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Ethylene And PE Markets Decline Continues

Business, China, Company Strategy, Economics, Europe, Middle East, Olefins, Polyolefins
By John Richardson on 13-Jun-2011

By John Richardson

THE decline in Asian and European ethylene and polyethylene (PE) markets continued last week with no sign of the recovery that producers still hope will take place by end-June at the latest.

Asian ethylene prices slipped by a further $60-70/tonne to $1,130-1,170/tonne FOB Korea to reach a six-month low, according to our colleagues at ICIS pricing.

Interestingly, our ethylene team picked up reports of cargoes from South Korea and the Middle East that will be sold on a floating formula rather than on a fixed-price basis. This is a further indication – as if we needed one – of how ethylene and PE have become buyers’ markets.

Ethylene in Asia was probably artificially supported by technical problems at the Shell Chemicals cracker in Singapore after demand had already started to weaken.

But now problems downstream are dominating the C2s mood: Asian polyethylene (PE) declined by a further $10-30/tonne last week following a $60-80/tonne fall the previous week.

European ethylene producers conceded last week that the local market had gone into oversupply because they had failed to anticipate the extent of the dip in demand.

Producers have very successfully matched supply against demand for more than two years. Their failure to do so over recent weeks indicates the unexpected scale of the problems in China.

European ethylene and PE markets are under pressure both at home and overseas as everyone attempts to compensate for the weakness in China.

Some European PE June contracts had been settled at Euros20-45/tonne lower than in May, reflecting the Euros45/tonne fall in June contract prices, said ICIS pricing.

The full settlement of European June PE contracts had yet to be achieved as other buyers were hanging-on for reductions of Euros60-80/tonne over May, added our colleagues.

As we said at the beginning, the hope persists that China will recover by end-June at the latest

The inventory run-down process started three or four months ago, several polyolefin industry sources have told us.

China has historically only run on stocks for 3-4 months before it has had to come back into markets to restock, they added.

This means that by mid or end-June we should see a recovery in demand.

“The benefit could be that the longer China stays out of imports the bigger the pent-up demand and therefore the bigger the recovery in prices,” said an industry observer.

Also underpinning this logic is the start of the peak Chinese manufacturing season and the next agricultural film season in July-August.

Traditionally, this is when demand picks up for polymer imports that are re-exported as finished goods ready for Christmas sales seasons in the West.

This coincides with an increasing requirement for low-density PE (LDPE) and linear low-density PE (LLDPE) film used by farmers.

How strong will the export trade be this year given persistent, and perhaps worsening, economic problems in the West?

And even if export orders are good, what about power-supply problems that could prevent manufacturing plants in China from operating?

The further concern is the strength of the domestic economy as the struggle against inflation continues.

“You are incredibly bearish,” a chemicals analyst told us last week.

True, but if anybody out there could give us some good news we would love to report it.