OUTLOOK ’15: Europe PE, PP uncertain as crude plummets

By Linda Naylor

LONDON (ICIS)–2014 has been a year of two halves for polyethylene (PE) and polypropylene (PP) in Europe.

It started off sedately enough.

PP prices remained stable for the whole of the first quarter, bucking the volatile trend of 2013 that had been hard for players to manage. Prices then rose in orderly fashion on propylene shortages, but pricing was largely in line with upstream propylene movements.

PE price movements were similar. The word benign was used to describe the gentle price movements, usually in line with manageable upstream ethylene monomer price changes, and crude oil and naphtha remained high, moving within a relatively limited price band.

Increases in import duties into Europe from GCC countries, among others, on 1 January 2014, from 3% to 6.5%, did not have much effect in the first part of the year. A hike in imported volumes at the end of 2013, as sellers brought big volumes in to Europe in a move to avoid the new duties, took time to be absorbed, and buyers were relaxed.

For the first seven months of 2014, Brent crude moved within a small price band, but in August, prices fell below $100/bbl. They rallied a little but in early September fell below that level again and have not stopped falling since, to close at $63.03/bbl on Thursday 11December.

Ethylene and propylene contracts have fallen in the past couple of months, but instead of PE and PP prices falling in line with the contacts, product was tight enough for producers to be able to keep some of the monomer drops and improve margin.

The lack of imports has left C4 (butane-based) linear low density polyethylene (LLDPE) and bimodal high density polyethylene (HDPE) film tight, to the point where large buyers are concerned over 2015 volumes.

The strong dollar has also added to importers’ woes, and netbacks to other regions have been better than into Europe, where net prices have been among the lowest in the world.

A strong dollar also meant that exports from Europe have been high, and European producers have been sending volumes abroad, sometimes to the detriment of their buyers in Europe.

Demand in the fourth quarter was also better than expected, and end-year availability has turned out to be tight.

The PP market has experienced similar movements: A lack of imports, increased exports and better-than-expected demand at the end of the year. However, by December volumes have tailed off, and while product availability is not long, it is no longer tight.

Expectations for January ethylene and propylene contracts are for a price decrease.

The massive drop in upstream crude oil and naphtha pricing – naphtha dropped below $500/tonne CIF (cost insurance freight) NWE (northwest Europe) on Thursday for the first time since May 2009 – is leading to expectations of big drops in January ethylene and propylene contracts.

Supply and demand are now playing a role in expectations for early 2015 pricing, however, rather than simply upstream movements, although this is more pertinent in the PE market than for PP.

Most players expect prices to fall in January, but almost all expect producers’ margins to improve again.

The euro is expected to remain weak against the dollar throughout 2015.

“It wouldn’t surprise me to see the euro and dollar at parity next year,” said one large PE buyer.

A weak euro would continue to have an impact on imports, and would also allow European producers to continue to export.

Prices in other regions are also being impacted by weak upstream prices, however, and Asian levels are also crashing.

“It all depends on the comparative price drop in each region,” commented another buyer.

Most sources were wondering where Middle Eastern volumes in particular would move, when prices began to fall.

“January demand is already looking strong,” said a producer, “but if demand drops off,  they need to move it.”

Few players are willing to stick out their necks and place bets on what will happen in 2015. Some traders are taking the risk of buying ahead, but offers are on the high side, and the risk is high.

“Nothing makes sense any more,” said one trader.

Borouge 3 will be coming on stream in Abu Dhabi imminently, with around a million tonnes each of PP and PE, and this will have to be placed. Such volumes have been introduced mainly to serve the Asian market, but some will inevitably find its way to Europe.

Much of what happens in Europe in 2015 depends on the evolution of Asian demand and of crude oil, which at present doesn’t look like changing. European economic forecasts have been adjusted down, and this week Cefic dropped its growth forecast for the EU chemicals sector in 2015 to 1% from earlier predictions of 1.5%,

Europe continues to face challenges from regions with low-cost energy, but producers point out that Europe has no coherent energy policy to be able to face these challenges, which will get worse after next year.