LDPE Re-investment Case Gets Harder

Business, China, Company Strategy, Economics, India, Polyolefins

By John Richardson

JUST when you thought it might have been safe to push really hard for building more low-density polyethylene (LDPE), prices have started to decline. European prices, for example, recently slipped by Euros30/tonne with Asia down by $20-50/tonne last week, according to ICIS pricing.

Overall polyolefin prices are, of course, on the decline – as we shall explore in detail tomorrow.

But the slippage in LDPE has led the way in Europe because it got too expensive relative to its replacement, linear-low density (LLDPE), forcing film producers to blend increasing quantities of LLDPE.

In the booming coatings grade sector in Asia, LLDPE is also an alternative, including metallocene grades. Metallocene will be much more available when the new ExxonMobil plants comes on-stream in Singapore in Q4 2011–Q1 2012.

It would be plain dumb, of course, to draw a long-term conclusion from the falls over the last few weeks in LDPE, but the price-weakening does come at a very interesting time for corporate planners. The blog has had several conversations with mid-level planners working for polymer producers over the past few months, who have been building cases for re-investment.

One of the planners told us a couple of weeks ago: “We have never seen LDPE deltas over LLDPE like this before and so boards are finding it difficult to believe that this can continue.

“Investing in a new autoclave or tubular process plant costs substantially more than an LLDPE facility and so you can understand the reluctance.”

Nobody has built an autoclave process anywhere in the world since the 1990s.

But as we have discussed before on the blog, you can only make good coatings grades on autoclave process plants – and not on tubular plants.

Booming demand for coatings grades in flexible packaging in India has boosted the margins of producers with supply tightened by some autoclave plants switching to even higher-return ethylene vinyl acetate (EVA) production). EVA demand is being largely driven by its use in solar panels.

The same corporate planner gave us some interesting insights into why coatings-grade production for low-end flexible packaging might be a little more profitable than might at first be assumed.

“For consumer-goods manufacturers the margins on single-serve pouches (flexible packaging) are very good because it is more about branding than the quality or quantity – i.e. value for money – of the product inside.

“These single-serve products are very cleverly marketed, focusing on lifestyles – e.g. the example I gave earlier of the maid in India who cannot afford a whole bottle of shampoo. But she can afford one sachet at the weekend so she can feel like the Bollywood star used in the advertising campaign.

“It is a cash-flow issue for the poor people who buy these products. They should really buy a whole bottle of shampoo as this would work out cheaper in the long run, but they don’t have enough money at any one time to do this.”

For several years now companies have been attempting to produce acceptable-quality coatings grades via the tubular plants – but we have yet to hear of any breakthroughs, hence the interest in building new autoclave facilities.

Demand for film grades, which can be made successfully on either process, is also booming.

“LDPE film growth is very strong because of the rise in shrink-wrapping for finished goods such as beer, which used to be packaged in cardboard,” said our planner.

“Shrink-wrap film is lighter in weight and so saves on transportation costs.

“You can blend a high percentage of LLDPE into shrink-wrap film to lower resin costs, but you lose clarity the less LDPE you use. Processors with older machines also still prefer LDPE for its better processability.”

Perhaps the much-more important issue, though, is whether pricing in general has peaked.

We could face some long-term problems that will make any investment argument, regardless of the product, harder to win.

Watch this space….

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