European PE, PP below Euros1,000/tonne

Business, China, Company Strategy, Economics, Olefins, Polyolefins, US

By John Richardson

JOURNALISTS are often accused of exaggeration for the sake a good story, but it is genuinely no exaggeration to say that markets are in free-fall.

Last week we reported on how European polyolefin pricing was on a downward spiral. For example, my ICIS pricing colleague Stephanie Wilson wrote in this article: “We started the week with (low-density polyethylene) prices of €1,250/tonne free delivered Northwest Europe,” one trader said. “By Monday afternoon, we were forced to re-adjust this to €1,180/tonne, and then to €1,150/tonne by Wednesday because of competitive selling in central and eastern Europe.”

Linear low-density PE (LLDPE) pricing for the week ending 24 June had also taken a severe tumble – by Euros55-70/tonne to Euros1,130-1,150/tonne free delivered Northwest Europe from the previous week.

Now we hear that some grade of PE and polypropylene (PP) are being imported into Europe at below Euros1,000/tonne – and that spot pricing is back at levels not seen since 2010.

We are not sure what grades are being offered at such low levels, but whatever grades they are, this would be nothing short of stunning, at the risk of again being accused of journalistic hyperbole. Last week, all the grades of PE and PP assessed by ICIS pricing were well-above Euros1,000/tonne.

Putting two and two together to make four (or five you might think if you disagree), we think that the fall in European pricing looks if it is in part being driven by big problems in the Middle East.

Saudi LLDPE prices have this week fallen by $100-120/tonne to $1,280-1,290/tonne delivered Saudi Arabia, according to this story from ICIS news.

Gulf Co-operation Council (GCC) offers for July LLDPE cargoes are about $130-150/tonne lower than those for June.

GCC LLDPE prices are now 13% from the year-to-date’s high – an April level of $1,520-1,560/tonne delivered Dubai.

It is the case with PP.  Prices in the GCC are down 8% from June to July and 12% from their peak so far this year, which occurred in mid-May.

Operating rates at GCC LLDPE plants were high with some units running flat out, a Saudi producer told ICIS news.

PP producers in the region had no plans to lower production, but were instead aiming to search for more outlets for their volumes, given that China was so weak, we were also told.

The GCC is therefore diverting cargoes to Europe because China is so weak.

We also maintain our strong suspicion that Saudi production could have risen on greater availability of associated-gas feedstock, following the Kingdom’s decision to raise crude output.

Kuwait has also reportedly increased its crude production in response to the failure by OPEC to agree on overall increase in quotas. The country might therefore have been able to raise polyolefin production.

In a free-falling market it might not at first glance make sense for the GCC to ramp-up output. But the region’s producers always make money no matter what the market conditions and so now they have extra feedstock, raising production to gain market share makes sense.

The US, too, is under downward pressure as a great equalisation of pricing occurs across all three regions.

Asia fell first, from the end of the Chinese New Year onwards, and now the West is following.

Careful production management has helped maintain excellent olefins profitability in Europe since early 2009.

But even this skilful calibration of output has failed to prevent further falls in monomer contract prices. July ethylene and propylene contracts were settled lower this week over June. The reductions in June were the first price declines for seven months.

Persistent reports from all regions of high inventory levels among polyolefin producers and converters (another reason why prices are falling everywhere), suggest to us that:

1.)The industry built stocks thinking crude would continue to go higher. Notwithstanding yesterday’s rebound on the Greek parliamentary approval of austerity measures, the outlook for oil looks still looks highly uncertain – and very probably bearish

2.)Nobody anticipated the extent of the drop in demand for polyolefins in China. As we have said several times now, some industry players and observers remain in denial. Naphtha cracker operating rates may therefore be higher than should really be the case based on a realistic assessment of China. Naphtha cracker profitability remains very good, thanks to the production management we talked about in Europe and strong co-product credits. “And so why rush to cut when China is about to come roaring back?” might be the attitude

The turning point has been reached. We think that more and more industry players and observers will be coming round to our view that this is more than just a minor hiccup in China’s growth trajectory.

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