03 August 2012 12:26 [Source: ICIS news]
By Cuckoo James
LONDON (ICIS)--Europe's polyethylene (PE) buyers are vocal about risks to their packaging businesses from cost-driven price volatility in July and August, and are keen to take steps to ensure a relatively flat September, industry sources said.
The price volatility in PE was sparked by the three-digit feedstock ethylene contract price movements in July and August, with producers moving PE prices accordingly to secure good margins.
Converters in the packaging industry maintain the volatility in PE pricing has increased significantly since the introduction of monthly contracts for ethylene in January 2009. Some also question the lack of transparency in the monomer contracts.
"These [monomer] contract prices are not very transparent ... there are two digit discounts offered on these contract prices," said a PE buyer.
PE converters are often sandwiched between major polymer companies and downstream food retailers and face pressure from both ends. A second large PE buyer said: "Economically this is a disaster. You cannot have this sort of a price movement in a consumer supermarket environment. It's crazy. I've been involved in this market for a long time; I've never seen price volatility like this."
A PE producer agreed with the converters' point of view: "July was something I've never seen in my life in the plastics environment, with the situation before and after 4 July. The converters are a bit squeezed, on the one end there are suppliers who are firm, and on the other end they have to face the end user."
Price reductions for July monthly business was unusually volatile. Producer INEOS limited its price decrease to €70/tonne, but several competitors initially gave away the full €170/tonne ($207/tonne) drop from the July ethylene monomer contract. They then backtracked around 4 July - partly as a response to an uptick in naphtha and crude prices - and closed the bulk of their deals at reductions of €100-140/tonne.
Consequently, August offers which are at an increase of €190-220/tonne from July, that is, €50-80/tonne more than the €140/tonne hike in the August feedstock ethylene monomer contract price, remains unpopular with buyers.
The first PE buyer said: "They cannot expect us to finance their inefficiency. There is a credit crunch in Europe. They have inefficient factories, and they expect us to pay the cost of these old machines."
Nevertheless, buyers are under pressure to accept the proposed price increases because of a lack of alternative supply sources, especially as imports remain minimal. Although underlying demand is poor, a spate of pre-buying has been propping up July and August demand.
A third large PE buyer said: "If we want it that’s the price we need to pay. Most of the producers have good order book levels, and product is not available from elsewhere."
With August increases almost inevitable, converters are taking steps to ensure that September could be relatively flat. "With a price increase of €200/tonne on the table for August, the market cannot have a further price increase in September [because] fundamentally demand is low in Europe. So, I will buy only what I need in August and use my volumes from pre-buying in September," the second buyer added.
A fourth buyer said: "Production is down in most factories in Europe. Nobody would buy in September, we will buy for the both August and September, so prices will not go up in September."
The PE producer said that although September would be "a situation of tension", it would still be favourable for polymer producers because of the lack of imports. "To organise imports, you need six weeks, that is not before [the] end of September. My opinion is that the game is in our favour in September, in October I don’t know."
"I believe there will be very little imports in August and September. Also, many crackers are going down, so production should be limited," said a second PE producer.
A trader of imports said: "There will be a price increase in August, and further price increases in September. By September, the prices would be high enough for imports to be offered."
However, the trader said there was a problem with this cycle, as it is too short. "You cannot work like that, everybody is speculating. Everything is mere speculation. Long term contracts ensure predictability. Now the large accounts are keeping more and more space for spot. The film industry is getting very, very tough. Before it was more or less predictable, there was competition but within limits."
Despite the risk of price volatility and losing out on customer support, many PE producers remain primarily concerned about ensuring margins. A third PE producer said: "We have an increase in cost. When you start to lose the money at the cracker level, it [is reflected] not just in the PE business, but in the balance sheet of the company."
($1 = €0.82)
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