Asian Polyolefins Face Two-Year Freight Squeeze

Container Freight Rates: Luck Before Brains

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By John Richardson

ASIA’S polyolefin industry is facing additional pressure from new Middle East capacity due to higher freight rates from the Middle East to Europe, the blog has been told.

This is also contributing to tighness in European polyolefin markets, we also understand.

Increased freight rates in general – resulting from a shortage of container-ship capacity – are likely to last for the next couple of years, exerting downward pressure on FOB prices, say industry observers.

“We usually see around 30% of Middle East polyolefins moving to Europe with the rest to Asia, but the freight issue is resulting in a higher percentage heading this way,” said a Singapore-based source with a global producer.

“The reason is further manufacturing industry weakness in Europe. This means container space is even more likely to have to be moved to the Middle East empty in order to collect polyolefins,” said a second industry source – this time based in Europe.

“The decline in European low-end manufacturing versus Asia is obviously an old story, but one that keeps developing. Asia has made even greater gains in consumer electronics etc since the rapid and very big recovery in global trade.

“Hence, the gap between freight rates on the Middle East-Europe route versus Middle East-Asia has widened.”

The outlook for European polyolefin demand remains at best uncertain, but supply has long been tight and remains so.

Limited polyethylene (PE) and polypropylene (PP) supply was at first the result of deep operating rate cus when the 2008 financial crisis began – and then also the rapid Chinese economic recovery which enabled Europe to export significant volumes.

European polyolefin exports to China have since fallen due to displacement by new Middle East and Chinese capacity.

But Europe is staying tight because of continued operating-rate discipline and the high freight rates that are discouraging buyers from acquiring Middle East material, said a petrochemicals consultant.

“European PE prices are $300/tonne above those in Asia, but that’s still not enough to attract Middle East shipments,” he added.

Overall high freight rates are the result of orders for new container ships being cancelled in 2008. Just as the petrochemicals industry, with the wonderful benefit of hindsight, overreacted to the late 2008 crisis so did the container industry.

In the dark days of September-December of that year this was perfectly understandable as the world seemed to have come to an end.

But a painful consequence is – as we’ve said – this lag effect of markets taking some time to absorb all the new polyolefin capacity as container space stays at a premium.

If you can’t be always smart, at least try to be lucky.

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