APLA: Volatility hits polymer markets

09 November 2012 11:34  [Source: ICB]

Volatility has dominated polymer markets in Latin America this year in those countries with open economies and with few subsidies and tariffs. These include some of the largest markets in the region, such as Mexico, Colombia, Chile, Peru and Ecuador, as well as many others in Central America and the Caribbean.

 

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US polyethylene (PE) has been a volatile commodity in 2012. Low-density polyethylene (LDPE) in the US Gulf started the year in the low 60 cents/lb ($1,323/tonne, €1,026/tonne) region, rising to the mid-70 cents/lb until April. It then declined to the mid-50 cents/lb before going up again to the high 60 cents/lb.

Prices will likely remain volatile, but the volatility will affect each country in Latin America differently. Countries with high import tariffs such as Brazil and Argentina may not see much volatility. Venezuela only opens its door to products it does not produce or does not make in sufficient quantities. As such, prices in the country can be very low, making smuggling polymer out of Venezuela attractive. At the other extreme, prices can be very high, making the products uncompetitive beyond the country's boundaries.

Countries with more open markets have to be more careful to control costs. Historically, US and Mexican companies keep inventories low at the end of the year to avoid taxes. This causes a gradual destocking towards the end of the year and pressures prices lower. This has already started in Mexico this year, with price reductions of 3.5-4.3% effective on 5 October for all grades except high-density polyethylene (HDPE), which is in short supply.

Sellers of imported product initially sought increases of 3 cents/lb in October and 2 cents/lb more in November. However, there is already evidence that some sellers have accepted flat prices in October, which casts doubts on the November increase. Few market players are venturing to forecast prices for November and December, but most participants expect prices will drop, based on historical trends.

These changes could hit Brazil and Argentina a month later, and the effects could cause their domestic prices to stay flat or diminish slightly. Producers in Brazil and Argentina were some of the few that pursued increases in October. Countries with lower tariffs will have to time their purchases carefully so they correspond with the lower prices.

Meanwhile, demand has softened in Latin America. Although the region has fared better than other parts of the world, it is not immune to the global crisis that has slowed down growth in Europe, China and the US. On the supply side, several maintenance turnarounds have tightened markets in Latin America. Maintenance has been performed in Argentina, Brazil and Mexico, resulting in lower volumes of HDPE. In fact, recent HDPE prices are not that far below those for LDPE.

FEEDSTOCK-INDUCED PP VOLATILITY
Polypropylene (PP) markets have also been volatile in 2012. In the US Gulf, PP started the year in the mid-60 cents/lb range and prices climbed fast to the 80 cents/lb. Buyers balked at the high prices and minimised purchases, sending prices back down to about 60 cents/lb in June. There has been a slow recovery from that point, but PP prices remain among the steadiest of all resins.

Feedstock propylene prices have made modest gains in recent settlements and, barring any unforeseen production problems, prices should remain mostly steady. Crude oil prices are fluctuating in a narrower band and appear poised to end the year well below the $100/bbl mark for West Texas Intermediate (WTI).

Although prices could change quickly, the current trends for PP indicate that a steady path is more likely for the final months of the year. Buyers in the northern hemisphere will reduce purchases to avoid taxes, and volumes will suffer, but feedstock prices are expected to limit the effect of downward pressures.

Prospects are steady for Latin America too, but price levels will fluctuate in every country with variations imposed by their respective import tariffs. In countries with alternatives, price increases will carry the risk of losing market share. That is why October prices have been steady at September levels.

With demand moderated by the weaker global economy and with feedstock propylene costs near this year's low, the last two months of 2012 have little room for surprises.

POLYSTYRENE STEADYING
Polystyrene (PS) markets were also volatile this year with surprising behaviour of feedstocks benzene and styrene monomer (SM). Benzene prices rose to an all-time high in July, even with crude oil far below its highs in 2008. That spike pushed benzene to an average of $5.28/gal ($1,587/tonne) in the US, placing it above even SM for a short period of time.

PS prices started rising in the first quarter of 2012 and grew steadily during the second quarter, only to stabilise in August and September. However, benzene prices are again rising in October, and this could bring more PS spikes in November, if the effect on margins is substantial.

The main problem for PS producers is to maintain production margins at a time when PP prices are much lower. A large premium for PS brings back the likelihood of PP substitution by transformers equipped to make the switch. October PS prices have been steady in Latin American markets, with only isolated initiatives for a price increase in Brazil, which do not have the support from all producers.

Demand for PS has not been strong this year, even in market sectors like disposables, which historically fare better than other applications. The global economic woes have affected all resins, and PS has not been the exception.

The prospects for November and December suggest PS prices will be stable, provided that feedstock costs will not exhibit another unusual bout of volatility. For high impact polystyrene (HIPS), a substantial decline in the price of feedstock butadiene (BD) has failed to substantially reduce the differential between general purpose polystyrene (GPPS) and HIPS. The gap between the two grades varies for each country in a seemingly arbitrary fashion, likely dictated by marketing considerations.

PS remains a mature market that has gone through much consolidation in recent years as producers direct investment to more profitable sectors of the chemical industry. The remaining players will have a good niche in the market, but for some, more consolidation could be forthcoming, particularly in Brazil, where domestic production still outstrips consumption.


PVC PRICES FIRM IN OCTOBER BUT ARE EXPECTED TO SOFTEN BY YEAR END
 

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Latin American polyvinyl chloride (PVC) prices rose in October, driven by feedstock costs, thin margins and the firming trend in other regions, industry participants said. In most Latin American countries, PVC prices for October were confirmed at higher levels early in the month, but in Brazil, by mid-month participants were negotiating price increases that would likely be accepted at close to the proposed initiatives, according to local sources.

The exception is Venezuela, where resin prices remain steady on government controls, while the immediate concern of the population is the aftermath of the presidential elections of 7 October.

In several regions of Latin America, however, market talk points to weakening PVC prices into November, because aggressive resin offers are being heard. Market sources are projecting that demand will soften in December, as participants shave inventories toward the end of the year. Sources in Mexico and Brazil talked of current soft demand not meeting earlier expectations. On the supply side, sources said that US PVC makers had resolved production or logistics issues resulting from Hurricane Isaac, and previously snug supply had eased by mid-October.

Additionally dampening demand, the housing industry in the US continues to suffer from the lame recovery. Demand from global export markets for product from the US or Mexico was also down, sources said. The eurozone crisis and weaker activity in China has resulted in decreased demand for PVC from the Americas,

In Argentina, participants said PVC prices increased by $30-50/tonne (€23-39/tonne) for October, following the $30/tonne hike in September. Participants noted lacklustre activity, as government restrictions on imports continue to dampen market sentiment. In Brazil, price increases of 5-8% were being discussed for October PVC, supported by firm resin and feedstock markets in the Americas and other global regions, local sources said. No blanket announcement was heard, as negotiations are carried out on a customer to customer basis.

September PVC prices firmed by an average of 8% on partial success of proposed 12% increases, after a 5% boost in August.

Demand has improved from the first half of 2012, but is still below seasonal expectations, sources said. Infrastructure projects for the 2014 World Cup and 2016 Summer Olympics are proceeding at a slow pace, and are not yet consuming significant PVC volumes.

Supply is in balance with demand, as more domestic material is produced by Braskem's new PVC plant and complemented with resin imports.

COLOMBIA
In Colombia, domestic PVC prices for October rose by $70/tonne for pipe-grade, on support from similar market dynamics throughout the Americas and other global regions, sources said. In September, domestic PVC prices rose from August by $50/tonne for pipe grade and $20/tonne for general purpose,

Colombian PVC for October exports is being quoted at $1,120-1,140/tonne cost and freight (CFR) South America except Brazil and at $1,160-1,180/tonne CFR Brazil, up from September offers at $1,080-1,100/tonne CFR South America including Brazil. July prices were at $980-1,000/tonne CFR South America except Brazil and $1,060-1,080/tonne CFR Brazil.

In Mexico, PVC domestic prices increased by 4 cents/lb ($88/tonne) in October, on upward pressure from US imports, sources said.

Resin supply has eased, sources said, suggesting that increasing availability could result in weakening prices into November.

Demand is expected to decline as participants destock toward year-end, placing downward pressure on PVC prices.

Mexican export material for October is being quoted at $1,060-1,080/tonne CFR South America, India and Turkey, up from September exports at $1,010-1,030/tonne CFR Europe/Turkey/Asia in September and $860-880/tonne CFR Europe/Turkey/Asia/South America in July.

In Venezuela, the population is focused on the impact of the presidential elections of 7 October. However, industry participants said PVC demand was steady despite an uncertain outlook on the economy. Market sources said that PVC availability for private industry, as well as for public construction projects, is ample because of the arrival of resin imports from Colombia and the US in the past few months.

PVC prices offered to private industry are assessed as stable, with the mix unchanged at 25% imported resin to 75% domestic for pipe-grade, and 80% imported to 20% domestic for general purpose (GP).


PET STRENGTHENS, DRIVEN BY ASIAN ELEMENTS
 

Summer PET business for drinks bottles was slow

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Latin American polyethylene terephthalate (PET) markets strengthened in October led by earlier firming in Asia and the US, industry participants said. Major drivers for PET price direction in Latin America are Asian PET and feedstock paraxylene (PX) prices, which had been on an uptrend in August and September.

Although some participants in Brazil said that PET demand is rising significantly in the second half of 2012 driven by seasonality, sources in other countries noted that the region's markets are generally performing under expectations, even in countries in southern cone of South America where the peak season is currently getting started.

In Mexico and the US, the high season has ended as cooler temperatures set in. Earlier, participants described summer bottled-drink and PET business as soft.

Although by early October the price increases in Asia had appeared to have peaked, lagging Latin American prices were still catching up. October prices in the Americas were being talked higher.

However, markets sources suggest that PET prices in November and December may stabilise or decline, as participants throughout the production chain manage inventories at the end of the year.

Additionally, sources in Latin America doubt that the upward trend for PET and upstream PX evident in the recent past can be maintained, as resin demand for bottle- and fibre-grades remains weak in Asia.

In Argentina, sources said prices rose by $72/tonne (€56/tonne) for October PET, driven by the market dynamics in Asia, and coming after a $60/tonne increase in September.

Demand remains moderate despite the warming temperatures and the beginning of the peak season for bottled beverages, participants said.

In Brazil, an $80/tonne price hike announced for October was under discussion, but early in the month, the outcome of negotiations was not clear, sources said. The proposal is supported by gradually rising seasonal business, firming feedstock costs and the global resin trend.

However, PET consumers noted that domestic demand, although increasing, remains less than robust, while offers of PET resin from Asia have been declining.

Brazil's PET prices in September were up by an average of $70/tonne, on a $90/tonne hike initiative by the local producer.

In Colombia, September PET domestic prices stood at $1,950-2,000/tonne delivered (DEL), amid slow industry activity, sources said, while initiatives for October had not emerged by the first week of October and participants talked of rollovers.

Domestic PET prices stood at $1,850-1,900/tonne DEL in August and $1,800-1,900/tonne DEL in July, on support from the global trend.

PET from Mexico was offered in September at $1,680-1,700/tonne cost and freight (CFR) Colombia, up from $1,640-1,650/tonne CFR Colombia in August, in line with the firming trend in the Americas and other regions.

In Mexico, sources said that a 4 cents/lb increase was implemented in October on support from higher PET values in the US and elsewhere in the Americas, despite tapering demand at the end of the peak season.

Offers of Mexican product for Colombia and Venezuela were heard at $1,600-1,680/tonne FOB Mexico. PET targeted for Venezuela was last heard quoted at $1,760-1,780/tonne CFR.


Author: George Martin and Ron Coifman



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