INSIGHT: PP starts to look tough in Europe

26 February 2008 15:39  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--That Europe’s polymer producers are wary of the expected sharp rise in production capacity in the Middle East and Asia is an understatement.

Capacity additions based on low cost or advantaged feedstock will hit the sector hard. So much depends on China’s appetite for plastics and that country’s ability to produce material of its own.

The greatest impact is expected in one of the most attractive plastics, polypropylene (PP).

Significant new production capacity additions are planned to come on stream in Asia and the Middle East at a time when China demand might be expected to slow.

Some construction delays are possible given the pressure on the engineering and capital equipment supplier markets but the writing is on the wall.

LyondellBasell opened up this week its online discussion on just what could happen in this vitally important plastics market.

A webinar held in November and involving customers for its web-based Alastian business was also made available.

The key points from the latter were that the PP business environment is going to change significantly - and change fast.

Two big production units start up in the Middle East in the first half of this year along with Reliance Industries' huge unit at Jamnagar in India in 2009. 

The business may be at the peak now but by the end of this year consultants expect a change from a sellers to a buyers market.

CMAI’s Mike Smith, speaking on the webinar, said that 19m tonnes of PP capacity is expected to be added to the world total in the five years between 2007 and 2012.

Six million tonnes of capacity will be added in the Middle East and 50% of the planned total in Asia. Current PP demand is about 44m tonnes/year.

The key point for Europe’s PP players is just how much in terms of the additional impact might China absorb over the next few years.

Its demand for PP is growing strongly but its appetite for imports is not likely to grow as fast given its own expanding production capabilities.

China will also not be immune from the expected global economic slowdown.

China will by no means absorb all the additional Middle East output. Material, largely homopolymer, will back up into Europe with some finding its way to markets in North and South America.

And by 2009 western Europe will be a net importer of the plastic.

Saudi Arabia this year will replace South Korea as the world’s largest PP exporter, Smith says.

The PP trade flows between the Middle East and Europe have, until now, been largely one way but the situation will change as the new capacities come on stream. European players are likely to lose out in important markets such as Turkey.

Middle East players are beginning to sell into Europe, a point made during the webinar. They are likely to prefer to sell in large volumes, of more than 1,000 tonnes a month, to a few customers but are also signing up distributors in key countries.

European producers have prepared for the change by closing older plants and upgrading to facilities that produce higher tech grades.

The hit will come largely in the commodity market so companies have pushed harder on the process and product innovation front and on product differentiation.

The question is, however, whether the inevitable can be delayed, giving plastics makers the opportunity to tap into a few more months of relatively strong demand growth and relatively strong margins.

A report on India’s PP market suggested that while imports could drop by about 23% in 2008-2009 exports could fall even more sharply. Domestic demand growth in 2007-2008 was put at 13-14%.

And the high oil price environment has taken the edge off the bearish sentiment in plastics, a point made by Societe Generale in its latest review of the world's PP and LLDPE (linear low density polyethylene) markets.

The PP market in Europe, though, is beginning to show signs of the impact of the upcoming wave of new capacity.

Spot prices in Europe have tracked lower in recent weeks and producers have not achieved the price increases they wanted on monthly business according to ICIS pricing. Demand has slowed in February.

Pressure on demand coupled with more than adequate supply makes for a very different market from that seen recently.

The European PP market is changing. Business is about to get a lot more difficult.

For more on PP capacity additions see the ICIS Plants and Projects database

By: Nigel Davis
+44 20 8652 3214

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