INSIGHT: Uncertainty drives tighter Europe PE inventory control

21 August 2013 16:00 Source:ICIS News

By Linda Naylor

LONDON (ICIS)--European polyethylene (PE) players are paying ever more attention to inventory control as the industry becomes increasingly sensitive to naphtha pricing movements and imports as low-cost production affects markets.

“Nobody wants any stock,” said a large buyer, adding that the only inventory buyers wanted to hold was for PE grades that were tight.

The unwillingness to hold any stock stems from uncertainty over future pricing and the fear of holding high-priced inventory in a falling market.

Volatility in naphtha pricing, one of the main drivers of PE prices, has led to some spectacular price movements in the PE sector in past months and this has in turn led to more caution from both buyers and sellers.

All players are keen to avoid a repeat of the pricing fluctuations that hit the market in summer 2012, when producers’ stocks were high as naphtha prices collapsed. Naphtha prices rebounded only days later, too late to stop a bun fight that had begun between sellers that left PE prices €170/tonne lower, or more than 10%, in some cases, leaving the market in disarray.

Producers argue that such a situation could not happen in 2013, as stocks have been carefully controlled since the 2012 calamity.

In the early months of 2012 demand was so soft in Europe that some sources estimated cracker and polymer output to be as low as 75% at its lowest point.

An upturn in demand in May, prompted by a €100/tonne drop in the monthly ethylene contract and its subsequent pass-through to the PE market, tightened availability and demand levels have been sustained since then.

Output is still carefully controlled and a series of planned maintenance shutdowns in the coming weeks will affect production rates.

Demand is still not back to the good old days before the financial crash of 2008, however, and the holding of low stocks across the chain has been a consequence of events in that year.

“Before 2008 our stocks were high,” said one producer. “Now they are at close-to-record lows.”

Even with the eurozone officially out of recession, there are still concerns over growth.

“I’m not a guy who gets excited about 0.2% growth [recorded for the Austrian second-quarter economy in August]. I know how national statistics are calculated, and there’s a room for error larger than the thing you’re getting excited about,” said Borealis CEO Mark Garrett on 16 August.

Many producers still intend to keep a cap on production and some say they will only produce what they are sure they can sell.

As stocks become so carefully controlled at the producer and converter level, the prospect of price spikes caused by an unplanned outage is high.

On the last day of August a minor incident at LyondellBasell’s Aubette low density polyethylene (LDPE) plant in France led to the rapid declaration of force majeure because of low stock levels and some buyers fear low stocks could lead to a sharp rise in September pricing.

“There is one alarming concern,” said another large buyer, “if the market comes back in September, as it traditionally does, there might not be enough material."

LDPE and linear low density polyethylene (LLDPE) are particularly tight, but even high density polyethylene (HDPE) film and blowmoulding grades have tightened. Some sources put this down to fewer imports.

Port congestion in Saudi Arabia has led to fewer imports and some sources say a planned maintenance outage at a production unit in Saudi Arabia has also affecting the level of exports moving to Europe.

“When we have a blip with a Middle Eastern plant it makes a difference, the dynamics have changed,” said a large HDPE buyer.

HDPE imports have gained ground in Europe and some large buyers have regular contracts with them as well as the usual European suppliers.

It is in the LLDPE C4 (butene based) market where imports hold most sway, however. Some sources say they account for as much as 80% of the market and European output has been closed in the face of lower-cost imports.

Figures show that 2013 imports are significantly down on 2012 and this is affecting the European pricing situation.

“There are two main reasons for the LLDPE C4 tightness,” said a major PE producer. “One is the European economy is not looking quite as bad as it did, and two, imports are less.”

It is not clear whether imports have been reduced by accident or design, but it has certainly had an impact in the European PE market in recent months as buyers have been forced to pay a higher price to get what they need.

In the face of increasing imports from low-cost producers, both from the Middle East and imminently from the US, European producers are closing down old, unprofitable assets, and many sources expect more closures to be announced.

Several PE closures are taking place in Europe in 2013-2014.

Dow

HDPE

Tessenderlo, Belgium

190kt

Closed

End 2012

LyondellBasell

HDPE

Wesseling, Germany

100kt

To close

Q3 2013

Versalis

LLDPE

Priolo, Italy

150kt

To close

Sep 2013

Total

HDPE

Antwerp, Belgium

70kt

To close

2014

Eni

LDPE

Gela, Italy

150kt

To close

Not given

Borealis

HDPE

Burghausen, Germany

175kt

To close

End 2014

Most observers expect the European high-cost naphtha-based PE industry to run at reduced rates for the foreseeable future. But this begs the question, how long can an industry run at such rates and be profitable?

($1 = €0.75)

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By Linda Naylor