INSIGHT: A fragile polyolefins recovery or a 'dead cat' bounce

04 February 2009 16:46  [Source: ICIS news]

By John Richardson

SINGAPORE (ICIS news)--How much should be read into a moderate recovery in global polyolefin prices, prompting a slight improvement in confidence?

Joe Congdon, Director Global Polypropylene Consultancy at Townsend Solutions is convinced that polypropylene (PP) prices have reached the bottom, partly because crude cannot fall much further after its collapse from $145/bbl.

Another reason for recovery is that the de-stocking process is almost complete. Purchases of PP and polyethylene (PE) resin for non-durable applications – which make up much around 70% of demand – seem to have increased.

The recovery in Asian prices, which began in January, continued this week.

On 30 January, ICIS pricing assessed film grade high-density polyethylene (HDPE) at $900-940/tonne CFR main port China, some $100/tonne higher than in December.

A Japanese trader offered HDPE film grade from Thailand at $950-960/tonne CFR main port China on 3 February.

Polypropylene (PP) prices have shown similar improvement with raffia grade assessed at $780-800/tonne CFR main port China on 30 January. Offers rose to as high as $860-870/tonne CFR main port China earlier this week.

The big question, though, is whether this represents a ‘dead cat’ bounce, an inevitable improvement after pricing fell too far in the fourth quarter of 2008.

But fears of a post-Lunar New Year price collapse have so far not been realised with early indications that the reverse might be happening.

“I was surprised to see domestic PE and PP prices edging up by yuan (CNY)150-200/tonne ($22-30/tonne) over the last couple of days,” said a markets analyst working for a leading global producer.

”It is far too early to get excited but, relatively speaking, confidence appears to have got better compared with late last year.

“My personal view is that the Chinese government stimulus package, the prospect of more government spending, a rise in bank lending and re-stocking has improved the mood.”

It is Congdon’s view that with crude bottoming out, so has propylene.

Another factor behind the rally is the return of naphtha to its usual multiples over crude following production cuts at refineries.

Naphtha has also rebounded on a rise in petrochemicals demand as cracker operating rates have crept up in response to better markets.

This followed major output cuts late last year in response to some very strange market conditions.

“US propylene fell below its value into gasoline in Q4, but didn’t stay there long once incremental supply from refineries ratcheted down,” said Congdon.

“For PP you have to look back to 1982-83 to find such a difficult market. Record prices in July 2008 were followed by record price reductions in the second half. 

“In November alone US PP producers’ inventories were devalued by (a total of) $700m.”

Declines in the second half occurred much faster than earlier price increases. Again in November, US PP fell by $660/tonne.

“The uncertainty about the future of the world economy has caused the oil, stock and polymer markets, to overreact.

”That's not to say that demand will recover right away.  Townsend is still trying to help our producing customers connect efficiently with converters, where there is still much turmoil and uncertainty.”

China should logically register growth this year as its GDP (gross domestic product) is forecast to increase by at least 6%.

Apparent PE demand in China fell by 1.3% from January until November to 10.28m tonnes, compared with the same period in 2007, according to Chinese commodity markets information service CBI.

PP consumption contracted by 1.3% to 9.57m tonnes over the same period.

The reductions seem to have been caused by demand coming to a virtual halt for three months as everyone de-stocked.

As for global growth, consultants are busy revising their forecasts in response to the end of the credit party.

“Previously, Townsend had forecast 5% average global growth in PP consumption per year until 2012, but this is not likely to happen,” said Congdon.

“US PP demand fell by 10% in 2008 with consumption likely to be down by a further 5% in 2009.”

The market could have been even worse during 2008 if Hurricane Ike hadn’t taken much of US PP capacity off-line during September.

But it will take more than a hurricane to bring the US industry back to health. PP plant shutdown announcements are a monthly occurrence.

“Some of the producers are still operating plants that have been fully depreciated a few times over and are a long way off from being world-scale. They are losing money, which should make the difficult decisions easier to make.”

The number of North American producers could fall to eight from the current 12, he added. There are 11 producers in the US, one in Mexico and none in Canada.

Compounding the economic crisis is new PP capacity that will likely give buyers the upper hand for several years.

A total of 10.5m tonne/year started up over the past four years with a further 18m tonne/year of announced capacity due on stream by 2012, estimates Townsend.

This is against global consumption totalling 45.5m tonne in 2007. Very little growth is likely to have taken place last year.

Start-ups amounted to 4m tonne/year in 2008 with more than 4m tonne/year due on stream this year and 5m tonne/year in 2010.

“But most projects from late 2010 afterwards are likely to be postponed unless there are compelling economic justifications – that’s good news for keeping supply in better balance with demand,” said Congdon.

Because he has seen it all before, he stressed that demand hadn’t gone away, that the “world hasn’t stopped” – reflecting his optimism and 27 years of experience in the industry. 

This, though, looks like the mother of all crises – or rather a series of crises happening at the same time.

Despair and fear are also powerful emotions, especially if you have never experienced a recession before.

This can leave you with the feeling that the recoveries in pricing and confidence are very fragile.

($1 = CNY6.84)

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By: John Richardson
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