INSIGHT: PE/PP muted, supply overhang beckons

19 February 2007 17:20  [Source: ICIS news]

LONDON (ICIS news)--The global polyolefins picture is surprisingly muted against the backdrop of recent volatility in the price of crude oil.

European polyethylene (PE) producers are trying to push through price increases in attempts to capture margins lost at the end of last year. US markets are well supplied and Asia is at the start of a quiet holiday season.

Polypropylene (PP) makers have little to complain about. Demand growth remains strong although there is adequate supply. The pricing game centres on passing on feedstock cost increases in a well supplied market.

Underlying demand growth is encouraging but producers cannot afford to give too much away. At least two European PE producers indicate they will be looking for higher prices in March.

They lost more than €150/tonne ($197/tonne) in the fourth quarter of 2006 when ethylene was stable – the Q1 2007 ethylene contract price is down €45 at €855/tonne FD NWE (free delivered northwest Europe).

In the US PE prices stayed flat in January as intended price increases were postponed. Supply was adequate for the level of demand with the market very much in a ‘wait and see mode’ as the calendar year got underway.

Markets in Asia, not surprisingly, are quiet to say the least. Many converters in China have shut down for the holidays which started on 18 February and lasts for a week.

PP producers in Europe are seeking to recover margin lost in Q1 when propylene prices rose by €35/tonne while the derivative fell around €50/tonne.

US propylene prices have risen as energy prices have climbed and downstream PP demand has expanded. PP makers are seeking to pass on higher costs in product prices for February and for March against the backdrop of relatively tight demand and little inventory.

The first quarter will be somewhat weaker for producers of both polymers and margins down from 2006 highs but there cannot be too much to complain about.

Analysts are largely neutral on plastics. Societe Generale said late last week it was somewhat bullish on Europe and America but slightly bearish on Asia PP demand and looking to production problems in the Middle East and Asia leading to tighter supply into Asia.

Asia demand was forecast to be lower due to local holidays.

The bank regularly charts physical regional plastics prices against the futures prices for linear low density polyethylene (LLDPE) and PP traded on the London Metal Exchange (LME).

LME prices have remained relatively flat during a quiet period for the sector but with a recent downward trend due to easing oil and regional naphtha prices.

Plastics producers are largely confident of another good year in 2007 but wary of the impact of new supply due on stream in the Middle East later this decade.

Basell predicted recently that PP operating rates could remain above 90% until 2010 but PE rates might drop to as low as 83% from 86% now.

China, long a sink for polyolefins makers, has become increasingly self reliant in plastics. Local production is expected to match demand growth until 2011 although the PP net deficit may be as high as 3.5m tonnes in 2011.

As 2007 progresses more attention will be turned to the potential impact on global markets of reduced China polymers demand and impending new production capacity, particularly for LLDPE and high density PE.

Over the next few years, there is a great balancing act to play.

($1 = €0.76)

By: Nigel Davis
+44 20 8652 3214

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