Polymers: North American PE prices may experienc a spike

06 September 2010 00:00  [Source: ICB]

Prices for the polymer in North America are poised to rise on tight supply, while Asia and the Middle East face uncertainty

A tight supply-demand situation and continued low supply inventories have set the stage for a proposed 5 cent/lb ($110/tonne, €87/tonne) increase for North American polyethylene (PE).

US PE prices reached a high point in the second quarter (Q2), following a gradual recovery and rise since Q3 2009. Contract prices held steady during the week ended August 20, as assessed by ICIS.

US low density polyethylene (LDPE) was in the range of 71-73 cents/lb for bulk linear grade, while high-density polyethylene (HDPE) was in the range of 59-62 cents/lb for bulk film. Linear low-density polyethylene (LLDPE) film (butane) was at 59-62 cents/lb, and LLDPE film (hexane) was 61-64 cents/lb, as assessed by ICIS.

"Ethylene pricing peaked in March and declined through [Q2]as unplanned outages ended and ethylene was no longer short in the market," said Randy Woelfel, CEO of Canada-based PE producer NOVA Chemicals, during the company's Q2 earnings call.

"Following a similar pattern, PE prices peaked in April and also began to decline. Between May and June, PE prices declined by 8 cents/lb for LDPE and 14 cents/lb for both LLDPE and HDPE. This change in market direction caused some customers to delay their buying in anticipation of lower future prices," he added.

However, overall purchasing dynamics remained solid, Woelfel pointed out.

"Short-term volatility and order patterns were constrained by the industry's supply chain, which continues to operate at historical low levels. Industry chain margins peaked in April and declined in May and June. However, they were still at what we would consider to be healthy levels throughout the quarter," he said.

During July, LLDPE and HDPE prices declined by an additional 2 cents/lb, while LDPE prices remained flat. Indicators pointed to August pricing remaining steady for all grades,

"All indications are that August pricing will remain steady for all grades, and, effective September 1, producers have nominated a 5 cent/lb increase for all grades. This increase is supported by a tightening supply/demand position and continued low inventory levels across the chain," said Woelfel.

Domestic PE demand in North America remained strong during Q2 2010. Domestic sales in the US and Canada are up by about 6% this year through July, compared with the same period last year, according to trade body the American Chemistry Council (ACC).

Meanwhile, exports are down by only 8% in the year to date compared with 2009, which was a record year for exports. Overall year-to-date PE sales are up by 3%, Woelfel said.

Yet despite NOVA Chemicals having strong financial results in the first half of this year from its olefins and polyolefins business (including ethylene, PE and co-products), the company is not anticipating the second half of 2010 being as strong.

"In the first half of the year, unplanned shutdowns of ethylene production caused a short market for ethylene, which resulted in rapid margin expansion. The industry is now fully operational, ethylene no longer short in the market, and prices have declined from the peak," Woelfel said.

"However, these events demonstrated just how sensitive the market for ethylene and co-products can be, where a few unplanned shutdowns can rapidly affect the marketplace," he added on the call.

For the second half of the year, there remain questions on the global economy in general, which can slow the strong growth of PE consumption.

"We are also cautious about supply additions in the Middle East and Asia, and their potential impact on global pricing.

On balance, while we are encouraged by the market dynamics so far in 2010, uncertainties remain in the outlook, so our employees continue to work very hard managing costs, generating cash, and focusing on implementation of our strategy," Woelfel said.

So far in 2010, ethane flows to NOVA Chemicals' Joffre, Alberta, Canada, facilities continue to be stronger than forecast. This is because of higher production from currently producing wells.

The increase in well production, though considered modest, is important to the company as it tries to maximize its current ethylene production.

"However, small short-term increases are not enough to overcome the structural declines in supply that we've seen in the last three years," Woelfel said.

In an effort to minimize its reliance solely on natural gas flows out of Alberta, and into the US, and to improve the long-term feedstock availability for its west Canadian assets, in July NOVA Chemicals signed a memorandum of understanding with US energy company Hess and Canada's Mistral Energy to extract and transport ethane from the Williston Basin in North Dakota, US.

"This ethane will flow north into our Alberta, Canada, facilities. Hess will extract the ethane at its Tioga Gas Plant in North Dakota, US, and we will purchase 100% of their production under a long-term arrangement," added Woelfel.

In the meantime, Mistral will design, build, own and operate a proposed interconnector called the Vantage Pipeline, which will transport the ethane from Hess's Tioga gas plant into the existing Alberta, infrastructure.

The new oil-based ethane supply diversifies the feedstock source for ethylene, and down the line, PE. It's a significant move for NOVA Chemicals in that it presents the potential to become less dependent on cross-border natural gas flows into the US.

"We are working on other feedstock projects that are based on both traditional natural gas supplies and other non-traditional supply sources. This work includes our project with Buckeye Partners that would move feedstock from the Marcellus Shale basin in the US, north to Corunna, Ontario, Canada," said Woelfel.

Further, NOVA began a planned shutdown of its LDPE unit in Mooretown, Ontario, at the end of July to conduct the final installation and start-up of its new hyper-compressor. This will result in a capacity increase of about 50% and the ability to produce new, higher-value products. The unit is on schedule to restart in late September.

In comparison, while producers attempt to push through a price hike in North America PE, Asian PE prices may get hit by weak crude oil futures, which were seen in late August.

Asian and Middle Eastern producers had been pushing for a raise in PE prices for September shipments, according to industry sources.

There is concern that poor upstream crude oil prices could fuel strong buyer resistance to the proposed price hikes because regional PE importers are generally reluctant to play the market when crude oil values dip, several Northeast Asian PE producers have reported.

Some Northeast and Southeast Asia producers had been testing the market by offering film-grade HDPE at $1,200-1,210/tonne (€948-956/tonne) CFR (cost and freight) China, or $40/tonne higher than levels discussed earlier in August, for September shipment, as assessed by ICIS.

Film-grade HDPE was $1,120-1,170/tonne CFR China and $1,140-1,170/tonne CFR southeast Asia (SE Asia) for the week ended August 20, as assessed by ICIS.

Additional reporting by David Barry in Houston and Chow Bee Lin in Singapore

By: Feliza Mirasol
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