European Markets Weaken Further



By John Richardson

THE dreadful state of European polyolefin markets became even more evident late last week as prices continued their declines.

Discussions on further reductions in European olefin contract prices were also set to begin today.

High density polyethylene (HDPE) and linear low-density polyethylene (LLDPE) spot prices have now fallen by Euros80-150/tonne in June, according to our colleagues at ICIS pricing.

Low density PE (LDPE) became far-too unaffordable because of limited supply and unexpectedly strong demand in certain end-use segments. Spot prices fell by Euros100/tonne last week.

Producers had been hoping to limit June PE contract price declines over May to Euros45-60/tonne, which at the lower end would have been in line with the Euros45/tonne drop in ethylene contracts for the same month.

But the PE contracts settled Euros50-80/tonne lower, said ICIS pricing.

Some polypropylene (PP) June contracts were agreed at Euros80/tonne lower than in May, double the Euros40/tonne fall in the June propylene contract.

The global demand outlook is back to what one industry commentator described over the weekend as “late 2008 recession levels’.

Not surprisingly, therefore, as discussions begin today for the July ethylene and propylene contracts, further reductions are being expected by ICIS pricing.

Talk for ethylene is expected to focus on declines of Euros80-120/tonne.

The majority of propylene players are anticipating falls of Euros50-70/tonne. However, a couple of players said Euros100/tonne was possible.

“Margins are still historically very good and so cracker producers would still make a workable margin if they made significant reductions,” a second commentator told the blog last week.

This was confirmed by the latest-available ICIS pricing Weekly European Ethylene Margin Report, which is for 17 June (the 24 June report is published later today).

As of 17 June, for example, naphtha-feed ethylene contract margins were at an average of Euros450/tonne for the year-to-date in 2011.

This compared with Euros354/tonne for the full-year 2010 and Euros228/tonne in 2009.

Improving margins are a result of production being well-managed against demand, naphtha feedstock shortages and a high number of force majeures.

“There is an old school of thought that decreases in monomer prices can make the situation worse,” our second industry commentator continued.

“What is on everyone’s minds is whether the Europeans will do enough to align their domestic markets with what is happening globally.”

European olefin and polyolefin producers were clinging-on the hope - vain in our opinion - that weakness in China was only the result of destocking, the source added.

China’s PE demand was down by 4% in January-May this year to 7.1m tonnes over the same period in 2010, according to this post from the ICIS Chemicals & The Economy blog.

European net exports to China halved over the same period to 71,000 tonnes as China also raised its own production and the Middle East took market share, added the post.

Higher Saudi PE production seems inevitable as a result of the Kingdom’s decision to raise crude-oil output.

This will put more pressure on Europe – not only in the China export market, but also in other export markets as Saudi Arabia struggles to sell this extra output to China.

The blog believes that the China market is not going to stage a major recovery until the battle against inflation is won.

Despite China’s Prime Minister Wen Jiabao declaring victory over inflation last Friday, the cost of living might get worse before it gets better. This would mean more interest-rate rises and further credit-tightening.

The outlook for crude is at best uncertain, and quite probably bearish, on higher Saudi output, last Thursday’s decision by the International Energy Agency (IEA) to release some of its reserves, and the weak global economic outlook.

“Buying forward” is therefore unlikely to provide any support for chemical and polymer markets in general.

Perhaps the single-biggest risk to the global economy is Greece.

The Economist wrote in its 18 June issue that “dangerous political brinkmanship” over resolving the Greek crisis was affecting corporate spending.

“Companies are currently sitting on piles of cash because they are wondering how strong economic growth will be,” added the magazine.

“Politics gives them more reason to sit on their hands rather than investing and hiring immediately, providing a boost the world economy sorely needs.”

A Greek debt default seems inevitable with only its timing in question.

The consequences of such a default, according to this article from the UK’s Daily Telegraph, would include:

1.) Every bank in Greece becoming instantly insolvent

2.) Greece walking away from the Euro and relaunching the Drachma at an exchange rate 30-70% lower than the Euro

3.) Insolvency at the European Central Bank

This further post from Chemicals & The Economy blog details the extent of liabilities of other European banks to Greece and what a default could therefore mean for the wider EU economy.

A petrochemicals Supercycle? You must be kidding.



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