By John Richardson
ASIAN high-density polyethylene (HDPE) margins have improved in June and July compared with the rest of the year, according to the above chart from the ICIS Weekly PE Margin Report.
But the overall year-to-date trend illustrates how the industry has lacked pricing power as a result of persistently weak Chinese demand.
August offer prices for both HDPE and linear-low density (LLDPE) were increased last week in an effort to further improve margins.
LLDPE offers from a Middle East producer were, for instance, increased by $60-70/tonne, said a source with a major producer.
"Higher oil prices and the expectation of reduced production from the Middle East were used as justifications for the higher offers," he added.
Crude has rebounded by around 14 percent over the last month on greater geopolitical concerns and the hope that the Fed will announce another round of economic stimulus at its Jackson Hole at the end of this month. Hopes have also been raised that some kind of positive action will be taken by the European Central Bank, which also meets this week.
On the supply side for PE, producers are hoping that high temperatures during the Middle East summer might lead to technical problems that force a slight reduction in output, as has been the case in the past.
"But, sadly, nobody is attempting to justify these modestly-higher August offers on stronger downstream-demand in China because there hasn't been any significant improvement," added the source.
The outcome of pricing negotiations for September deliveries is likely to be viewed as much more important barometer of the health of the industry, he said.
"September is a peak manufacturing month in China, when factories should be running flat-out to make finished goods for export to the West in time for Christmas.
"I think that pricing will actually be flat in September, reflecting the weakness in the global economy."
European HDPE margins, as the chart again illustrates, fell to their lowest level in July since January of this year.
As in Asia, therefore, Europe's cracker operators are trying to claw-back lost margins through an increase in the August ethylene contract price.
"Producers were adamant that they would not be compromising for August, having seen previously high cracker margins wiped away so rapidly to as low as they were in January by the upstream developments in July," wrote European ethylene ICIS pricing editor Nel Weddle in her, as always, excellent report for the week ending 27 July.
"In hindsight, they said, the €170/tonne drop in July (the ethylene contract price) had been a mistake."
Producers were therefore pushing for €170-200/tonne contract price increases for August, with initial settlements €140/tonne higher.
But there was no great confidence in the strength of demand for PE and other ethylene derivatives, she added.
The US has been buoyed by the shale-gas advantage, but, as the chart again shows, July HDPE margins fell to their lowest level since January.
There are no prizes for guessing the reason why: A decline in PE demand on a weaker economy.
US PE producers have announced a 6-7 cents/lb price hike for August, but consensus on price direction is lacking, according to ICIS.