19 July 2012 16:16 [Source: ICIS news]
LONDON (ICIS)--Producers have closed their European polyethylene (PE) order books for July in the expectation of securing higher prices in August, as buyers scramble to secure extra volumes to avoid a price hike, industry sources said on Thursday.
The increasing price of crude and naphtha is expected to put upward pressure on August PE prices for monthly business. September Brent was trading at $106.20/bbl late on Thursday morning.
Spot PE prices rose this week on the short supply and price hikes in crude, with traders citing an increase of €40–50/tonne ($49–61/tonne) for low density polyethylene (LDPE) from last week's price of €1,120/tonne FD (free delivered) NWE (northwest Europe).
Buyers across Europe, even in southern European countries, are expected to procure more volumes than is usual for the summer holiday month, if crude oil prices stay above the $100/bbl mark.
Producers remain confident of recouping lost margins and expect the current high number of inquiries to translate into better-than-expected sales in August.
"I think August demand is going to be massive, we have [already] seen customer demand rise, and that is why the order books are closed… from Monday… for LLDPE [linear low density polyethylene] and HDPE [high density polyethylene]," said a producer.
"August demand for polymers would be strong [and] producers are limiting you to your [allocated] volumes in July," said one buyer.
"The market was very, very speculative, and remains speculative. Customers cannot buy any more – there is not enough material [and] we do not support pre-buying," said a second PE producer.
Price reductions for July monthly business are cited anywhere between €70–170/tonne for PE, depending on the time of the month and supplier.
In the first week of July, producer INEOS Olefins and Polymers Europe (INEOS) said it would limit its polymer price reductions to €70/tonne because of the rapid escalation in oil and naphtha prices, despite a €170/tonne fall in July ethylene monomer contract, but several competitors had already given away the €170/tonne drop.
Much of the August demand is likely to come from customers that were caught out by the sudden change in market sentiment, said a distributor. "Even last week there was still disbelief at what was happening, [but now] all of a sudden people have come running into the market," said a distributor.
While most producers closed their order books this week, a few started restricting their volumes as early as last week.
"Our order books were closed very early," said a third producer. "As soon as we realised there was an inversion in prices, we decided to filter out volumes [and then] as soon as we reached the allocation, we closed [the order books]. It is simply not to allow pre-buying."
The producer said it was banking on a good September and October to recoup lost margins, as these months were traditionally the high season in Europe for packaging industries.
A second PE buyer said: "The walls went up a week ago for any orders above the norm. They are pretty disciplined about not giving away product. They are not silly to give away August product in July, which is what a lot of people are trying to grab."
While August demand might be better than usual, it would not turn out to be "another July" where much of the good demand resulted from restocking and pre-buying, the buyer added.
"It [closing order books] is a dangerous game. A lot of customers will be away on holidays. If prices go up, and nobody is going to be around, then it's very, very difficult to predict what is going to happen," said a second distributor.
($1 = €0.82)
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