Tough negotiations ahead as Europe Feb PE offers up by €150/tonne

31 January 2012 11:53  [Source: ICIS news]

LONDON (ICIS)--Producers and buyers in the Europe polyethylene (PE) market are expecting a tough round of negotiations for February contractual business, as initial indications point to a €150/tonne ($197.4/tonne) hike in offers, they said on Tuesday.

The offers are €51/tonne above a feedstock ethylene price increase for the month.

The European ethylene (C2) contract price for February settled at €1,219/tonne FD (free delivered) NWE (northwest Europe), up by €99/tonne from January.

Producers cite low margins because of rising feedstock costs, plus a better-balanced PE market in Europe because of recent production cutbacks, as major reasons for the rise in offers.

“We are coming from a horrible market position. Our goal for February is a €150/tonne increase. This is to cover the C2 increase, and to get a €50 margin,” said one PE producer.

Current margins are unsustainable, the producer added – a sentiment echoed by other PE producers, most of which are aiming for a similar margin.

US-based Dow Chemical is set to announce a €150/tonne increase for all grades of PE in February.

Italy-based petrochemicals producer Polimeri Europa is planning to apply “an ethylene plus” increase to low density polyethylene (LDPE), and an even higher increase to linear low density polyethylene (LLDPE) prices.

“There is huge pressure from raw materials, what we expect for PE is a strong increase – especially in LLDPE [because of] the stronger demand and low inventory levels,” a Polimeri Europa source said.

News of the hike in offers has come as no surprise to PE market players, and buyers have been gearing up to bid the offers down.

Converters point to slow to normal downstream first-quarter demand, and a consequent difficulty in passing on any higher raw material cost to their customers.

Demand from downstream industries, such as agriculture, will be quiet until the second quarter, while customers in the packaging business buy on a need basis that would not translate into a dramatic rally in demand, a major PE buyer said.

“They won’t get €150/tonne – they know that. The realistic target for them is ethylene plus €30/tonne – that is, €130/tonne,” the buyer said.

“The producers would then achieve a €200/tonne increase in two months [January and February]. Which of our customers are going to give us that kind of money? That would eat into their credit. That is going to cause them problems.”

Other converters expressed confidence in their comfortable stock position, saying it was enough to obtain them a good bargain.

A second buyer said: “Our stocks allow us to be strong in negotiations. If producers want more than the C2 increase, we will turn it down.”

A third buyer said: “I don’t think it will be €150/tonne. It will be €100/tonne – only the ethylene increase. We don’t really need volumes – we only buy what we need. So there is no pressure on us. So if the producer is increasing prices, we will say no.”

However, a second producer, which is pushing for a €150/tonne increase, said: “The economy is not good, but it is not dead. Day by day, you are eating. So food packaging is going on.”

The producer added that it had customers asking for product for “consumption, not just restocking”.

Meanwhile, buyers are citing the Middle East as an alternative source if European product becomes too expensive.

“I was offered LDPE on Friday, which is being shipped by a trader who has got several thousand tonnes. In the end, it is a world game,” the first buyer said.

“I am sure I’m going to pay more money in February, but the question is by how much. Whatever they say, they still want volumes.”

PE is used in agriculture and packaging.

($1 = 0.76)

For more on PE, LDPE and LLDPE visit ICIS chemical intelligence
For more on pricing intelligence visit ICIS pricing

By: Cuckoo James
+44 (0) 208 652 3214

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