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Polyolefin Producers Maintain Their Control

Business, China, Company Strategy, Economics, Europe, Middle East, Olefins, Polyolefins, Projects, US
By John Richardson on 21-Jan-2011

Water%20Tap%20Dripping%20resized.jpgSource of picture: Dallhouse University, Canada


By John Richardson

THE incredibly smart way in which polyolefin producers have managed production since the great collapse of September 2008 continues to defy what appear to remain some very uncertain, and some cases weak, macro-economic fundamentals.

As we discussed on Wednesday, China faces a significant demand-growth gap as its economy changes gear. Yesterday we talked about surging crude oil and inflation in Asia, Europe and the US as further big concerns for 2011.

But ever since the great Lehman Bros disaster there have been numerous other macro-economic threats – and constant predictions of new polyolefin supply wrecking the market – that have failed to make life a misery.

A big reason seems to be, as we said at the start of this post and as we’ve said before, the determination of producers to ration output and control their inventories.

Yes, emerging-market growth continues to surprise on the upside. But as Nigel Davis, editor of the Insight section at ICIS news points out, global production has yet to return to 2007 levels.

Right now the cost-push is intense as olefins, polyolefins and petrochemicals prices in general (we will look at some of the other product chains next week) surge to record levels.

US propylene contract prices rose by a whopping 28% in January with the ethylene contract up by 13% in December compared with October, according to William Lemos, Senior Editor, Manager, at ICIS pricing in Houston.

The European market continues to defy the pessimists. Polypropylene (PP) prices, for example, reached record levels earlier this week as producers were comfortably able to pass on the rise in propylene costs.

The blog began last year in a pessimistic mood, by May felt overwhelmed with the persistent optimism of the industry as it succumbed to a heavy bout of euphoria, felt a little more gloomy by December and now, quite frankly, hasn’t got a clue.

Another of my colleagues, Linda Naylor, Senior Editor with ICIS pricing who covers the European polyolefin markets, has also spent a lot of time expecting everything to end in tears.

But she believes that her predictions have floundered largely thanks to production management.

One European PP buyer told her this week that there has always been a crash after a price rally on the lines of the one we are seeing right now.

He believes this time, though, that if volumes continue to be very skilfully controlled, a crash won’t happen.

Asian prices have increased in line with those in Europe and the US, but in a sluggish, reluctant fashion due to widespread worries over weaker China growth.

There is talk of prices edging up a little further after the Chinese New Year (CNY) holidays, which fall in the first week of February.

Comments from a Southeast Asian-based sales executive with a leading North American polyolefin producer perfectly describe the nervousness in Asian markets we have been picking up over the past couple of weeks.

“The big question is how much more feedstock cost increases the end-users can take,” he told us yesterday.

“They are remaining exceptionally reluctant to buy because they are worried about the direction of crude and the effect of inflation on demand.

“If you can manage to sell to an end-user margins are paper-thin at $20-30/tonne. You really need a minimum of $30/tonne to cover your storage and letters of credit costs.

“What we are seeing, therefore, is not much price movement.

“The Middle East is selling just below market prices and the South Koreans and Taiwanese are seeing their margins squeezed.”

(Note – we have heard of one Southeast Asian cracker with poor integration which has cut back on high-density polyethylene production in order to sell more ethylene)

“We have seen in the past few days, though, a moderate increase in buying by traders as they take positions ready for after the CNY,” continued the sales executive.

“I am not sure to what extent these purchases have been driven by current arbitrage on the Dalian Commodity Exchange, anticipation of higher oil prices versus estimates of an up-tick in real demand post-New Year.

“For the traders  it can be a no-lose game these days as even if physical prices start falling, they might have already made their money on the Dalian.

“Linear-low densitypolyethylene (LLDPE) domestic prices right are now equivalent to $1,320-1,330/tonne compared with the May contract on Dalian – which is at $1,380-1,400.

(Note – The May contract is seeing the biggest trading-volume at the moment, as is always the case with the contract which closes four to five months out)

“Import prices are, however, at the same level of Dalian so there is no arbitrage to use overseas shipments to back-up deals on the exchange,” he added.

“LDPE is kind of stuck at $1,700/tonne and I don’t see much room for movement upwards in the short term.

“The good news is that inventories are low across-the-broad. End-users are hand-to-mouth, as they have been since 2008, traders have only 3-4 weeks in stock and producers around a month.

“So far there is not much sign of anybody chasing higher oil prices.”

There you have it. Any predictions gratefully accepted.