INSIGHT: Short-term polyolefins outlook is good

18 April 2007 17:03  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Polyolefins prices are expected to be under pressure later in 2008 and through to the end of the decade as new low-cost capacity comes on stream in the Middle East and China boosts production.

As yet, however, producers have been able to pass on fluctuations in oil and gas prices to a greater rather than to a lesser extent and hold their own in the great profitability race.

Companies may not be basking in a warm or even comfortable glow, but supply/demand fundamentals have helped keep them happy.

Nova Chemicals CEO Jeff Lipton, for instance, was upbeat at his company’s annual general meeting on 12 April.

“Results in March of this year improved dramatically after we worked through inventory-related softness in January and February, and we expect the second quarter to be just as strong,” he said.

“With growing demand and continuing delays in new capacity additions, we believe ethylene and polyethylene [PE]market conditions can remain strong through 2011,” he added.

Lipton is ever the optimist and surprisingly bullish for the sector up to 2011. Most commentators forecast a drop in PE operating rates from around 2009, particularly as new capacities come on stream in Saudi Arabia.

Delays in bringing some plants on line elsewhere in the Middle East might be expected, so the demand side of the equation becomes particularly important.

Polyolefins giant Basell suggests that global polypropylene (PP) operating rates will remain over 90% until 2010. That is the good news. Not so encouraging is its forecast of PE operating rates as low as 83% in 2010 from around 86% this year as the new Middle East capacity hits the market.

In these circumstances, how China absorbs increased low-cost volumes of PE and additional PP will be critical.

For the much shorter term, however, market analysts are relatively bullish. With demand holding and not currently looking pressured, higher feedstock and energy prices are working to keep polyolefins prices high.

Naphtha prices have hit new peaks in Europe and Asia this year and risen sharply in the US. Ethane and propane prices for US Gulf Coast manufactures have also moved sharply higher.

Demand in China has been hurt by relatively high polymer prices. Inter-polymer and inter-product competition is strong in such a high priced polyolefins environment. Yet demand has held up remarkably well.

In Europe, PP and high density PE (HDPE) markets have been tight in April, with demand relatively strong. The trend in PE in Europe and Asia is to move away from commodities towards more specialised grades that will not be undermined by exports from the Middle East.

Societe Generale analyst Sebastian Castelli is also relatively bullish on linear low density polyethylene (LLDPE) and PP in the short term. Energy prices are helping drive the markets for both polymers.

The bank expects plastics prices to continue their upward trend and register another slight increase in the next few weeks. The London Metal Exchange plastics futures prices and the physical market are reacting to the upward momentum in energy prices.

Polyolefins spot prices have risen in most markets since the beginning of the year as energy prices have climbed. The outlook is more neutral for Asia, given the tendency to de-stock in the face of higher prices to try to drive prices down.

SocGen is bullish on European North American PP, given strong demand. It is bullish on LLDPE in Europe for the next few weeks and sees LLDPE demand improving in North America on top of good export volumes.

LME and physical spot/export prices ($/tonne)

		Current*	Last week**		Last month***
LLDPE	LME LL	1,170	1,180	-0.8%	1,157	1.1%
	Global average	1,339	1,335	0.3%	1,316	1.7%
	W Europe	1,523	1,511	0.8%	1,457	4.6%
	US Gulf	1,224	1,224	0.0%	1,210	1.1%
	SE Asia	1,270	1,270	0.0%	1,282	-0.9%
PP	LME PP	1,240	1,240	0.0%	1,154	7.4%
	Global average	1,320	1,312	0.6%	1,312	0.6%
	W Europe	1,470	1,467	0.2%	1,466	0.3%
	US Gulf	1,246	1,224	1.8%	1,217	2.4%
	SE Asia	1,245	1,248	0.0%	1,253	-0.6%

 Sources: LME, ICIS & SG Commodities research

*First week in April; **Second week in April; ***March

By: Nigel Davis
+44 20 8652 3214

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