Europe PE, PP arbitrage window opens as prices surge

17 February 2012 11:18  [Source: ICIS news]

Europe PE, PP arbitrage opens as prices surgeLONDON (ICIS)--High polyethylene (PE) and polypropylene (PP) prices in Europe are leading to increased offers of imports as re-exports from China, as well as new offers from some Middle Eastern suppliers, who see a better netback in Europe than Asia, sources said on Friday.

“The [arbitrage] window is well and truly open,” said a major PE producer.

PE and PP prices have risen by over 20% in Europe in 2012, while the Asian market has been lacklustre so far this year.

Traders and large converters report offers of imports but prices are not necessarily attractive enough for them to buy, as the outlook for Europe remains uncertain.

“Everybody knows that [European] prices are going up in March, but what will happen after that is anybody’s guess,” said a large buyer. “I can see a scenario like 2011, when prices fell after the first quarter.”

Low density polyethylene (LDPE) net spot prices started 2011 at €1,400/tonne ($1,842/tonne) FD (free delivered) NWE (northwest Europe), peaked at €1,480/tonne FD NWE in March, and fell steadily throughout the year to reach a low of €1,030/tonne FD NWE by December. PE prices fell on a glut of supply and slow demand.

Current spot LDPE prices are around €1,320/tonne FD NWE, with a tendency to move up.

Demand in 2012 is not bad, but producers have been successful in increasing prices mainly because of cutbacks in production which have left supply tight in some cases. High feedstock costs have cut deeply into producers’ margins, leaving PE and PP prices barely above the headline monomer contract prices by the end of January.

March is expected to see another rise in monomer contract prices and PE and PP prices are widely expected to move up at least in line with these new contracts.

“If we carry on like this, all the windows and doors will be open for material to flow into Europe,” said a trader who feared that the European PE market is becoming overheated.

Producers say there is no choice, however, and some expect a different outcome to the current situation.

“Yes, there are imports at present, but I don’t think they will ruin the European market,” said another PE producer. “It won’t be European prices falling, but Asian ones going up. Chinese PE producers can’t survive at this level. They will have to cut production.”

LDPE prices in Asia are currently offered at $1,370/tonne CFR (cost & freight) for Iranian material, but with FOB (free on board) China offers mentioned well above $1,400/tonne – plus freight and the probability of a 6.5% import duty into Europe, as well as costs and margin – European buyers are naturally hesitant.

Nervousness surrounding the European economy and its effect on markets globally could mean that European producers will maintain a certain balance, as traders and buyers do not want the risk of bringing material into Europe with a six-week delivery time.

PP and PE are used extensively in packaging. PE is also used in the agricultural industry and PP in the automotive sector.

($1 = €0.76)

For more on PE and PP visit ICIS Chemical Intelligence


By: Linda Naylor
+44 20 8652 3214



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