27 June 2012 12:21 [Source: ICIS news]
LONDON (ICIS)--European polyethylene (PE) prices are at a six-month low as producers take advantage of the drop in naphtha prices to produce material for spot and export sales at levels at which most traders cannot compete, sources said on Wednesday.
Large low density polyethylene (LDPE) buyers have been able to buy at €1,040/tonne ($1,300/tonne) FD (free delivered) NWE (northwest Europe) in June, from a high of €1,400–1,450/tonne FD NWE in April.
Naphtha prices were trading at $718–725/tonne CIF (cost insurance freight) NWE on Wednesday, while the average naphtha price in April was over $1,030/tonne CIF NWE. This drop in a major PE price driver has led to strong cracker margins for European ethylene producers and cracker operators have been tempted to run high to take advantage of good margins.
However, PE demand, the major outlet for ethylene, took a dive in April following a strong start to the year. May volumes did not improve so inventories with producers rose and buyers bought minimum volumes.
February and March PE prices soared on expectations of higher prices to come but the opposite took place in May and June, as the slump in naphtha prices could mean only one thing for PE prices, and prices collapsed.
In June, demand has been better, but much of this has been prompted by low-priced spot sales and export deals, supported by a favourable exchange rate.
“For the first time in a long while we have been able to export and we intend to take full advantage of it,” said a large European PE producer.
The lowest prices reported from Turkey and Africa in June have been offered by European producers. LDPE sales from southern Europe were reported at barely above €1,000/tonne CFR Turkey.
By mid-June spot sales in Europe began to be reported at similar levels and low prices also brought some buyers back into the market.
“At these prices I am going to build some stock,” said a major PE buyer. “Our strong season is in September onwards, so I will be buying in June, July and August.”
PE spot prices have reached the level of late 2011, when a surplus of stock sent sellers into the market looking for volume low-priced deals. LDPE reached €1,040/tonne FD NWE, a price available to large creditworthy buyers in June 2012.
This month, however, PE prices are down on lower feedstocks, rather than simply surplus stocks, although inventories with some producers are high because of the temptation of high cracker margins on such a low naphtha price.
Converters’ stocks are low and many now raise the question: have prices reached the bottom and, if not, when will they?
Larger buyers do not want to be caught short, as they were in January 2012, when prices began to rise to reach a high of €1,400–1,450/tonne FD NWE in April, but nor do they want to be left with a warehouse full of high-priced material.
All the signs are for a sharp fall in the July ethylene monomer contract price. Some sources talk of a drop of as much as €200/tonne from the June level of €1,205/tonne FD NWE. The June monomer contract was seen as too high by many, who said that the naphtha drop was not reflected in the ethylene monomer contract. They expect a full reflection of the naphtha drop in June. Spot ethylene prices are assessed below €900/tonne FD NWE on the pipe.
Since the start of the second quarter, the European ethylene contract price has fallen 10.4% while spot prices are down by a third. The latter decline, particularly, reflects 35% lower naphtha and Brent crude off by 28%.
PE buyers will expect the ethylene price drop to be transferred directly on to the PE market but there is caution from all sides.
“What really worries me,” said another PE producer, “is that naphtha rallies. Then where will we be?”
Cutbacks are now being considered at the PE level, and some producers have begun to implement them.
“Dynamics are changing,” said a third PE producer. “It is very difficult to predict stock levels and movements in a market like this.”
PE buyers are also nervous.
“What we really don’t want to see is for prices to drop again in June and July, producers to cut back and then in September for prices to go up again because there’s no material,” the producer said.
“I suppose there could be a rebound in September,” said another large buyer, “but there’s a lot more material around than there was in January.”
“European producers are trying to lock in volumes for three months now,” said another buyer. “Prices may go up in September, they may not. What I expect is a lot more volatility and shorter cycles.”
2011 and 2012 have been roller coaster years for PE buyers, and it is not surprising that so many are finding it difficult to gauge when prices have come to the bottom.
Much of what happens in Europe depends on markets elsewhere, of course. Asian PE demand has been lacklustre and sentiment much affected by the eurozone crisis.
PE is used widely in the packaging and agricultural sectors.
($1 = €0.80)
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