FocusEurope PE, PP buyers face more hefty hikes in March

24 February 2012 11:16  [Source: ICIS news]

LONDON (ICIS)--European polypropylene (PP) and polyethylene (PE) buyers are facing more increases in March, as product availability of some grades is tight, production costs remain high and producers’ margins low, market sources said on Friday.

There is an unusual consensus among buyers and sellers that prices will go up again in March, following February hikes of approximately €120–140/tonne ($160–187 tonne), depending on the grade of polymer in question.

“Everybody seems to have a similar idea about March at the moment,” said one large PE buyer.

Expectations for an increase in upstream monomers are widespread, particularly as crude oil and naphtha prices soar. On Friday morning Brent crude was trading at $123.86/bbl and naphtha was at $1,051–1,059/tonne CIF (cost, insurance & freight) NWE (northwest Europe).

“Prices will go up next month,” said a trader, “it’s just a question of how much.”

PE and PP producers are expecting increases of €50–80/tonne for ethylene and propylene contracts in February, and they are expected to seek more margin improvement.

February PE and PP prices rose by more than the increase in the ethylene and propylene contracts, as producers managed to claw back some lost margins and increased PE and PP prices by slightly more than the monomer increases.

Margins are still poor, however, and production has been cut back as installed capacity outstrips demand. Some large buyers have said that they are taking all their contracted volumes even though their demand is not as good as expected, in a move to be able to avoid buying too early in March.

“I can wait until 10 March before I discuss March [pricing],” said a PP buyer who normally settles early in the month.

Demand for PE is stronger than for PP but in both markets production cutbacks rather than strong demand have propelled prices upward.

“They are struggling over margins but there is a market reality out there,” said a large PP buyer, who expects the steam to run out of the current upward momentum by April.

European PE and PP prices are now high enough for importers to jump into action and another increase in March would mean a more substantial flow of product, particularly if Asian prices remain lacklustre.

Low density polyethylene (LDPE) is now trading at €1,300–1,350/tonne FD (free delivered) NWE on a net basis and homopolymer injection PP is at €1,280–1,320/tonne FD NWE, up by over 20% since the end of 2011.

There is now speculation as to how long the current upward momentum can run, with most sources expecting it to run out of steam by May. Some buyers expect the market to change by April. Much depends on the level of demand in Europe and beyond in the coming weeks.

Monomer and polymer production problems in Europe have left some producers short of product in some PP and PE grades and they will have little chance to rebuild inventories in the short term.

Others have been running capacities at low rates to accommodate weak demand in Europe. A couple now plan to ramp up output.

“We will increase our output over the coming weeks but the momentum in the market will continue until at least May,”said a major producer.

Several sources, both buyers and sellers, look back to 2011 when prices rose in the first quarter before falling steadily throughout the year only to rally in 2012.

In April 2011, homopolymer injection PP spot prices reached €1,400/tonne FD NWE but by December they were trading at €1,020/tonne FD NWE. Other grades followed a similar pattern.

The spectre of increased imports from the Middle East also looms in Europe as prices increase and move beyond those in other regions. Until now re-exported product from China and new imports from the Middle East have been limited, and hardly workable in many cases, but this could change if the current price trend continues. However, most players are very much aware of the minimum lead time of six weeks and increased freight rates, so are carefully weighing the risks before committing.

“I bought some LLDPE [linear low density polyethylene] being re-exported from China a couple of weeks ago but I don’t know if I would buy now,” said a trader.

March PE and PP pricing ideas will be clearer once the monomer contracts are settled. Producers will roll out their price ideas and the tetchy process of monthly price negotiations will begin again. Meanwhile, spot prices are rising in anticipation of new price hikes but most buyers remain cautious and prudent in their purchases.

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

($1 =€0.75)

By: Linda Naylor
+44 20 8652 3214

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