INSIGHT: Euro PE/PP tight but beware the volume trap

20 January 2006 13:15  [Source: ICIS news]

By Nigel Davis

Polyethylene not yet wrapped upLONDON (ICIS news)--European polymer prices look as though they will continue to move up on tightness of supply and low converter inventories but the sector is still very much in a ‘wait and see’ mode.

The London Metal Exchange (LME) plastics future contract prices give a feel for the situation in the physical market although correlation is not yet meaningful. Forward LME contract prices are, for instance, much higher than projected European physical prices.

Futures contract prices appear to be reacting to underlying physical market fundamentals. Yet prices have been swayed this past week particularly by movements in the oil price and concerns over natural gas supplies to Europe caused by the cold snap in Russia.

It is also difficult to reconcile regional differences in PE and PP prices with the numbers quoted on the exchange. There is industry concern, particularly, about the differential between linear low density polyethylene (lldPE) and polypropylene (PP) futures contract prices which has remained steady for days at $100/tonne.

On the face of it producers can be relatively content now with pressure for a rising market. Converter inventories are low and demand has been higher than expected putting pressure on producers to supply.

The situation is most acute in linear low density polyethylene (ldPE) where producers have announced hikes of Euro100-120/tonne for February. In early January prices rolled over from December but producers have managed to implement hikes of around Euro30/tonne for the second half of the month.

This week, on 19 January, Sabic put a stop to new ldPE orders for January in Europe and indicated that it was considering doing the same for January lldPE. Total on Thursday reached a similar conclusion on PP following the unplanned outage of its 180,000 tonne/year PP1 plant at Feluy in Belgium.

The futures contract prices currently are reflecting sentiment for price increases running into 2006 and 2007. March prices for lldPE closed at $1,310/tonne on the exchange on Thursday (19 January) while March PP prices were at $1,210/tonne. The February lldPE contract price closed at $1,295/tonne and PP at $1,195/tonne on the day. Both markets are in contango with highest prices for April 2007 at $1,445/tonne (lldPE) and $1,345/tonne (PP).

Despite this pricing profile, however, rising demand is difficult to justify from segment fundamentals and clear trends that suggest downstream demand is being sucked away to China and central Europe.

The volume blip – if it proves to be that – is more related to inventories and the demand for product ahead of expected price increases in February. Of the true growth seen in the market, much has been and will continue to be export-driven.

We are in the midst of a re-stocking phase and even the most conservative of thermoplastics producers is admitting that true demand growth is difficult to find. Currently there is tightness in lldPE but not so much in PP. The upward push on prices is cost driven more than anything else.

Europe’s polyolefins producers then probably have more reasons to be concerned than to be happy moving further into 2006. Certainly, they are not yet off the rollercoaster that was 2005.

Globally shrinking demand around the Chinese New Year holiday has yet to be factored into the market to any great extent. And plastics makers remember that European PP demand growth was as low as 1% last year - PE hardly sparkled.

Producers will need a lot more encouragement if they are to feel more comfortable in the first few months of the New Year.

By: Nigel Davis
+44 20 8652 3214

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