INSIGHT: PE bucks a trend globally as buyers go with the flow

By Nigel Davis

PHILADELPHIA (ICIS)--Polyethylene (PE) prices are being driven higher globally by a variety of factors bucking an expected trend of a weaker price and demand environment in the fourth quarter.

Principally, demand is strong and ethylene feedstock in North America and Europe is tight.

Ethylene prices have weakened markedly in Asia and record margins are being made on the polymer, yet the pull from stronger demand in the region appears to be the driving factor.

Macroeconomic nervousness persists, and against that backdrop plastics consumers are hedging their bets. The case is the same across many commodities.

Consumers expect oil to track higher and foresee a price push downstream. And while it may stretch the imagination to compare polyethylene price movements to those of a true commodity, there are similarities.

Consumers appear willing to accept price increases because they need to match demand. Some also want to be in a position to pass higher prices on down the chain into markets that are still recovering from the impact of recession.

Overlaid on regional influences is the pull from the China market.

Take one polymer, linear low-density polyethylene (LLDPE). Strong demand from the agricultural film sector in China is overlaid by a widespread anticipation that the yuan will strengthen against the US dollar, distributors were saying last week.

Standalone low-density PE (LDPE) margins last week in northeast Asia were the highest this decade, ICIS reported, and standalone high-density PE (HDPE) margins the highest since October 2009.

PE prices were up but feedstock ethylene prices were well down - at their lowest since October last year - on lower (ethylene) prices and higher naphtha costs.

Polyethylene buyers in Europe were expecting to pay more in November and could not see the relief they were expecting from price rises in 2010.

While significant new capacity additions have been made in the Middle East, and in Asia, their impact has not yet been felt on the European market.

The availability of low-density PE, for instance, has been restricted globally and capacity closures in Europe last year have not been fully covered by new European capacity additions.

Producer margins have been squeezed by higher crude and naphtha costs which they are keen to pass on down the chain. At the same time ethylene availability has tightened following port and other strikes in France.

In the US a combination of an ethylene price surge and the pull of export demand is working to push PE prices higher. Indeed there was a rapid turnaround in sentiment as ethylene rose, the dollar weakened and PE exports looked strong. The market has not stabilised as some buyers had expected.

In each region the strong draw of emerging markets is apparent - and apparently sufficient to balance out the rising tide of product available from new production capacities.

But questions remain as to what is demand growth driven by speculation - or by anticipation that prices will climb higher - and what is truly sustainable.

My colleague John Richardson wrote in his blog this week about the herd mentality in commodities.

He added: “For chemicals markets, the dangers are that real demand pictures get distorted as buyers hedge against the anticipation of higher oil prices by building stocks (sounds familiar?).

“And as the great scramble to guard against feedstock inflation gathers momentum, those who trade in chemicals might well be tempted to come out with outlandish and silly stories to justify why ‘real demand’ is strong - ie to promote a bit more panic among the buyers.”

Buyers may or may not be panicking, but they appear to be being forced to go with the flow.

Does that mean they are accepting the pain, or are they passing these higher costs on in their own prices?