INSIGHT: A tricky year for polyolefins in 2011

08 April 2011 14:58  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The polyolefins business is very much a “tale of two worlds”, ChemSystems says. The consultants predict a tricky time this year, with depressed operating rates.

“Despite a major recovery in 2010, there are still turbulent times ahead for the global polyolefins industry as it continues to grapple with the residual effects of the economic crisis of 2008 and 2009.”

The problem is that economic stimulus packages have been wound down and new polyolefins production capacities continue to come on stream.

Suppliers are exposed to real market demand, which remains weak in North America and Europe, particular in the vitally important automobile and housing sectors.

And political instability in North Africa and the Middle East puts direct pressure on polyolefins pricing and contracts through higher-priced crude oil.

“The United States and western Europe struggle to maintain a modest recovery amidst the booming developing economies in Asia, particularly China and India,” ChemSystems says.

But it looks so different from a full-year 2010 perspective, with companies globally making strong profit gains against 2009 on the back of the rebound in volumes and prices.

Global polyolefin consumption leapt “substantially” in 2010, the consultants' data show – by 6.8%, following a decline of 0.14% the previous year.

But even though consumption in western Europe grew positively at 4.7%, it was still below the global average, whereas Asian polyolefin demand surged by 6.9%.

There can be no doubt that the dynamics of the business are changing fast.

On the supply side, the focus has been on feedstock-advantaged capacity additions and on fast-growing markets – although there have been interesting developments in Europe, where new plants to serve some higher added-value markets have been built to replace older units.

Looking at the global picture, Asia-Pacific has increased its share of global polyolefins capacity to 39%, from 33% 10 years ago. The Middle East share has risen from 6% to 14%, while the combined contribution from the US and western Europe over the same period has dropped from 51% to 36%.

The consultants forecast that demand for bimodal grades of high density polyethylene (HDPE) in film and pipe will continue to rise strongly, having grown by 9.7% in 2010. Polypropylene (PP) growth has been slower because of the troubles in the automobile industry – it was 5.6% in 2010.

“LLDPE (linear low density polyethylene) continues to penetrate the LDPE (low density polyethylene) market, displacing LDPE with easy processing LLDPE, while use of single site/metallocene LLDPE continues to rise across the world,” it says.

The ChemSystems work underscores the trends in supply and demand for the major polymers as low-cost producers, and those closer to the most dynamic markets, continue to assume greater global importance.

It also highlights, however, the importance that feedstock cost and integration continue to have on both polyethylene (PE) and polypropylene. Middle East polymer exports, for example, are playing a much greater role in the China market and will continue to do so.

However, it remains to be seen how important a part of the mix polyethylene exports from the US become, given the expected olefins capacity additions in North America predicated on low-cost shale gas ethane. Competitive positions do shift and are not always as clear cut as they might at first appear.

There also has to be concern in 2011 with the development of polyolefins demand in China.

ICIS Asia Chemical Connections’ John Richardson noted last week that China’s polyolefins market currently “remains very quiet indeed”.

"It is ice cold out there, with very little activity. Importers are waiting and hoping for some kind of improvement," a Singapore-based polyolefins trader was reported as saying.

Small-to-medium sized companies (SMEs) seem to be finding it difficult to gain credit and the working capital to run at full capacity. Even the speculators on the Dalian futures exchange are hard pressed.

"The packaging film, agricultural film and home appliance sectors are unable to pass on any further resin prices increases. This is part of the reason why polyethylene pricing has remained basically flat since the end of the Chinese New Year holidays," a producer said.

The question is whether China’s economic problems persist through the year. If they do, the impact on demand and trade flows could prove to be significant.

Day-to-day business is one thing. The longer-term trend is another.

Read John Richardson and Malini Hariharan's Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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