Polymers: PE demand and prices remain strong

22 November 2010 00:00  [Source: ICB]

Strong demand and increasing feedstock ethylene costs push PE prices up

With demand strong, and feedstock ethylene costs up, polyethylene (PE) prices do not show signs of falling anytime soon.

"PE prices are influenced by ethylene prices, but the supply-demand balance always trumps feedstock prices," said Frances Moore-Jones, director at the US-based consultancy Townsend Solutions. "Presently, demand for PE resin in the US and Canada is strong."

In fact, demand is so strong that in mid-November, Canada-based NOVA Chemicals made the decision to focus on direct sales to domestic customers, reducing PE sales through export and unbranded distribution channels.

"We're encouraged that domestic PE demand has remained strong," NOVA CEO Randy Woelfel said in an early-November earnings conference call. "Based on continuing high utilization rates, low inventories and increased feed prices, PE price increases totaling 9 cents/lb ($198/tonne, €146/tonne) have been announced for the rest of the year."

US and Canada domestic sales of PE were up by 7% through October compared with the same period in 2009, according to trade body the American Chemistry Council.

While US and Canada export sales were lower by 12% from 2009, a record high year, 2010 continued to rank as one of the best years for exports, Woelfel said.

Through September, high density polyethylene (HDPE) domestic sales were up by 8.35% compared with last year, low density polyethylene (LDPE) domestic sales were up by 5%, and linear low density polyethylene (LLDPE) domestic sales were up by 6.58%, according to Townsend Solutions. "Sales are keeping pace with production thus far this year, and, in the case of LDPE, sales have exceeded production by 1.08%," said Moore-Jones.

PE AND THE WORLD
As feedstock ethylene costs rise and cracker outages produce ripple effects downstream, US PE producers are expected to face little resistance in implementing 4 cent/lb price increases in November, as assessed by ICIS.

Producers have also nominated 5 cent/lb price hikes for December. While rising feedstock costs could support the full 9 cent/lb increase in the fourth quarter, there was uncertainty about the December price hike because of weak demand and the dwindling number of manufacturing weeks before the end of the year.

Buyers viewed the high prices as temporary, and were directing their buying strategy accordingly. According to traders, after a flurry of buying in mid-November, the spot market has grown quiet.

Other market participants indicated that converter inventories were being managed down ahead of the year-end tax accounting via hand-to-mouth buying patterns.

US domestic prices for LDPE averaged 75-78 cents/lb; grades of HDPE averaged 61-65 cents/lb; and LLDPE averaged 64-69 cents/lb, as assessed by ICIS. European prices as of mid-November averaged €1,360-1,380 FD (free delivered) EU for LDPE; €1,140-1,180 FD EU for HDPE; and €1,240-1,260 FD EU for LLDPE. In Asia, LDPE averaged at $1,650-1,700/tonne; $1,300-1,360/tonne for HDPE; and $1,410-1,480/tonne for LLDPE.

Major North American PE producers include Chevron Phillips Chemical, LyondellBasell Industries, Dow Chemical, ExxonMobil, Westlake Chemical, INEOS, Total and NOVA Chemicals.

In Europe, PE prices were stable to firm in November. LDPE remained the strongest grade, followed by HDPE, and then LLDPE, although some sources are beginning to see an upturn in LLDPE demand.

LDPE continued to be tight in Europe because of outages - both planned and unplanned (thanks to French strikes) - and good demand. Inventories were low with both buyers and suppliers but buying sources were quick to point out that there were no shortages of product.

Demand in Europe was good but many large buyers were still not discussing November because their pricing was done on a retroactive basis and would not be fully settled until toward the end of the month.

SELLERS TAKE INITIATIVE
Sellers were eager to push their supply advantage, however, and some were even talking of more increases in December, when they expected a hike in the monthly ethylene monomer contract price.

Meanwhile, the US's quantitative easing policy - the Federal Reserve's move to print $600bn in new money and use it to buy government bonds to further stimulate the economy - resulted in a jump in commodity and oil prices, which, in turn, pushed up naphtha prices to a two-year high, traders said. Asian LDPE prices rose by $70-80/tonne in mid-November, trading at $1,650-1,700/tonne CFR, but later trended down. Prices were boosted by rising crude oil and naphtha prices, reflected also in a surge in LLDPE futures prices.

FEEDSTOCK'S FEEDSTOCK
But when talking about contract ethylene rather than spot, things may be a little different. "This year is a good example of PE price increases outpacing ethylene price changes," said Moore-Jones. For the year through October, North American ethylene contract prices have lost 0.25 cents/lb, while PE resin prices are understood to have gained 9 cents/lb during the same period.

Based on Townsend's buyer survey, through October, HDPE extrusion resin prices were up by 0.8 cents/lb for the year, HDPE molding resin prices were up by 3.5 cents/lb, LDPE resin prices were up by 2.6 cents/lb and LLDPE resin prices were up by 4.4 cents/lb. "These gains would imply that PE resin price increases were far exceeding that of ethylene," said Moore-Jones. "Remember that ethylene prices have shrunk by 0.25 cents/lb during this same time period."

North America is not expected to have an oversupply of PE in the coming years. According to Townsend Solutions, capacity at North American PE plants was 19.589m tonnes in 2009, and is projected to grow to 20.339m tonnes by the end of 2012, based on producers' announced plant changes or additions. Operating rates are expected to average around 85% or higher over the next five years. "To keep margins at sustainable rates, producers of PE are expected to continue monitoring their production to match demand," said Moore-Jones. "A steep run-up in prices would occur if several plants shut down unexpectedly."

But it is doubtful if there will be any global PE oversupply. "No chance," said Joe Pilaro, president of US-based consultancy BRAE Partners: "In fact, there may be plant closures in Europe. No new ethylene plants are expected for the US, although there may be debottlenecking and capacity increases."

While the Marcellus Shale deposits in the US promise a bounty of natural gas "high in liquids that may one day produce a lot of ethane," said Pilaro, much "depends on where that ethane will go."

HUGE INVESTMENT
Pilaro believes much of the Marcellus Shale ethane will be headed for Canada, where there has been "huge investment in ethylene capacity based on ethane" and chemical companies have been clamoring for a pipeline to connect the nation to the US gas fields.

"If they get access to the gas, [no new ethylene plants] will be built in the US," said Pilaro, which does not mean plants will be built in Canada, either. "The gas could be used as Canada's ethane sources decline," he added. The two main feedstocks for ethylene are naphtha - used in Europe and Southeast Asia - and ethane - used in North America and the Middle East. "Ethane availability in the US has been an influence on the pricing chain," said Pilaro, while "naphtha prices follow crude oil [which] has been on the high side."

Naphtha-based producers said margins were getting squeezed as crude oil and naphtha prices soared. Brent crude oil was at $86.96/bbl as of November 15, and naphtha swaps at $784-794/tonne CIF (cost, insurance and freight) NWE (Northwest Europe).

Additional reporting by David Barry in Houston, Nigel Davis and Linda Naylor in London, and Felicia Loo in Singapore

By: Ivan Lerner
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