FocusEurope PE, PP July price discussions tough in changing market

12 July 2012 11:46  [Source: ICIS news]

Tough pricing talksLONDON (ICIS)--European July polyethylene (PE) and polypropylene (PP) pricing talks are challenging and mixed following a sharp turn in the trend of the market last week that had some sellers backtracking and left short of material, several sources agreed on Thursday.

“I haven’t seen anything like this in my 12 years in the market,” said a trader, commenting on a turnaround in the market that happened almost in one day.

“Demand suddenly came back last Wednesday [4 July],” said a producer.

Demand in the European PE and PP markets has been poor since a sharp downward turn in April, and May and June saw steady early-month volumes tail off in the second half of the month.

Some sellers expected this pattern to continue into July, and immediately offered a €170/tonne ($207/tonne) reduction on polymer prices for the month as soon as the July ethylene contract was settled at a reduction of €170/tonne from June.

However, a sharp upturn in naphtha pricing in the first few days of July increased costs sharply at the cracker level, and cracker margins that had been supporting low PE and PP spot prices disappeared.

“Costs are killing us,” said a major PE producer. “Ethylene has been sponsoring us [PE producers] and the sponsor has gone bust.”

European contract cracker margins were slashed by 60% as naphtha feedstock prices have firmed in the aftermath of the significant reduction in the July ethylene contract price, according to ICIS analysis.

Cracker margins collapsed by €458/tonne to their lowest level since February 2012 after naphtha prices surged by 10.4% once a 3% strengthening of the US dollar against the euro was factored in. In June, cracker margins had been at their highest since December 2008.

This drop in cracker margins, coupled with the very low spot PE and PP prices offered by European producers, led to a belief that polymer prices had reached their lowest point of the current cycle, and buyers that had stayed away from the market for several weeks began to rush to buy.

This “feeding frenzy”, as one large buyer described the situation, led to many sellers being sold out of many PE and PP grades. Much of the business had been done at very low pricing, however, and some producers admitted that they could have played things differently.

“We have managed to throw away the whole of our margin,” said one PP producer.

“We just got it wrong,” said another polymer producer.

Many buyers were able to settle July pricing at a reduction of €170/tonne from June, a level that is now increasingly difficult to achieve.

“I have two suppliers,” said a medium-sized PE buyer. “One says it will stand by the initial offer of minus €170/tonne, but the other has told me it can’t.”

Producer INEOS made a public statement that it would not reduce its July PE and PP pricing by more than €70/tonne, in spite of the €170/tonne drop in the ethylene contract price, and this stance is fully confirmed by buyers.

Most sources expect the final outcome of July negotiations to be around €100–140/tonne down from June.

Spot prices have been rising quickly, however.

Low density polyethylene (LDPE) spot prices at the end of June were in the mid-€900s/tonne FD (free delivered) NWE (northwest Europe), available from European producers. Prices are now at €1,060–1,120/tonne FD NWE.

PP homopolymer prices at the end of June were at a similar level to LDPE, but now have risen to €1,100/tonne FD NWE. The gap that had emerged between spot and monthly pricing is now closing to a more normal level, and the lowest prices in the market are no longer offered by European producers.

The question now on everybody’s lips is what will happen in August.

Demand is not thought to be based on any change in fundamentals, but simply on a stock shift. Producers’ inventories had been high, and converters’ low, so a transfer is now taking place.

“There has been no change in fundamentals,” said a large buyer. “If I was a small buyer, I don’t know how much product I would be putting into stock.”

However, for the moment buying is brisk, when product is available.

“For the moment people are knocking on our door,” said another producer. “Nothing fundamental has changed but the industry needs to build inventory.”

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

($1 = €0.82)

By: Linda Naylor
+44 20 8652 3214

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