INSIGHT: PE prices tracking market changes

23 December 2005 15:08  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The roller-coaster ride of polyethylene (PE) prices in Europe in 2005 illustrates at least one thing – that business is not going to get any easier over the coming years.

The pressure is on as never before to commoditise the business and drive prices down. The wide disparity with polymer values in Asia, particularly out of China, illustrates the point. The chart below gives some spot price details for linear low density polyethylene (lldPE). 

At times in 2005 the differential between prices paid for material in China and in Europe was significant. The impact was felt throughout the chain. Downstream in the plastic bag market retailers in Europe have battled to keep prices low (of bags made in China) and avoid any anti-dumping action by the European Commission (EC) on Chinese imports.

China as a source of cheap finished goods is having a great impact on European value chains. Polymer producers in Europe are being forced to sit up and take notice and costs will have to come down if they are to compete effectively against the up and coming economic powerhouse.

The flight to products of higher added value and of closer relationships with important customers sought by so many will hardly be enough. News from Basell on Friday that it will register its brands on the London Metal Exchange (LME) on the prospect of shorter dated contracts further illustrates that times are changing fast.

Key developments this year have been the launch of the LME futures contracts for linear low density polyethylene (lldPE) contract alongside contracts for polypropylene (PP). Structural change in the physical market – the sale of polyolefins giant Basell to private equity group Access and of BP’s Innovene to Ineos – also goes to show that the future focus will be on costs and efficiencies. The new owners of both businesses recognise that they operate in an increasingly tough competitive environment.

The LME contracts give producers, converters and downstream purchasers of polymer products the chance to hedge some of their risks against physical price movements. Uptake of the contracts has been understandably slow but they are gaining traction. Prices on the exchange are reflecting movements in the European and US polymer markets, with some influence from Asia. LME contract prices, however, have not tracked down to prices out of Asia, reflecting more than anything else the almost complete lack of involvement of Asian players on the exchange.

Will that change? It is difficult to say. But the bigger financial institutions are beginning to take an interest in polymers futures trading. Greater liquidity in the LME plastics contracts and possibly shorter-termed contracts will make these financial instruments more attractive. And they are indicative of the trend towards greater transparency in polymer markets.

The fact that retailers can buy plastic bags cheaper from China than in Europe says a great deal. At some stage these global disparities will be ironed out.

It would be wise to expect that change sooner rather than later. The downward pressure on prices over time continues and is increasing. Someone, somewhere in the chain will be hurt if they are not armoured against the trend.

LLDPE prices spot China and Europe 2005

By: Nigel Davis
+44 20 8652 3214

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