INEOS HDPE plan highlights non-integrated economics, sources

11 May 2012 15:22  [Source: ICIS news]

LONDON (ICIS)--INEOS Olefins & Polymers' plan to potentially divest two of its high density polyethylene (HDPE) plants in Europe have drawn the polymer industry's attention to the high cost, slow growth dynamics of non-integrated plants in Europe, sources said on Friday.

"Those two sites are high cost, you need to invest heavily for these big volumes, and if you are not integrated, you have to pay for ethylene and you cannot get integrated margins," said a polyethylene (PE) pipe producer.

INEOS' businesses at Rosignano, Italy and Sarralbe, France, which could be put up for sale, represent 37% of the firm's nameplate HDPE capacity in Europe but are not integrated upstream to a cracker.

European integrated PE margins increased by almost €120/tonne ($156/tonne) in the week ending 4 May, primarily on a $70/tonne slump in naphtha prices. PE margins are the highest since June/July 2011, according to ICIS data.

However, standalone or non-integrated margins were flat as the lower PE prices were offset by a €20/tonne decrease in contract ethylene prices. Average April standalone low density polyethylene (LDPE) margins rose by €7/tonne to their highest level since October 2011, but HDPE margins fell by €10/tonne.

Most western European PE plants (approx 90% by capacity) are integrated back to cracker sources of ethylene.

"The European business for [the] commodities market is really under huge structural pressure after the shale gas discovery in the US," said a PE producer. 

The official statement from INEOS has also raised questions about the company's potential shift in focus from certain speciality PE grades towards others.

INEOS produces commodity HDPE and speciality pipe-grade HDPE  at both Sarralbe and Rosignano. Each plant has a nameplate capacity of 200,000 tonnes of HDPE per year.

"They are selling the family jewellery. These sites produce speciality grades so there must be some difficulty [and] it must be down to the financials," said the PE producer. 

The two sites constitute a significant share of PE pipe production in Europe, and a decision to sell them reflects recent poor margins in the speciality HDPE pipe sector, said a second PE pipe producer.

"This has taken us by surprise. It is quite drastic. The industry shares the view that margins for pipe compounds have reached extremely low levels. They remain disappointing," the latter PE pipe producer said.

INEOS also manufactures an HDPE premium grade at the French site which caters for the packaging needs of the domestic milk pasteurisation sector, which utilises UHT technology, industry sources said.

"The UHT market is really big in France, where 95% of milk is long life," said the PE producer.

"It will definitely have an impact in the French market because these plants were serving the French milk market. It will cause some questions among converters who were looking at having a long-term partner," said a second PE producer.

INEOS informed the market in a statement that it will be focusing its production on sites that are highly integrated upstream and downstream. These include the cracker complexes in Cologne, Germany; Rafnes, Norway; Lavera, France; and Grangemouth in the UK.

"The Cologne site is very diverse. It is something [INEOS] would want to nurture [and is] very demanding in terms of capital. There are lots of business units that could benefit from investment," a source close to INEOS said.

Autoclave grade LDPE and metallocene linear low density polyethylene (MLLDPE) grades are among them, the source added. 

INEOS's 230,000 tonne/year C4 LLDPE plant in Cologne will be converted to MLLDPE production by the end of 2012.

A major PE buyer in Europe said this would hardly be surprising in an industry that is shifting its focus toward speciality-grade MLLDPE.

"As I understand it, there is a big investment going into Cologne. They decided they are investing in metallocene. They might be looking at joining the Exxons and Totals. Everybody is pouring into metallocene in the hope of selling the speciality grade," said the buyer.

"There is also a significant amount of ethylene at the Cologne site. [They] are constantly looking at developing [it], lots of businesses are fed from the Cologne cracker," the source added.

($1 = €0.77)

Additional Reporting: Nigel Davis

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

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