By John Richardson
SHOULD any petrochemicals value chain be a zero-sum game – a constant battle between suppliers and customers to determine who emerges as the single winner in any one month or quarter?
No, absolutely not. It is possible to create win-win situations for both suppliers and customers, as has been the case in China. Savvy polyolefins sales managers have supported their customers in China, literally over decades now, even if at times this has on some occasions involved less dollars per tonne for resins than finance chiefs at corporate headquarters would have ideally liked.
The rewards for this approach have been fantastic as China has become the world’s biggest polyolefins market in terms of both volume and growth over the last 20 years.
Senior management teams at the polyolefins producers with the good sense to give their sales and marketing teams this kind of latitude have benefited in another way: When markets have been oversupplied and it has thus been a real battle for volumes and margins, the natural human response of customers in China who have been well looked after has been, “I’d rather still buy my supplies from my friend, even if it means paying a little more than the market price, if it helps my friend out.”
Flexibility on pricing, which has taken into account the short term cash flow challenges of particular customers, hasn’t been the only means of emerging as a winning polyolefins supplier in China.
The smart companies have in addition not balked at the extra cost of supplying free technical advice to converters over the years. Some of these converters have, as a result, been able to grow from small, unsophisticated companies to big manufacturers of state-of-the-art plastic films etc.
In other words, the intelligent suppliers have created what is in effect captive demand growth through this approach, whilst also being able to sell bigger volumes of higher-margin grades of resin.
It will therefore be fascinating to observe what will happen after H2 2017, when all the new US polyethylene (PE) capacity starts to flood the global market. Chinese customers will be in a strong position to pick and choose from whom they buy, and of course at what price, as has been the case during previous periods of oversupply. But this time around I strongly suspect that the oversupply will be far far greater than in previous downcycles.
That’s the China story. But what about Europe? This could seem unfair on European polyolefins producers, but the impression from some of their European customers is that the story is very different.
During the 5th ICIS World Polyolefins Conference, which took place in Vienna last week, European plastic converters argued that there is a lack of sufficient relationship maintenance and building by some sales and marketing executives who work for certain producers.
Plastic processors compared this with the situation in the past, when the producers’ sales and marketing teams were said to spend a great deal more time and resources in supporting customers with market knowledge and technical advice.
And they also complained about being caught blindsided by last year’s high number of force majeures. Numerous polyolefin plant shutdowns left processors scrambling, often unsuccessfully, for local material.
Despite the problems with the wider European economy, the processors said there was little problem with domestic resin demand last year. The bigger issue was instead getting hold of enough supplies of resin to keep their own customers happy.
As I said, this might seem unfair from the perspective of the producers – and also one-sided: Last week’s discussion took place when there were no senior representatives of the producers in the room, who might have been a better position to respond.
As always, I am on the side of the industry – both upstream and downstream. I would therefore welcome feedback from European producers.
Meanwhile, here is my take on what seems to have gone wrong in Europe last year:
- In Q1 2015, oil prices were of course very weak and weakening. So European converters pulled back from purchasing PE and polypropylene (PP) in anticipation that resin prices would continue to decline. There was little point in buying in, say, in the first week of January when in the second or third week prices could have been lower.
- European producers therefore lowered operating rates and/or exported greater volumes in response to this weaker local demand. They were helped by better export netbacks, thanks to a weaker Euro.
- From late February, however, crude recovered, which led to higher PE and PP prices.
- The converters suddenly wanted more volumes because now they faced the prospect of their raw material costs being higher, rather than lower, in the immediate future.
- Local producers were still getting good netbacks from exports.
- And as they turned operating rates higher in order to meet stronger local demand, outages began to multiply.
What strikes me as critical here is a better pooling of market knowledge between producers and converters.
If converters had been able to forecast – or at least spot very early on – the turn in crude markets in late February, then they might have been in a better position.
And if producers had been able to see ahead to a sudden surge in demand from their customers, they could have been a better position to meet these requirements.
Of equal value, both in 2015 and right now as oil prices again rally, would be an understanding by buyers and producers of the radical shift in underlying oil-market fundamentals. You have to separate the market hype from the underlying realities if you are going to be able to sensibly plan your raw material purchasing and production.
This could be wide of the mark, and so please tell me. What seemed clear, though, from last week’s conference is that bridge rebuilding is needed.
What is at stake here is a European polyolefins market that remains very big – and continues to grow at reasonably healthy rates – despite the wider macroeconomic context.
The longer that bridges remain damaged, the more likely it is that European converters will increasingly attempt to turn to import resins, despite all the logistics constraints.