15 March 2013 09:23 [Source: ICB]
Big fluctuations in the euro/dollar exchange rate are affecting trade into and out of Europe
Increased volatility in the euro/US dollar exchange rate is lowering overseas buying interest and causing caution across the petrochemicals complex, sources in multiple markets have confirmed in the first week of March.
Currency fluctuation has a major role in decision-making
The euro to US dollar exchange rate has become increasingly volatile since the start of 2013.
"[It went from] 1.37 [US dollar to the euro] to 1.30 in one week. It came out of nowhere, I thought we were going straight towards 1.40," a PET buyer said.
TRUE COST CONCERNS
This has limited exports of finished goods as overseas buyers are unwilling to purchase from Europe given uncertainty over the true cost of materials when they land.
"The exchange rate uncertainty is still there and that's a risk for people that want to sell into Europe," an MMA seller said. "In three weeks it has changed a lot, not making a trader's life easy.
"So it is less attractive for sellers to export to Europe. Asia was tight in January and Feb. Everyone was fighting for cargo. Usually it takes two months for a vessel to arrive. At 1.30 [US dollars to 1 euro], Europe loses its attractiveness for potential exports and the shrink in the rate is a risk for Asian producers wanting to sell into Europe."
Overseas buyers are unwilling to take deliveries - typically with lead times of up to eight weeks to Asia - amid uncertainty over the true cost when material lands.
"In one day it [the euro/US dollar exchange rate] can change 3-4 cents. It makes players more reluctant to buy," and ACN buyer said.
While some sources said they factor in exchange rate movements and hedge against them, volatility has risen sharply in 2013.
"Currency is one of our problems in the past year. We factor it in - I think it's something we have to get used to. I don't think it's going away. If you don't have hedging in place, it's of course a concern," an ACN buyer said.
Traditionally, Europe ACN exports would rise following the end of the Lunar New Year holiday in Asia, as Asian players look to restock material. Nevertheless, players are yet to see a rise in exports so far in 2013.
Engineering plastics players have already noted a drop in year-to-date 2013 demand of up to 20% year on year. Forecasts from other automotive markets bear this out, with estimates of a reduction in demand over the same period of around 15% in 2013.
Reduced overseas consumption as a result of volatile exchange rates is resulting in material previously earmarked for export remaining in Europe.
For example, European nylon 6 availability has been increasing because of imports from the Former Soviet Union (FSU).
Volatile exchange rates are also a problem for products where production and feedstock costs are in one currency and sales of the product in another.
For example, ACN spot prices are sold on a US dollar basis, but production costs are in euros, creating a fluctuating spread between the two, and an uncontrollable cost basis.
"Of course the exchange rate has a huge influence on the price. Propylene we get quoted in euros and [our] production costs are in euros - but sales of acrylo[nitrile] are always in US dollars. It's a huge influence, really a huge influence," an ACN producer said.
In the benzene market, where the euro contract price is converted at an agreed exchange rate. An initial March European benzene contract was agreed at €1,054/tonne, up €14/tonne from the previous month, one buyer said on 7 March.
The contract was agreed on a US dollar concept of $1,380/tonne FOB (free on board) NWE (northwest Europe) and converted to the euro price at the agreed exchange rate of €1:$1.3093. While the settlement reflects a $28/tonne drop in US dollar terms in an increasingly bearish European market, the weak euro meant that the euro number moved up from February.
Shifting cost basis and long-lead times for exports is making forecasts of price movements increasingly difficult, and leading to buyer caution across the petrochemical complex.
"The exchange rate volatility is preventing any exports. If it were up to me I wouldn't take the risk. For imports, we see it the same ... given the volatility and uncertain exchange rates, it's gambling," a R-PET flake producer said.
Additional reporting by Caroline Murray and Helena Strathearn
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