INSIGHT: Uncertain times ahead for polymers

24 September 2008 17:23  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--These are tough times for polymer makers. Demand growth is fragile to say the least and fluctuating feedstock costs make the business extremely difficult.

In addition, new capacities coming on-stream suggest that established producers will have to work doubly hard to secure margins.

There are optimists in this business as there are in any other. But it is difficult to see how some companies, without clear feedstock advantage and without technically up-to-date plant, will cope with the vagaries of the market over the next two years or so.

The writing has been on the wall for a long time but some of the sector’s fears look set to become reality.

Producers globally have faced a difficult few months as demand growth has stalled, and feedstock and energy costs have risen.

In 2007, producers were playing catch-up with input costs. This year the business moved out of step as converters became more reluctant to commit to polymer purchases as demand for their output wavered.

Fears over downstream demand have risen sharply, particularly over the past few months while the outlook on prices is bearish to say the least.

Prices for the London Metal Exchange’s regional futures contracts for linear low density polyethylene (LLDPE) and polypropylene (PP) have moved lower. Market sentiment in polyethylene has been weak in Europe and Asia.

Hurricane's Gustav and  Ike had a clear impact in the US. This was brokers MF Global’s comment on the US LLDPE market earlier this week: "Participants noted the acute supply crunch brought on by the outages following Hurricane Ike was matched by a lack of interest from buyers."

"There was a report of some panic buying from converters who lacked inventory but producers did not issue any price hikes for October, which typically means prices could be under pressure to fall," they said.

Not surprisingly, PE and PP buyers are reluctant to commit to purchases given the uncertainty they see in oil and feedstock prices and demand.

The monthly market analysis from Societe Generale in London, published at the beginning of September, was largely bearish on regional polymer prices.

US demand had continued to fall, it said, even though hurricanes had threatened supply. This year, PE and PP prices declined from July through to early September in Europe and Asia due to weak regional demand and ample supply. Non-integrated producers suffered the most.

There has been some recent respite on the cost front but the financial crisis has dealt the sector another blow as oil prices have climbed again.

It was reasonable to expect prices to fall to a level that would eventually stimulate more demand, but producers now appear trapped in a cleft stick.

The extent to which the financial crisis will affect the North American, European and other economies cannot yet be gauged but a sharper slowdown than that expected just a few weeks ago is now more likely.

The credit crisis last week was likened to an uncontrollable forest fire, with the future direction and potential damage to the US economy at the whims of the markets.

The potential for much more widespread economic damage is also largely unpredictable.

In the polymers business there are some certainties – pressured margins from new capacities, for instance. Producers had been expecting a two-year or so period of lean times.

Those times, however, could prove to be a great deal more difficult than many once thought.

The next few weeks and months will prove to be critical as buyers and sellers factor in even greater uncertainty into their market tactics.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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