FocusEurope PE buyers to face Jan hikes on soaring feedstocks

06 December 2010 11:35  [Source: ICIS news]

Europe PE buyers face January hikesLONDON (ICIS)--European polyethylene (PE) producers are already talking of January price increases even before December discussions get fully under way, sources said on Monday.

“Cracker margins are squeezed. We will continue the battle into January,” said one major producer.

On Monday, Brent crude oil was trading at $91.74/bbl, with naphtha at $843-847/tonne CIF (cost, insurance and freight) NWE (northwest Europe).

“With the increase in crude prices and the weakening euro, we get hit twice,” said another producer. “Cracker margins are now negative. December demand is good and we are already getting good indications for January volumes.”

PE buyers were finding themselves increasingly under pressure to accept higher prices in a month when they had expected some relief.

The weak euro meant that imported volumes were down and availability was affected by production problems. There was also still some overhang from the French strikes at the end of October, which tightened availability.

“Now it’s not just low density [PE] that’s tight,” said a buyer, “we’re having difficulty getting hold of extra high density [PE] volumes.”

The reasons behind tightness in these PE grades were different, but the outcome was the same - tight availability was leading to higher prices across the board.

Soaring feedstocks and the expectation of continued strength upstream meant that producers were now aiming to claw back margin into January. Inventories were low along the chain and even if buying was low in December, which many sources expected it to be, it would take time to build up stocks.

The level of demand in December had taken many sellers by surprise. The high density polyethylene (HDPE) injection market in particular sought to understand why product availability had become so tight, when only weeks before buyers had expected to be able to get a modest decrease in December.

One reason that HDPE grades were not in such oversupply as buyers had expected was the lack of imported material. This was exacerbated by the weak euro rate versus the dollar, and delays in new Middle Eastern capacities.

Another reason was the very low profit margins in the HDPE sector in Europe. Net HDPE prices had been barely above the ethylene contract price for many weeks, and producers were now refusing to provide supplementary volumes to regular clients at the contract level.

Low density polyethylene (LDPE) availability continued to be tight, and some producers envisaged a situation where LDPE would be structurally undersupplied and command a permanent premium over other PE grades.

“People have made the mistake of thinking that LDPE is a commodity,” said one producer, “and we don’t think it is. Anybody who wants to buy our LDPE will have to pay for it.”

LDPE was tight following some permanent capacity closures in 2009, and also due to several production issues in Europe.

Borealis’s new 350,000 tonne/year plant in Sweden was not performing at its best, and the company’s LDPE unit at Schwechat in Austria had been running at reduced rates for many weeks. SABIC’s new 400,000 tonne/year LDPE plant at Wilton in the UK had also been underperforming since its start-up last year, according to buyers.

Polimeri Europa's LDPE unit in Dunkirk, France, had been down for prolonged maintenance and was still not back on line, according to market sources, and there were reports that LyondellBasell's 320,000 tonne/year LDPE unit at Aubette, France, was experiencing production problems, but this was not confirmed by the company itself.

Linear low density PE (LLDPE) availability was also tightening on reduced imports and better-than-expected demand.

December pricing discussions had hardly begun at some accounts, but there were already clear indications that prices were higher this month. Many producers said that they had already cleared the €27/tonne ($36/tonne) increase in the December monthly ethylene contract price, but others were less confident, reporting strong resistance from buyers at anything above a rise of €20/tonne.

Buyers were arguing over the amount of the increase they would take in December, rather than the fact of it.

“We are aiming to get away with just the ethylene hike. We definitely won’t be able to avoid the ethylene pass-through,” said one large buyer.

Another added a note of caution to producers: “This situation reminds me of the third quarter 2008, when it looked as though prices could only go one way - up. And look what happened then.”

Producers dismissed this argument and said that inventories were too low for prices to crash, as they had done in the last quarter of 2008, when LDPE spot prices traded at less than half the price of the ethylene contract, leading to the implementation of monthly monomer pricing.

“I can’t wait for when the tables turn,” said another buyer. “I will not be taking any prisoners when prices start to go down.”

For the moment, however, there was little chance of a price decrease.

LDPE net prices were currently around €1,300/tonne FD (free delivered) NWE; HDPE net prices were much lower, in the mid-to-high €1,000s/tonne FD NWE, depending on the source of product and terms of contracts, and LLDPE C4 commodity net prices were around €1,120-1,150/tonne FD NWE.

PE is used extensively in packaging and household goods.

PE producers in Europe include INEOS, Total Petrochemicals, SABIC, Borealis, LyondellBasell, Polimeri Europa, ExxonMobil and Dow.

($1 = €0.75)

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By: Linda Naylor
+44 20 8652 3214

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