INSIGHT: China imports still help to keep polyethylene afloat

04 November 2009 17:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Forecasting with confidence is not a phrase one is likely to hear in the current climate.

Visibility is so poor at the macro level that any drill down to individual businesses and segments is difficult in the extreme. But the trend is positive, away from the trough.

The fourth quarter may be seasonally slow. Many wait for firmer indications of the possible course of demand and business in the early part of 2010.

Polymers demand, for instance, remains well down on last year, and could be squeezed further in 2010, depending where you are. But just look at Asia.

Asian export demand for US polyethylene (PE) has recovered from a temporary September slowdown and should remain strong through at least November, polyolefins giant LyondellBasell said on Tuesday.

“Right now, through November, our order book is pretty much full with these export opportunities,” said COO Ed Dineen.

Those exports have buoyed LyondellBasell and others through most of this year. The fear a month ago was that China demand might slow and the primary impetus for growth in a desperately difficult year dissipate.

But as the LyondellBasell numbers show, September held up well compared with August despite what proved to be a temporary drop in exports.

“We’ve seen PE demand - particularly in China where these opportunistic exports are largely moving - strong throughout the year,” Dineen said. “It turned down somewhat as we saw crude retreat a little, but as crude turned back up toward $80/bbl, we saw the Chinese market react strongly to that.”

At the start of the year, LyondellBasell, which has its US and some other operations under US Chapter 11 bankruptcy protection, expected polymer operating profits of $352m but it has produced segment earnings of $628m for the year to date.

About 60% of its polymer segment earnings come from PE, 15% from polypropylene (PP) and 25% from advanced plastics. September 2009 polymer earnings were slightly higher than those for the same month last year.

The LyondellBasell numbers, and the near term outlook are encouraging, suggesting that China polymer demand might hold up longer than at least some had feared.

Concerns over product going into inventory appear to have been misplaced. BASF said on 30 October that it had not seen any PE inventory build up in China in the third quarter.

The heat has come off the China market. Dalian PE futures have lost a lot of ground reflecting changed sentiment. But China’s engine for growth appears still to be turning strong.

That engine for growth will be sorely needed next year as globally polyolefins seek to gain ground on 2009.

The view from the US outwardly appears more positive than that from Europe in the face of new capacities coming on-stream in the Middle East and in Asia. Plants disadvantaged by age or technology are closing or have already closed in the higher cost regions.

Volumes in Europe are weak and stocks are at a record low, said one producer. Crude and naphtha costs are high but producers simply cannot push prices higher because the demand (for polyethylene and to a lesser extent, for polypropylene) is simply not there.

Producers in Europe and North America can only feel more comfortable when they see stronger domestic regional demand return. Export demand is hugely welcome, but may only be short lived as the expected highly competitive new capacities come on-stream and start churning out commercial quantities.

European and US producers particularly have to be concerned about the extended trough that is likely to be brought about by the new capacities. Polyolefins operating rates appear stuck at a low level. The fourth quarter looks difficult, as does the first few months of 2010 at least.

The business, as industry executives have pointed out in recent months, has its own ‘U’ shaped curve to get through. In a worse case, the recovery could be dragged through an extended ‘L’.

“We’ve come to a new place in polymers,” said LyondellBasell’s global polymers head, Anton de Vries, in early October. The company does not expect the operating environment to get better next year, and fears it could worsen. Supply/demand balances at least point that way.

This has been an extremely difficult year for polymer makers and despite a modest upturn its does not look as though the business is going to get any easier, or, rather, much more profitable in the short to medium term.

The export business is hugely welcome but cannot supplant a base load of more local domestic demand. Producers have yet to determine, or project, a true level of demand following the slump.

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By: Nigel Davis
+44 20 8652 3214

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