INSIGHT: Slow global polyolefins demand growth troubles producers

08 January 2013 16:03  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--The impact of weak industrial and consumer product demand on the petrochemical business is most widely apparent in the primary polyolefins. Demand for polyethylene (PE) and polypropylene (PP) has been hit by the difficult macroeconomic environment. The pressure on these key polymers has proved difficult to manage for both integrated and non-integrated players.

Cracker output globally was constrained in 2012 by weak downstream demand and the prospects for 2013 currently are not great. Olefins profitability this year is likely to be driven by supply issues and feedstock costs rather than any significant change in demand pull.

Clearly, China has a major role to play and once again this year the run-up to the Lunar New Year, which begins on 10 February, will be critical. Converter activity is likely to be subdued ahead of the holiday period, although some pre-buying is expected and the post-holiday rebound will be closely monitored.

The slump in China’s export-driven industries in 2012 hit the growth of polymer demand.

China’s plastics products output was estimated at 46.31m tonnes for the January-October period, ICIS reported in late December. Official statistics showed plastics output up 10% year on year compared with growth of 22% in the similar period in 2011.

By the 2012 year end, converters were living from hand to mouth because of the global economic environment and not a great deal is expected to change in the first half of January 2013 at least. But the pattern of buying in the first two months of the year, when China’s downstream appliance sector traditionally buys plastic products, will be watched carefully.

In Europe PE and PP players foresee another difficult year. Demand is expected to have contracted last year from 2011. Production rates were low with prices volatile as producers attempted to pass on high olefins costs in a difficult market environment.

The market is nervous with players operating on wafer thin margins. A poor competitive position will put further pressure on producers in 2013. They want to push through price increases at the start of the year but it remains to be seen whether demand and the need for re-stocking is sufficient to underpin increases. Planned cracker maintenance from later in the first quarter and into the second quarter will tighten polyolefins supply.

Polyolefins buyers in the US were cautious in the fourth quarter, concerned about demand growth in 2013 and the then upcoming ‘fiscal cliff’ negotiations. The first quarter of 2013 could be strong given the interpretation of the tax agreement reached in Washington at the start of the year.

Not surprisingly, converters were not keen to build inventory towards the year end and prepared to sit it out until the start of 2013. Producers have announced price increases for January believing that demand will improve sufficiently to underpin them.

Polypropylene buyers might expect higher prices in the first quarter, based on the seasonal trend for more refinery turnarounds at the start of the year. Integrated US PE producers can benefit from a low cost shale gas derived ethane cost position while PP producers rely much more heavily today on polymer grade propylene from the refinery.

US PE producers are prepared to push the ethane advantage hard through into PE while any (olefins) feedstock cost advantage in PP will take longer to materialise.

Planned maintenance shutdowns by polyolefins producers in the Gulf Cooperation Council (GCC) nations will restrict supply to customers in Asia and other parts of the world in 2013. But total output from regional Middle East producers is likely to be pushed higher by the ramping up of supply from capacity additions made in 2012.

Converters in Africa will become more reliant on suppliers from the Middle East and supplies from Asia in 2013 as demand is expected to improve and no new regional capacity additions are planned.

There is demand across Africa for polyolefins for packaging and agricultural use but little in the way of high end applications grades of PE or PP. HDPE and raffia grade PP are in demand for bottles, bags and fuel containers.

The slowdown in capital projects in Latin America is expected to provide opportunities for imports, ICIS editors reported at the end of December. Regional GDP growth is forecast at 3.9% in 2013 with demand for commodities likely to grow at least at this rate.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214

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