FocusSouth Africa's PE, PP summer demand flat on political woes

25 October 2012 13:21  [Source: ICIS news]

PELONDON (ICIS)--South African polyethylene (PE) and polypropylene (PP) demand is flat this summer on economic concerns fuelled by ongoing country-wide political strife, industry sources said.

But some still hope for a spike in demand before the traditional summer PE and PP season ends, towards mid-December.

A wave of wildcat strikes over pay and working conditions in the mining industry since August, and subsequently in the transport sector, have hit the countrys economy hard, undermining investor and consumer confidence.

The industrial disputes, with their highly political roots, are estimated to have cost South African businesses and the state billions, with Moody’s and Standard & Poor’s downgrading the country’s credit rating.

“The Marikana [mining] issue has left a very bitter taste around the world [and] South Africa’s credit rating was downgraded. We have to face up to all these challenges, and keep our head above the water. Business is poor all round,” said a South African PP buyer.

The Business Confidence Index (BCI) published this month by the South African Chamber of Commerce and Industry (SACCI) dropped to 91.7 in September from 95.0 in August. The index indicates “a depressed level for local confidence”, SACCI said.

In manufacturing industry, the purchasing managers’ index (PMI) fell below the key 50 mark, to 46.2, in September, soon after the strikes began.

Meanwhile, the South African rand (R) continues to be volatile as renewed global economic uncertainty forces investors out of emerging market assets. On 22 September, the US dollar hit a 29-month peak of R8.5095, driving up the cost of PE and PP imports in South Africa.

Against a backdrop of a bleak economic outlook locally and globally, South African plastic converters have taken a step back in what is usually the peak summer season in plastic consumption.

“Market dynamics in South Africa for this time of the year are still weak. I don’t recall an October where very few converters are working weekends, that is absolutely unheard of,” said the buyer.

A hike in prices for certain PE and PP grades has not helped boost consumer confidence either. “There are a lot of end-product producers complaining about raw material prices,” added the buyer.

Import prices for PE have only recently begun to show signs of a decrease, after increasing steadily through a three-month period. LDPE import prices into South Africa increased by 5% from 8 August to 10 October.

“We are probably sitting at the top cycle of the international price [especially with] the rand effect,” said a sales executive based in the South African division of a major international trading firm.

Imported LDPE is being quoted at R14,000/tonne ($1,593/tonne) FD (free delivered) in the local market, the sales executive said, way above domestic producer offers.

“We have got two-tier pricing again – domestic at one level and importers at a [R]1,000 premium,” the source explained.

In the PP sector, local producer Sasol is said to be selling PP at above import parity levels. The Competition Commission of South African has contended that the prices at which Sasol supplies propylene and polypropylene are “excessive”.

The South African PP buyer said: “Polymers are duty free into this country. Both these [local] producers apply import parity pricing and we just have to pay import equivalent prices.”

As a result of the high domestic PP prices, South African plastic converters are unable to compete with finished products from India, Dubai and Egypt, the source added.

Although Sasol has been offering LDPE at what is widely confirmed as below import parity levels, an increase is due for LDPE as well. The company is increasing its November offers by R1,000/tonne FD to R12,450/tonne FD, as LDPE imports are thought to have dwindled and competition is less.

The price increase could be a sign that Sasol expects demand to pick up in November, just before the holidays, industry sources said.

“We will have to see how it pans out in the next six weeks. There's always a season, you [will] still get a seasonal spike [but] it tends to be later,” the sales executive said.

A second South Africa-based PE and PP distributor said: “We might see a pick up in the retail side of things before Christmas, but apart from that we expect nothing.”

A third distributor in South Africa added: “Everyone is adopting a wait-and-see approach.”

“I suspect Sasol will lift their market share. [It is the] worst time for importers when things are volatile,” the first South Africa-based sales executive added.

($1 = R8.79)

By: Cuckoo James
+44 (0) 208 652 3214

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