales of polymers and performance materials during the first quarter, mainly because of the acquisition of Veba's Vestolen business in November. But its operating profit in the segment doubled to FL 184 million, due to a combination of higher sales volumes and lower raw material costs.

PP producers in Europe are suffering the biggest squeeze in margins. At the start of the month, producers were reportedly selling raffia grade polypropylene on the spot market for as low as DM 1 per kilogram--around 10 to 15 pfennig below the average price, which itself was about 10 percent lower than in April.

Integrated PP makers had been taking advantage of relatively high European propylene prices earlier in the year to produce both more propylene and polypropylene. Much of the extra PP increased inventories, which producers have tried to reduce during the last few weeks.

In addition, the threat of rising imports of finished PP products from Asia and new capacity coming on stream is pressuring prices. PP demand this year is predicted to be up around 5 to 6 percent, but this will be half the level of last year.

"Prices are probably near the bottom now in Europe," says Chuck Platz, senior vice-president at Montell. "There could be an effort to bring them back up again as early as June. Some customers are now asking for longer-term price deals of two to three months, which is always a clear indication people believe prices are going up."

Excess capacity has been dragging down prices in the PE sector, where prices for linear low density polyethylene were the first to be hit by surplus supplies, particularly following the economic turmoils in Asia.

"The crisis in Asia has had a knock-on effect in the PE market," says Malcolm Mitchell, a business planning executive at BP Chemicals. "Product from the Middle East and the US, which would normally be going to Asia, has instead been diverted to Western Europe because of the fall in Asian demand."

Over the last few months, however, low density PE has lost its usual price premium in Europe over LLDPE, selling at or even below LLDPE. In April, film-grade low density and butene-based LLDPE were both around DM 1.45 to DM 1.50 per kilo.

"Eastern European producers of low density have seen their Asian export markets dry up, particularly in China, so they have been selling material in Western Europe instead," says a European Union producer.

Until recently, European prices for high-density PE were relatively stable, with those for blow-molding grades remaining static between last autumn and this March.

Some HDPE producers using slurring technology have taken advantage of the new gas-phase PE capacity in Europe during the last few years. This has consisted of "swing" units able to produce both linear low and high density.

"The new HDPE swing plants, which make up most of new high density capacity, have not been able to produce the same broad molecular grades as the slurry units," says Andrea Borruso, polymer manager at the Milan-based consultancy Parpinelli Tecnon.

"A lot of these slurry products go into high growth niche sectors for blow molding products, such as tank, bottles and other containers."

Parpinelli Tecnon forecasts that HDPE consumption will rise by 3 to 4 percent in Europe this year, making HDPE the second fastest growing polymer after PP.

For PVC producers in Europe, the main threat over the last few months has come from imports. Signs of a possible surge of imports from the US in April cut general purpose PVC prices by around 5 percent.

"The price reduction was completely unnecessary because the shipload from the US was only a small one," says a sales manager for one Western European producer of PVC.

"It showed the nervousness among producers about the influence of imports on prices. Demand has been steady since the beginning of the year, so we believe we can push prices up again once fears of imports have receded."

Polymer converters concede that if prices drop too far, they could start to trigger cut-backs in capacity among producers.

"We have to accept that consolidation has changed the structure of the industry over the last two to three years," says a director of one converter company. "Producers have much more flexibility to shut down high-cost plants once prices get too low."

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