European Polyolefins: The Luxury of Unintended Consequences

Another excuse for a Dylan picture – ref “Shelter From The Storm”

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Source of picture: www.israbox.com

By John Richardson

WEST EUROPEAN polyolefin markets remain tight thanks to the lingering effects of lack of spending on maintenance, several market sources have told the blog.

“Companies were so short of cash from late 2008 that they began to delay maintenance work such as furnace re-tubing,” said one source yesterday.

“You normally start to experience production problems 6-9 months after this happens and we have seen this recently with the high number of outages.

“This also happens in really tight markets where nobody wants to be the first one to shut down because everyone is making so much money. So in 2005 we saw a raft out outages.”

Tightness in Europe is just one of the consequences of the Lehman Bros-triggered crisis that have created a “New Normal” for markets, to borrow a phrase from my fellow blogger Paul Hodges.

Confusion continues among some industry observers who are familiar with looking at average operating rates and concluding that low average rates indicate poor overall profitability.

Average H1 operating rates for ethylene in Europe were just 82%, but some crackers were running at more than 90% while others were operating at much-lower rates or were shut down, we understand.

This was the result of both technical problems and lack of naphtha from local refiners.

The ICIS pricing European cracker and PE margin reports have consistently shown (here’s a report on the 17 September issue) that variable cost margins in Europe remain an awful lot better than many people had dared to expect this time last year.

The overall “New Normal” for markets, including all the other the factors behind tight supply that we’ve detailed before, is leading to the view that we might just be bumping along the bottom of the cycle right now.

This is slightly earlier than the Q4 low point than had been forecast earlier this year, and, as we said, margins are in a lot healthier shape than had been predicted in Asia and the US as well as Europe.

“It is our view that we might be at the bottom, or close to the bottom, of the cycle as most of the new capacity in this current wave is already on-stream,” said a Hong Kong-based chemicals analyst today.

“But most companies are only being cautiously confident because of all the risks ahead – not least, of course, the economy. Only the South Koreans are being very bullish over the prospects for 2011.”

This could all still end in tears.



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