Europe PE supply tightens on reduced output, good demand

Linda Naylor

13-Jun-2014

Focus article by Linda Naylor

watchingLONDON (ICIS)–Polyethylene (PE) supply in Europe has tightened in June as production rates continue to be cut back and demand is better than many producers had expected, sources said on Friday.

Price hikes continue to be moderate, however, with sellers targeting increases up to €30/tonne, and buyers generally aiming to close at €10/tonne over May, in line with the May ethylene contract increase.

The mood was beginning to change on Friday, as tensions in Iraq sent crude prices higher. Mid-morning Brent crude was above $113/bbl, a level not seen for some time. It closed at $109.05 on Friday 6 June.

Naphtha was also firm, closing at $951-953/tonne CIF (cost insurance freight) NWE (northwest Europe) on Thursday 12 June.

PE producers in Europe have been complaining of poor margins for many months, and such upstream hikes, if sustained, would likely be taken into consideration when monomer contract discussions take place at the end of the month.

Low density polyethylene (LDPE) spot prices have increased again this week, and are now trading consistently above €1,300/tonne FD NWE, with some sales now reaching €1,300/tonne. In early May they were at €1,260/tonne.

“People are interested in buying again,” said a trader.

“I think producers have misjudged demand this month,” said a distributor, “They are very very careful in controlling working capital, and now there isn’t enough material.”

Not all buyers saw the situation from this point of view, however.

“I am still aiming to get €10 [up],” said one, who was still aiming to get the same increase in PE of the June ethylene monomer contract.

There are differences between PE grades, and some linear low density polyethylene  (LLDPE) prices have been slow to move because of competition between grades limiting price movements.

High density polyethylene (HDPE) pipe prices have increased by up to €50/tonne at very low-priced accounts, whereas HDPE blowmoulding sellers are finding it hard to lift prices beyond €10/tonne this month.

HDPE demand has been strong in Europe this year, recording a volume increase of more than 6% year-to-date in May.

Imports have been reduced in volumes during 2014, mainly thought to be down to the increase in duty from major Middle Eastern suppliers from GCC countries in January, when duties rose from 3% to 6.5%.

The upcoming fasting month of Ramadan is adding some nervousness to the PE market as there have been times in the past when deliveries into Europe have been delayed significantly during Ramadan.

Several large buyers said they have experienced no supply issues at all and saw no reason to buy more product than they needed  for immediate use.

“There is some nervousness around here,” said one producer. “Everyone still has June 2012 in their memories.”

A PE selling spree by European producers at the end of June 2012, at levels often below €1,000/tonne FD NWE, left commodity PE grades short as demand surged when low naphtha prices soared back up only days after a slump.

The sudden change in the market stemmed from the sharp reversal in crude oil and naphtha prices that began on Friday 29 June, just hours after the settlement of July ethylene and propylene contracts in Europe, both down by €170/tonne.

LDPE spot prices reached a low of €980/tonne FD NWE the week of 29 June 2012, from €1,340/tonne a month earlier. They were back up €1,400/tonne at the end of August.

Naphtha’s weekly range during the week ending 22 June 2012 was $683-691/tonne CIF NWE. On Friday 6 July 2012 morning naphtha was trading at $819-827/tonne CIF NWE.

Sources do not see the possibility of such extreme movements in the current market, as inventories are not as high as they were then, and few expect the changes that were seen then, but they are keeping a close eye on crude oil and naphtha price movements.

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