Five Essentials For Planners



By John Richardson

POLYETHYLENE (PE) industry planners need to factor in the following as they prepare for 2012:

1.) Oil prices are causing demand destruction in the global economy. They could go higher due to the Iranian nuclear crisis. In real dollar terms, as fellow blogger Paul Hodges has written, crude prices were the highest they had ever been last year, undermining what was already weak consumer spending in the West.

2.) A “demand recovery” in China post Lunar New Year has to be put into the proper context. Restocking has already taken place as converter inventory levels were low. But any recovery will be capped by the Chinese government’s limited ability to increase bank lending, and by a worsening export environment for finished goods because of problems in the West. Demand growth in 2009-2010 was exceptional and will not be repeated. “Price recoveries” will be about limited restocking and margin recovery for naphtha-based producers. It will not and cannot be any better than that, despite what stock market and investor sentiment might say in the short term, as the economic fundamentals remain too weak.

3.) Middle East capacity is increasing. Last year also saw higher production at plants brought on-stream in 2009-2010 as a result of technical problems being resolved. The side below, from Global Trade Information Services, illustrates how the Middle East took a bigger share of imports in a weaker China PE market. As we discussed before, overall PE imports are likely to have fallen by around 4% in 2011 over 2010.

GTISJan2012.jpg4.) Asia’s less competitive naphtha-based PE producers will have to display “exceptional, and uncharacteristic, market discipline”, in the words of a source with a major North American producer, to bring supply and demand back into balance. Operating rates in Asia were this week said to be at 80-90 percent following cutbacks in Q4 2011. But deeper cutbacks, and plant closures, could well be necessary. The danger is that the reverse happens. The brief price recoveries we are likely to see over the next few months could be brought to an end as producers raise operating rates in an attempt to regain lost market share.

5.) Volumes displaced from China, as a result of higher Middle East production, will continue to search for a home, particularly if the Asian naphtha-based industry fails to show enough market discipline. The US saw a sharp decline in exports to China, as the above slide shows, but managed to largely compensate for this by strong sales to Latin America, according to a chemicals analyst we spoke to this week. This year, however, the US might not be as lucky, as everyone, even the Middle East, seeks outlets other than China – including the US market itself.

What’s next? Contact us and we can discuss.

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