INSIGHT: European PE producers prepare for the fall

13 August 2010 16:03  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--It may be a quiet time of year across Europe and much of America but many are gearing up for the fall. Whether that means autumn in the north or a sharp drop in market sentiment remains to be seen.

Chemical producers have continued to reveal healthy results for the second quarter compared with the similar period of last year and the first months of 2010. In Europe, they have benefited from stronger economic and industrial activity.

Europe-wide that activity is muted and certainly overshadowed by the Greek debt crisis and the knock-on effects. But as data from the EU statistical agency Eurostat showed on Friday, the strong German export-led and manufacturing-oriented economy has powered ahead.

Other EU countries produced less remarkable but still relatively strong growth in the quarter while the US economy grew by 0.6%.

There will be momentum behind Germany’s largely foreign trade-driven growth - with countries in Latina America and Asia providing much of the impetus. But most sensible bets now are on a slowdown in the recovery through the current quarter and into the following three-month period. Navigating through the second half will not prove to be easy.

That is why some chemical producers are moving aggressively to sustain margins. Times are uncertain and they are threatened by higher crude-based feedstock costs.

The rise in feedstock costs has helped push margins lower. The ICIS weekly integrated margin report for polyethylene last week recorded a €70/tonne drop in integrated PE margins based on a 2.5% increase in euro-based feedstock costs. A $27/tonne increase in the price of naphtha had been offset by a 1.6% weakening of the US dollar.

It depends where we are on the curve but integrated PE producers’ margins appear to have passed an inflection point having given up since June a fraction of the strong margin gains made through the first half.

Polyethylene prices slipped in August following the fall in the monthly ethylene contract price of €18/tonne. Linear low PE prices are still the strongest but high density PE film prices are down.

There are no significant imports from the Middle East, market sources say, but export opportunities are opening up for Europe’s producers again to Turkey and Africa.

One company that has been trying aggressively to push up prices this past week has been Dow Chemical.

It looks like a global push across different supply chains but the company wrote to PE customers in Europe signalling its intentions to raise PE prices by €80/tonne in September.

“After the holiday season the demand for PE in Europe will return to normal levels. This, combined with the influence from other regions, will result in a short balance for PE,” Dow said.

There is little doubt that, thus far, 2010 has proved to be better than expected for European producers. Markets have remained relatively tight given production problems and cutbacks. The once expected volumes of product from the Middle East have not materialised

Still in a quiet holiday period the European PE market is expected to show more signs of life next week.

Producers and consumer inventories are low and there is a view that some customers will start ordering for September. Others remain in holiday mode.

Dow’s confidence in the sustainability of the upturn - or is that confidence in the momentum behind the more recent gains - is noteworthy. September is not a long way off.

Another polymer producer this week was a little more circumspect.

“The second half won’t be as strong as the first half. We won’t see the rising price environment that we have enjoyed in the first six months,” Borealis CEO Mark Garret told ICIS in an interview.

Borealis expects the polyolefins market to be more difficult in the second half compared with the first.

“We see a more stabilising-towards-decreasing environment rather than the increasing environment in the first half of the year,” said CFO Daniel Shook.

It is that “stabilising-towards-decreasing environment” that presents the problem running into the fall. European producers will be lifted by exports so long as the developing economies continue to buy up polymers to help feed their own economic expansion.

Germany’s second quarter economic success shows what could be achieved even against the backdrop of generally lacklustre EU-wide growth.

($1 = €0.78)

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By: Nigel Davis
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