Oil prices create European polyethylene “shortage”

LDPE.pngOil price rises reduce chemical demand.

Initially, as we saw in 2007 – H1 2008, and in 1979 – 80, everything seems fine. Consumers continue to buy, and we all reassure ourselves that demand is still robust.

But, in fact, end-use demand starts to fall when prices rise, as individuals cut back on discretionary spending to pay higher gasoline and heating bills.

Europe’s polyethylene market currently offers a clear example of this process in action. An excellent ICIS news report by Linda Naylor highlights how:

“December monthly business is progressing normally”.
• “But extra sales are reported at much higher price levels”.

She also notes that buyers are “trying to obtain extra volumes in an effort to avoid higher prices in January“, whilst “many sellers had taken the decision to hold on to inventories“. As a result, LDPE prices for January are now talked €100/t ($130) higher than for December, with HDPE talked up to €160/t higher.

It is clearly impossible to stop this process, once it gets underway. Buyers are paid to buy below market, and sellers to sell above it, not the other way around. So if feedstock costs are moving higher, both sides have to react by building as much inventory as possible.

But demand for inventory is not the same as demand for consumption.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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