INSIGHT: Of golden eggs and geese

By Chow Bee Lin

“Why kill the goose?,” a plastics processor in Malaysia asked, referring to the fowl that laid the golden egg in Aesop’s fable.

He posed the rhetorical question after Middle East and Asian producers raised their price offers for polyethylene (PE) sharply for April shipments.

The processor was referring to the likelihood of the recent PE resin price spikes bringing on demand destruction by driving small and medium-sized plastics processors out of business.

The average weekly prices of film grades low density PE (LDPE), linear low density PE (LLDPE) and high density PE (HDPE) in China and southeast Asia rose by 11-14%, 20% and 12% respectively, in the first quarter of this year, according to ICIS.

Many plastics processors in southeast Asia are bearing the brunt of the recent spikes in plastics raw material prices because they have difficulties passing on the additional resin costs to their downstream customers, the processor said.

China’s plastics processors, in particular, are resisting resin price hikes because their customers in the key downstream application sectors such as home appliances and food have experienced lower returns since the year started, Chinese resin traders said.

The combined retail sales values of China’s top 100 home appliance manufacturers rose by just 1.11% in January-February, on a year-on-year basis, which was 16.68 percentage points lower compared to the same period in 2011, China’s Ministry of Industry and Information Technology (MIIT) said on Sunday.

The combined retail sales values of China’s top 100 food manufacturers rose by 13.8%, which was 24.1 percentage points lower from the same period in 2011, the MIIT said.

The lower retail sales values of key application sectors in China such as home appliances and food may indicate that plastics end-users and processors in those markets are not in the best position to pay more for plastic resins, components and packaging material.

Despite the indications of a slowing demand in the key China market, there is no certainty that Asia’s producers will refrain from raising plastic resin prices further because they have been grappling with squeezed margins too.

“We’ve been having a tough time because of high feedstock costs,” said a marketing manager with a global producer which operates a PE plant in southeast Asia.

The quarterly variable margins of an integrated naphtha-based low density polyethylene (LDPE) plant in northeast Asia was estimated to have fallen to $91/tonne in the first quarter, the lowest since fourth quarter 2000, according to ICIS.

Spot ethylene feedstock prices rose by 19% in northeast Asia and 30% in southeast Asia in the first quarter this year on the back of tight supply, ICIS data show.

Spot ethylene supply in Asia was tight in the first quarter because of lower cracker operating rates in China, Japan and southeast Asia.

Saudi ethylene supply shifted from Asia to Europe, where margins are higher, and exports from Iran were reduced as the financial sanctions imposed on the country made payment difficult, according to industry sources.

And the extent of China’s slower demand growth this year, and the impact that it will have on the country’s PE import demand, is still unclear.

“(The Chinese traders) always say demand is weak, but the import data shows they have not stopped buying,” said an export manager of a PE producer in northeast Asia.

China’s imports for January-February rose by 23.58% for high density PE (HDPE) and were up by 48.92% for low density PE (LDPE), on a year-on-year basis, according to China Customs.

China’s linear low density PE (LLDPE) imports for January-February fell by 8.71% on a year-on-year basis, but the February volume at 203,500 tonnes was similar to the monthly average import volume in 2011, the customs data show.

In times of rising energy costs, and when PE resin end-users, processors, traders and producers report squeezed margins at the same time, all segments of the PE supply chain are in the position of Aesop’s endangered bird.

Perhaps then, the PE industry as a whole could pose the same rhetorical question to stakeholders in the crude oil market: “Why kill the goose?”

Peh Soo Hwee contributed to this article.