(recast with additional information throughout)
By Linda Naylor
LONDON (ICIS)--2013 has been a fairly flat year for polyolefins with positive growth arriving only towards the end of the year, and even then sources acknowledge that fundamentals remained weak.
European naphtha-based players struggle to compete with low-production from the Middle East and, imminently, from North America, where shale-derived ethylene production costs are low.
Several older European polyolefins plants have closed or are earmarked for closure in the next couple of years, while Switzerland-headquartered INEOS will import shale-derived ethane into specific plants in Europe.
This year was typified by high feedstock costs that have driven ethylene and propylene pricing, and hand-to-mouth buying, brought about by uncertainty upstream, making buyers nervous of holding stock.
High feedstock costs and cautious demand have led to production cutbacks as cracker margins have suffered. Inventory control with both buyers and sellers has been paramount.
By the end of 2013, cutbacks were still in place, demand was better than had been expected as November prices reached what many buyers considered to be the bottom of the cycle, and converters showed some concern over where prices would go in January if volumes started well in 2014.
As December business drew to a close, buying was still cautious and most converters were leaving the year with low stock levels, in spite of widespread expectations of price hikes in January.
At the end of 2013, low density polyethylene (LDPE) and some linear low density polyethylene (LLDPE) inventories are very low. Polypropylene (PP) inventory levels are more patchy, with tightness in some grades and with some producers, while high density polyethylene (HDPE) stocks are higher, affected by imports from new capacity, particularly in the Middle East.
Buyers will go into January facing price hikes from sellers that want to recover the limited increases in the January ethylene and propylene contracts, but also to improve margins beyond the monomer hikes.
“If they push too hard in January,” said one large buyer, “it will all come falling down again by March latest.”
“Final demand is not strong, and we don’t want to lose market share, but January demand is normally good, so the market should be able to support an increase,” said a producer.
An increase in import duty from established importers, imposable from 1 January 2014 is a new element in the European market that could also add pressure to buyers. Duty will rise from 3% to 6.5%.
The most common imports of PE and polypropylene (PP) into Europe come from GCC (Gulf Cooperation Council) countries, and several producers have production in both the Middle East and also Europe, and it is not yet fully clear how much and when the duty increase will impact pricing. Much depends on the grade of PE or PP in question.
LLDPE C4 (butene-based) imports into Europe account for at least 90% of local consumption so it could be hard for these buyers to avoid a price hike in this sector. LDPE imported volumes are not significant.
“I can see a situation where LLDPE will trade at the same price as LDPE in 2014,” said one large buyer.
A €50/tonne delta between the two grades is often seen, with LDPE holding a premium over LLDPE.
“We will definitely be targeting a 3.5% increase in January because of this increase in duty,” said a PP producer.
“If prices go up in January, is it because of [high] naphtha [costs], tight availability, import duties? It is a market price, that’s all,” said another large buyer.
“It [import duty] will disappear into the market price. If less material is coming into Europe because [Middle Eastern] producers don’t think it’s worth it, then prices will go up. The market will correct itself,” he added.
“They don’t sell on cost. Maybe prices can keep up if Middle Eastern producers have no incentive to sell to Europe, but that’s all.”
The increase in duty could mean that Middle Eastern sellers will favour Asian markets over European ones. Freight rates are lower and the current strength in Asian demand could draw volumes eastward as duties are now comparable.
Downgauging continues to impact growth rates in Europe, and catalysts like metallocene mean thinner film with the same strength as thicker films made from competing materials.
“I reckon our growth rates are affected by around 1.5% in 2013 by metallocene (LLDPE),” said another large buyer.
For 2014, most sources expect little change from 2013, and for PE and PP prices to follow upstream crude and naphtha prices. Production is expected to be cut back to meet demand, and by the end of the year, players will be weighing up the effects of Borouge 3.
In mid-2014, new PP and PE capacity is coming on stream in Ruwais, Abu Dhabi. The project, entitled Borouge 3, includes an ethane cracker, two Borstar PE units and two Borstar PP units as well as a LDPE unit. The PP unit will have the capacity to produce 960,000 tonnes/year.
Such an increase in capacity cannot but have an impact on polyolefins globally.