INSIGHT: European plastics demand suffers from volatility say converters

17 May 2012 17:34  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Europe’s plastics converters have been hit hard by raw material price volatility and the drift of margin pressure in the supply chain. Understandably, then, in a difficult operating environment, they are looking for greater stability and security.

Polymer market dynamics changed fundamentally in 2009 when domestic polymers prices in Europe began to be agreed on a more regular monthly basis.

Polyethylene and polypropylene affectively followed their respective monomers when they moved to monthly pricing after the 2008 crash, which had exposed the weaknesses of the quarterly contract model.

But manufacturers of plastic products – from agricultural film to containers and more sophisticated items – often sell on much longer formula-based contracts. Somehow, they are expected to absorb sharp price increases without having the ability to pass these on directly.

Plastics film and bag producer BPI, for instance, says it has had to take tough decisions in recent years to align capacities to market demand and close under-performing plants.

It said earlier this month that while it had been passing on polymer price increases to customers, the inevitable time lag was having a short-term effect on margins.

Increases in March had been “reluctantly accepted by the market,” following price rises in January and February. Relatively high European prices made all imports of plastic products from the Far East more attractive, chairman, Cameron McClatchie told the annual general meeting (AGM).

Polyolefin purchasing has become a high risk operation, Ian Robinson, the purchasing director for biaxially oriented polypropylene (BOPP) film maker, Innovia, said this week. And particularly since 2009 supply and price volatility risk had been passed down the value chain to converters.

The dangers of such a shift in the market are clear. Converters operate in a highly competitive environment and without security of supply and the mechanisms to deal with raw material price volatility are exposed.

The London Metal Exchange (LME) offered some hope of providing tools to hedge against price volatility with its regional and global PE and PP contracts but these foundered through lack of active interest from polymer suppliers.

“We are the shock absorbers between the upstream volatility and downstream stability at the consumer level,” Robinson told the ICIS World Polyolefins Conference on Wednesday.

Producers had become very efficient at passing monomer price movements directly to converters he said.

PP prices in Europe, for instance rose by 30% in the first four months of 2012, from a very low base at the end of 2011. The fact that May olefins contract prices had fallen only marginally meant that buying had continued on a hand to mouth basis in the expectation of lower prices in June. This apparent lack of demand makes the market even less transparent for all players.

The problem in Europe is that such market manoeuvres are not helping build demand. The contention is that they are destroying it.

A company like Innovia has many customers and many different contract mechanisms with them, some with prices fixed over 12 months.

“Producers have solved volatility and walked away from it,” Robinson told his audience in Brussels. “It shouldn’t just be the converter who has to deal with it. We want stability and security of supply.”

Price and supply volatility since 2009 have exposed fault lines in Europe’s polymer markets which are crying out to be filled.

“There is mutual dependency in all this. We both need each other. If we continue in this way the customer base will shrink,” Robinson said. It is widely apparent that he is not alone in this view.

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By: Nigel Davis
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