European plastics producers gear up for greater dialogue

24 May 2004 17:36  [Source: ICIS news]

This is a year of change for the big polymer producers in Europe forced to react to their recent battering in the market place and the (expected) advent of futures trading in polypropylene (PP) and polyethylene (PE).

Companies are gearing up for the big K show in Germany in October but some have already re-positioned in attempts to cope better with possible faster commoditisation of basic polymer grades and even greater price pressure.

Producers have had some success this year in passing on higher raw material costs and are not surprisingly seeking further price increases in June. Times are looking better at long last but the threat of new capacity remains. The polyolefins business today is no place for the uncommitted or the faint hearted.

Large, asset intensive players with their own technology and many grades with discrete performance characteristics are bound to make for a complex and, in the current business climate, problem-bound sector. All sorts of solutions have been sought but the trend now is towards better market segmentation to keep prices afloat on the one hand and hedging to reduce financial risk on the other.

Plastics futures markets will give players the option of protecting margins in what have become increasingly volatile market places. Some polymer producers and downstream users in most segments want to see the futures idea work and appear to appreciate what is on offer. Others are very much against feeling they can do better by working more closely with customers and trying to convince them that it is worthwhile paying a price differential.

The arguments largely centre on volatility and the fear that active trading on marker grades might commoditise others and drive prices down generally. The sector, however, has become commoditised and driven by supply/demand balances. Given stronger demand growth and tightening supply worldwide currently, converters are holding little inventory and prices increases are on the cards. So producers have some time on their hands as demand and supply move into better balance

Yet, the bugbears are the high oil price and its impact on naphtha and, in North America, gas costs. Producers are caught between these fluctuating costs and much slower price movements further down the chain. Cyclical buying patterns driven very much by the price expectations of buyers amplify product swings and create difficult market conditions in which it is tough to talk convincingly of innovation and service improvement.

The implication is that producers need to talk to converters more (and vice versa) while further dialogue is needed down the value chain.

At least one major producer in Europe has suggested recently that players cannot afford a continued ‘price war’ and that efforts are needed to reduce cyclicality. We are already seeing companies working towards that goal by rationalising production, upgrading facilities and looking at new market mechanisms.

The underlying issues are a better understanding of the value chain and what drives it – from the perspective of the polyolefins converter and user as much as the polyolefins supplier – and more constructive talk. What form that communication takes, remains to be seen, but the messengers are already out. Particularly for converters, however, hard pressed as they are, the messages will have to be convincing.

By: Nigel Davis
+44 20 8652 3214

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