Supply Exceptionally Tight, But Real Demand Still Struggles

Business, China, Company Strategy, Economics, Indonesia, Malaysia, Thailand

HDPEmargins11June

By John Richardson

WHAT a fantastic year it has so far been for margins, with the chart above showing how in one grade of polyethylene (PE), Northeast Asia (NEA) and European producers are really, really cashing in. The same applies across many others grades of both PE and polypropylene (PP).

In Northeast Asia, one of the reasons for this might well be widespread, but unconfirmed, reports of gas-supply issues in the Middle East. PE and PP operating rates in two particular countries are reported to have been severely curtailed because of problems with feedstock availability.

We are also in the middle of a cracker turnaround in Asia in general. We estimate that 13% of Asian cracker capacity was lost to production issues in May, which will be the peak for this year. We expect this percentage to fall to 7% in June.

Tight polyolefins supply and rising oil prices have led to the expectation that PE and PP prices will keep on increasing. This has resulted in plastic converters “buying ahead” of their immediate manufacturing needs, as always happens at times like this.

As for Europe:

“In my thirty years in the polymer industry I have never seen anything like this,” said one large buyer. This sentiment has been echoed many times.

What lies above is from this excellent Insight article by my colleague, Linda Naylor,

Low prices, particularly in dollar terms as the euro has weakened against that currency, have left imports unworkable, but export opportunities strong, she added.

The imposition of an increased import duty on Gulf Cooperation Council product, from 3% to 6.5% on 1 January 2015, has also affected imports, said Linda.

And she added that in Europe, demand was poor as oil prices fell, but then rebounded in March as crude recovered.

Perhaps most importantly of all, though, PE and PP pricing in Europe has strengthened because of production issues. The region has seen a huge volume of outages, even by European standards. Supply has been further tightened by the permanent closure of some plants due to competitiveness issues.

But what about real, sustainable demand?

In Asia, we know that the key China market continues to slow down. Affordability of imported polyolefins has thus become a big issue for local plastic processors, resulting in widening price gaps between imported and domestic resins. The ability of local converters to afford PE and PP can only get worse as China’s radical, but essential, economic reforms continue.

Across the rest of Asia, demand is described as “OK, but hardly spectacular” because of macro-economic problems. For example, Indonesia, Malaysia and Thailand are struggling with falling consumer spending, weak wage growth and political uncertainties.

What about Europe? The most immediate threat  might turn out to be the “slow motion Greek train wreck”.

This is all connected, of course, as it is part of the Great Unwinding that I first start discussing early last year.

What of the second half of the year then? Because these are mainly supply-driven margins, rather than margins driven by sustainable, long-term demand, we should prepare for:

  1. More and more pushback from plastic processors in Asia and Europe as affordability issuesy worsen.
  2. As the Great Unwinding continues, a decline in oil prices,  just as polyolefin supply increases on the end scheduled and unscheduled shutdowns.

An important longer-term lesson from this year’s fantastic margins is that reports of the death of naphtha cracking have been greatly exaggerated.

Why would any further European cracker operators want to shut down, given that, as we are in a period of exceptional economic volatility, these strong margins might be repeated? Europe has also worked hard on improving its long-term competitiveness.

Similarly, why would NEA cracker operators want to push-ahead with any further restructuring?

What does mean for longer-term supply and demand balances as large volumes of new US PE capacity hit the market? I think, by now, everyone should know the answer to this last question.

PREVIOUS POST

US Oil, Gas, Chemicals Drowning In Excess Of Credit

10/06/2015

By John Richardson THE US oil, gas and petrochemicals sectors are drowning in an...

Learn more
NEXT POST

The Data Is Still Staring Everyone In The Face

12/06/2015

By John Richardson I CONTINUE to worry that people are only paying attention to ...

Learn more
More posts
Global polyethylene oversupply, the highest in 19 years, hasn’t gone away
03/07/2020

By John Richardson BRENT crude futures surged by 80% during the second quarter and enjoyed their bes...

Read
China could be in complete polypropylene self-sufficiency by 2022
28/06/2020

By John Richardson SORRY to labour the point but this comes from a genuine concern for the readers o...

Read
Asian polyethylene price recovery faces multiple challenges
25/06/2020

By John Richardson THERE are reports of significant cuts in Middle East polyethylene (PE) operating ...

Read
China’s long-term ambition for paraxylene self-sufficiency seems close to being realised
21/06/2020

On Friday, I examined how China’s paraxylene (PX) net imports could fall to as little 8m tonne...

Read
China’s big declines in 2020 PX and PP imports: the impact on its major trading partners
18/06/2020

By John Richardson CHINA’S refineries and petrochemicals plants came roaring back to almost fu...

Read
Paraxylene demand collapses as higher China production threatens 6m tonne fall in imports
15/06/2020

By John Richardson DON’T SAY I didn’t tell you that a decline in stock markets would happen. The...

Read
Coronavirus will severely damage the developing world unless we take the right steps
12/06/2020

By John Richardson IT IS a fantastic achievement. “Over the last 25 years, more than a billion peo...

Read
Main Street versus Wall Street and the crisis in the developing world
10/06/2020

By John Richardson RISING equity and oil markets do not necessarily point to a V-shaped recovery. I ...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more