By John Richardson
EUROPEAN polyolefin converters seem quite justified in pressurising their suppliers for further price reductions, given weak macro-economic fundamentals and still-excellent profitability at the cracker end of the value chain.
The news from China continues to get worse. China’s Vice-Premier Wang Qishan said last week that the government’s 2011 targets for GDP growth and inflation would be difficult to achieve.
China’s Premier Wen Jiabao also admitted last week that the official 2011 target for inflation of no more than 4% would be hard to attain.
Wen’s comments, made during a trip to Europe, were in marked contrast to his article in the Financial Times a couple of weeks ago when he talked about victory in the battle against inflation.
The $64,000 dollar question is WHEN this victory will be achieved. While inflationary pressures might ease by the third quarter, they are forecast to intensify again in Q4 because of strong underlying inflation.
Further increases in bank-reserve requirements and interest rates now seem almost certain, making life even harder for China’s small -and medium-sized enterprises (SMEs). These companies are, of course, the life-blood of chemicals and polymer demand in China as most buyers are SMEs.
In a post later this week we shall examine in detail why the SMEs are being hurt more by credit restrictions, higher borrowing costs – and also a sharp increase in wages – than the state-owned enterprises (SOEs).
Returning to Europe, it is evident from comments made to our ICIS pricing colleagues that the China factor looms large.
Polyolefin exports that would have gone to China are now being diverted to Europe, with this surplus availability accelerating the global price-equalisation we have discussed before.
A Greek debt default still seems inevitable, despite last week’s optimism following parliamentary approval of an austerity package. And given the level of public protest and political opposition, one would have to be pretty deluded to believe that the cuts will all be implemented on-schedule.
So if you are buying polyethylene (PE) and polypropylene (PP) plastic pellets in Europe you will hardly be in a hurry to stock-up on volumes.
This is also the summer holiday season when demand traditionally falls.
A further reason for buyers to remain on the sidelines is high stock levels among the producers.
Several PE and PP producers told ICIS pricing late last week that they were sitting on 2-3 months of stocks, with one admitting that his inventory was to close to its 2008 level just before the great crash.
“Since the 2008 financial disaster producers have been on the whole very disciplined, keeping stocks at no more than 3-4 weeks,” a European-based industry observer told the blog yesterday.
This suggests to us that the extent of the problems in China have not been fully understood, and that stocks were built on anticipation of firmer crude.
Strong overall cracker profitability could also be a reason for PE and PP output remaining high relative to the state of the polyolefin markets.
European contract margins based on naphtha feedstock did fall by almost a quarter last week on lower ethylene and propylene July contract settlements and high naphtha costs, ICIS margin analysis showed on Monday.
In the week ending 1 July, contract cracker margins fell by Euros162/tonne ($235/tonne) to Euros579/tonne.
But the average margin for June was Euros667/tonne – the best seen in 2011 so far and the highest margin since the 2008 crisis.
Upstream margins, as we have talked about before, have long been supported by strong co-product credits, disciplined operating rates and a high number of force majeures.
The ability of non-polymer consumers of ethylene and propylene to pay high prices for their raw materials has delivered a further benefit.
The July ethylene contract settlement - Euros95//tonne lower than in June - is therefore expected to be fully passed-on to July PE contracts, said our European-based poyolefins ICIS pricing editor, Stephanie Wilson.
Incidentally, the C2 settlement was the biggest movement in pricing since the monthly contract system was introduced in March 2009, added our European olefins editor, Nel Weddle.
PP markets were slow to react last week to the Euros75/tonne fall in the July propylene contract, added Stephanie.
But given that June PP contract prices fell by Euros80/tonne, further reductions in July contracts seem very likely.
Both PE and PP spot prices weakened further last week. PE declined by Euros20-50/tonne and PP by Euros40-70/tonne.