Commentary: Europe’s polymer drama

The stage is set for dramatic conditions in the region’s polymer markets as a spate of force majeures compound structural tightness caused by plant shutdowns and currency effects

Europe’s polymer markets have been in flux for several years as weak demand growth and new global sources of supply threatened traditional patterns of doing business. But, in 2015, the market has gone in a different direction once again, with dramatic consequences, especially for downstream buyers.

For the past two or three years regional polymer producers have been observing the US shale gas boom with disquiet. Having survived the startup of the first wave of Middle East polymer plants, now it seemed they would have to contend with a fresh wave of polymer imports. With over 17m tonnes/year of new ethylene capacity due to come onstream from 2017, much of it targeted at exports, domestic production looked vulnerable. ICIS Consulting forecasts that US polyethylene exports to Europe will mushroom from 180,000 tonnes/year in 2015 to 300,000 tonnes/year by 2020. Middle East exports to the EU will increase 10% to 4.2m tonnes/year over the same period.

With Europe’s high naphtha-based feedstock cost base, and greater competition from growing US, Middle East and Asian producers, export markets also looked shaky. EU exports to the Commonwealth of Independent States will plummet by 62% to 220,000 tonnes/year from 2015-2020, say ICIS consultants.

So European producers started preparing by closing older, less efficient plants. The impact of this was to remove 735,000 tonnes/year of polymer production capacity from the European market between 2013 and 2015 (see table).

Then, from late 2014, the structural change in oil prices we are all aware of took place. With the cut in oil prices came a corresponding reduction in naphtha, and with it, belatedly, other chemical prices.

At the same time the European Central Bank unleashed its wave of true Quantitative Easing, injecting billions of euros into the European economy to try and kick it into growth mode. However, a side effect of this has been the weakening of the euro as investors looked elsewhere for a better return on their investments.

Of course a plunging euro makes the region’s exports more competitive and imports more expensive. Observers say polymer producers have reacted by exporting more, at the expense of their domestic customers.

The final actor in this drama has been a large spate of six force majeure declarations by multiple European polymer producers since mid-March.

TEMPERS AND ACCUSATIONS
So the stage is now set for a play in which tempers are running high. The European polymers market is now experiencing extreme tightness with some downstream convertors being forced to curtail production because of a lack of available material on the spot market.

Accusations are flying with some buyers accusing producers of adopting a deliberate strategy of exporting material because profit margins are greater. Some of the force majeures are “not real”, they say (see page 16). High density polyethylene (HDPE) blowmoulding and also C4 (butene-based) linear low density polyethylene (LLDPE) have been particularly badly hit. The situation could continue into May and June.

Total Petrochemicals’ declaration of force majeure on all its polypropylene (PP) in Europe also brings drama to that strand of European polymers.

On the demand side, there should be some signs of improvement, at least in the short term. In Spain, for example, Q1 economic growth was the best the country has seen for seven years. The country is on course to meet a new 2015 growth target of 2.9% for 2015, up from 2% previously forecast.