OUTLOOK ’12: Flat times ahead for Europe polyolefins

27 December 2011 12:45  [Source: ICIS news]

By Linda Naylor

LONDON (ICIS)--The year 2011 saw a strong start for polyethylene (PE) and polypropylene (PP) in Europe, but the situation changed in April, as imports finally began to have an impact on European pricing.

Low density polyethylene (LDPE) spot prices fell steadily throughout the year – from a high of €1,500/tonne ($1,948/tonne) FD (free delivered) NWE (northwest Europe) in April to €1,030–1,090/tonne FD NWE in December – and other polyolefin prices suffered a similar fate. The long-awaited flood of material from new capacities in the Middle East finally hit Europe.

European producers – many of which had been congratulating themselves on being able to withstand imports of commodity PE and PP by moving towards the production of specialty polymers – could do little to stem the tide, and prices fell to unsustainable levels at the end of 2011.

Production at both the cracker and polyolefin level was cut back dramatically in the last weeks of 2011, with sources estimating cracker rates to be around 65% of capacity. Some LDPE plants have been closed for weeks, following a period earlier in the year when some sources saw LDPE as a quasi-specialty, such was the tightness in the market.

By December 2011, the only tightness evident in the PP market was built on hefty cutbacks.

“‘Short’ is too big a word to use for what we are seeing at the moment, but some grades are now getting tighter,” said one seller, commenting on availability of PP.

PE is generally still considered to be easily available, with only high density polyethylene (HDPE) injection grades showing less length.

“We have sold HDPE injection for January to March today,” one importer told ICIS. Such a sale to a medium-sized buyer would normally indicate that prices have reached the bottom.

Some producers are now preparing the market for a price hike in January, as stocks have dwindled because of the swingeing production cuts at most PE and PP units.

Buyers remain extremely cautious, however, and while some big converters prepare to buy stock for January – as they will be the first to suffer any potential shortages – smaller and medium-sized buyers are not convinced that prices can rise in January.

“I can’t see much of an increase in January,” said a producer. “But by the end of quarter one, we should see some improvement.”

It is not clear at what rate polyolefins units will run throughout 2012, but producers say that January output still be reduced.

“The fundamentals of the market remain the same,” said a large PE producer. “Supply outstrips demand. In 2011, we learnt an expensive lesson, which was to reduce output – something we have not been used to doing – and this will have to continue throughout 2012 and perhaps beyond.”

Producers maintain that current price levels are not sustainable, and hikes have been announced.

“We won’t be the only ones looking for price increases and keeping an eye on production in 2012,” said another major producer.

“Prices are unsustainably low. There is no other way out.”

Another producer saw the weaker euro as an opportunity to keep imports away from Europe, and to enable European producers to export volumes in 2012.

“Middle Eastern producers are not going to [direct] product towards Europe at the moment,” it said.

Polyolefins demand in 2011 has been poor in the second half of the year following a good start. Producers see this mainly as destocking, and do not expect to be running at the low rates they have done in the fourth quarter, in spite of dire predictions for the European market in 2012.

The Organisation for Economic Co-operation and Development (OECD) warned that the eurozone and UK could be entering a recession, and cut its global growth forecast at the end of November. It said the eurozone would shrink in the fourth quarter of 2011 by 1%, and by 0.4% in the first quarter of 2012. Such a forecast, if correct, means that polymer production will be cut back for some time.

The fly in the ointment for some domestic producers is the presence of a couple of major Middle Eastern polyolefins suppliers that have been reducing prices in a move to gain market share. Middle Eastern production is expected to continue to run at full rates, and traditional importers will clearly have the advantage over local production.

On the whole, sources expect 2012 to be a flat year.

“We are forecasting similar levels of growth for 2012 as we had in 2011,” said a large converter. Others agreed.

“2012 will hopefully be the same as 2011 for us,” said one.

“But we don’t expect to get back to pre-2008 levels.”

High crude oil and naphtha prices, coupled with growth from Asia, South America and (to a lesser extent) Russia, will prevent a price collapse, according to most sources, but they envisage a difficult 2012, with continued weakness in Europe.

($1 = €0.77)

For more on polyolefins visit ICIS chemical intelligence

By: Linda Naylor
+44 20 8652 3214

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