Damage Limitation

By John Richardson

POLYETHYLENE (PE) prices crept up by $10-50/tonne for the week ending 22 February, according to ICIS pricing.

HDPE.pngBut, as the above chart shows, integrated high-density PE variable cost margins in Southeast and Northeast Asia remained very weak, and were way below all the other regions – again, up until the week ending 22 February.

On an ethylene basis, the picture was slightly better (see below), but Asia was still performing far worse than the US and Europe.

EthyleneMargins27Feb.pngThe well-rehearsed story in the US is, of course, shale gas, whereas the highly disciplined European industry can to a large extent set its own profitability, regardless of the very weak macro-economic fundamentals.

Asia margins are therefore comparatively weaker because of the region’s feedstock position versus the US (most of Asia’s crackers run on naphtha).

Asia’s petrochemicals industry is also more fragmented and less well integrated than is the case in Europe.

This is only part of the explanation.

The other crucial part of the story is that, despite very tight supply in December and January, Asian producers have lacked pricing power. In a genuinely strong market even the highest-cost producers do well – i.e. many of those in Northeast Asia. 

This once again underlines how the equity and commodity markets have run ahead of the real economy, pricing-in a sustained recovery in the key China market that we worry isn’t going to happen.

PE supply is now lengthening and China has started to reduce liquidity in order to control run-away credit growth.

There also signs that the long-awaited rebalancing of China’s economy has begun, which, according to Peking University professor, Michael Pettis, will mean, even in the best-case scenario, annual average GDP growth of only 3% up until 2020.

PE producers are busy trying to repair margins by pushing for further price increases.

But this could be merely an exercise in damage limitation. We are with HSBC in thinking that the best of the year is already over.

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