All change for polyolefins

04 October 2013 09:39  [Source: ICB]

Fluctuating costs, crackers running at reduced rates and increased supply are adding to the pressures facing European producers

The European polyolefins market has seen some pretty dramatic changes in 2013, perhaps not as spectacular as in 2012, but there have been some notable fluctuations in prices and buying patterns.

 

 European producers have been facing many challenges and there may be more on the horizon

Copyright: Rex Features

Such sharp changes have been a feature of these markets since the crash of 2008 and the onset of the monthly monomer contracts in January 2009, when quarterly contracts were no longer considered viable given upstream volatility.

This year has seen more emphasis on inventory control from both the buy and sell side, as neither producers nor converters want to have high-priced material in their warehouses, losing value in a potentially falling market.

One of the principal price drivers for olefins and hence polyolefins, is naphtha, and naphtha prices have been unpredictable throughout the year, affected not least by global geo-political events that are impossible to predict.

Imports also play a bigger role in Europe, and this is expected to continue into 2014 as new capacity comes on stream.

Europe has been a net importer of C4 (butene-based) linear low density polyethylene (LLDPE) for some time and there is very little commodity C4 LLDPE output left in Europe, leaving Middle East suppliers responsible for selling the lion’s share of LLDPE. This year has seen a drop in volume, however, and at times in 2013 LLDPE spot prices have been more or less in line with low density polyethylene (LDPE), not trading at the traditional discount of around €50/tonne to LDPE.

High density polyethylene (HDPE) imports are increasing market penetration in Europe. Late in 2012, Saudi Polymers Company (SPCo) brought on stream its new cracker and HDPE plants, in Al-Jubail, Saudi Arabia. The two HDPE units at the site have an annual capacity of over 1m tonnes, and buyers in Europe have been able to negotiate regular contracts with the company, a joint venture partnership between Chevron Phillips and Saudi Arabia’s National Petrochemical (Petrochem).

Little has been seen in Europe of the 400,000 tonne/year polypropylene (PP) capacity that was due on stream at the site at the same time. Borouge 3, due on stream in 2014, is expected to have more of an impact on the PP market in Europe, but polyethylene (PE) is also planned to come from the huge new site.

 
CAPACITY BOOST
Located in Ruwais, Abu Dhabi, Borouge 3 will raise Borouge’s olefins and polyolefins capacity to around 4.5m tonnes/year from the current 2m tonnes/year. The project includes construction of a third ethane cracker, two additional Borstar PE plants, two additional Borstar PP plants and a low density polyethylene (LDPE) unit.

The new capacity is expected to have an impact globally. PE and PP players in Europe are weighing up how increased import duties from established importers, including those from the Gulf Cooperation Council (GCC), will affect pricing when duties increase from 3% to 6.5% on 1 January 2014.

Buyers in the HDPE sector do not expect much change in pricing policy from Middle East suppliers and expect sellers to take the hit on the duty.

“The bottom line is the market dictates what the price is. [Importers] have enough margin. There’s enough headroom for them to take it,” says one large HDPE buyer. “It won’t be a deterrent.”

Several other buyers agree, but buyers are not so convinced in the C4 LLDPE arena.

“Europe imports most of its C4 LLDPE – they will simply pass it on. On C4 linear there is every possibility that they’ll increase prices,” says the buyer. “It might not happen immediately, but it will happen.”

A couple of producers say they had not yet determined their approach for business based on new import duties. Several large producers that import PE and PP into Europe, such as SABIC and ExxonMobil, also have production in Europe.

THE SHALE EFFECT
There are now also threats from gas-based production in the US, based on shale gas, and this is also expected to maintain pressure on European PE players in particular.

Many European producers have investments in low-cost areas, or joint venture partnerships that give them access to lower-cost PE, and INEOS will be bringing over ethane for use in Europe, giving it access to lower cost feedstock.

In the face of new capacity, based on low-cost feedstock, several European PE closures have been announced, with Dow’s 190,000 tonne/year HDPE plant at Tessenderlo, Belgium, already having closed at the end of 2012.

Total, LyondellBasell and Borealis have all announced HDPE closures in Europe for 2013 and 2014, and some sources expect more closures to be announced. Versalis and Eni are also closing LDPE and LLDPE.

In the early months of 2013, demand was very weak in Europe and some sources estimated cracker and polymer output to be as low as 75% at its lowest point.

An upturn in demand in May, prompted by a €100/tonne drop in the monthly ethylene contract and its subsequent pass-through to the PE market, tightened availability and demand levels were sustained, until the possibility of a US-led attack on Syria led to a surge in upstream pricing.

Demand in the first week of September was very strong. An increase in the ethylene and propylene contracts led to higher PE and PP pricing, and spot prices were high.

Naphtha prices in the high-$800s/tonne CIF (cost insurance freight) NWE (northwest Europe) in early August rose to a high of $967/tonne CIF NWE during the first week of September, but by the last week in September it had dipped back below $900/tonne CIF NWE, and polyolefins buyers were keen to avoid taking stock.

FLUCTUATING DEMAND
“I have seen the best week’s demand in over two years in September, and also the worst,” said a producer.

October olefins prices have fallen by €35-40/tonne, and several producers have already said they would pass these on to PE and PP buyers.

There have been questions about the validity of the current ethylene contract process, as some sources think the disconnect between naphtha and ethylene has become too great.

Solvay in particular has been keen to point out that the correlation with naphtha should be used as a guideline during the contract negotiations as other factors – supply and demand – for example, also play a part.

PE and PP buyers have been faced with price movements pretty much in line with monomer movements in the past few months as production has been cut back to create a finer supply and demand balance. This has led to unexpected tightness in some grades in the recent past as output is so carefully controlled that a production hiccup can lead to a shortage.

Most players expect the same emphasis on careful stock control to remain a feature of the polyolefins sector throughout 2013 and into 2104. This means crackers and polymer units running at reduced rates in the foreseeable future and increasing pressure on naphtha-based European producers, whose costs do not look likely to reduce significantly in the short term.


By: Linda Naylor
+44 20 8652 3214



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