Europe Not Clutching At Straws

By John Richardson

EUROPEAN ethylene and polyethylene (PE) market participants seem a million miles away from buying into the idea that the recovery in Asia is sustainable.

This is a realistic view following last week’s interest rate rise in China, the fifth in eight months – and with the announcement over the weekend that inflation in June had risen to 6.4%.

We will discuss the implications of China’s inflation problem in detail in a later post. But here it it is worth saying that this official govenment pronouncement supports our view that more monetary tightening is on the cards.

The argument that last week’s interest rate rise would be the last this year, used to justify polyolefin price rises in Asia, looks as if it has been built on very shaky ground.

Consensus opinion on the European ethylene market late last week was that it had found its floor, wrote Nel Weddle, ICIS pricing olefins editor in Europe.

But she added: “Sources caution it is too early to determine whether the reversal of trend in Asia will be either large enough or sustained enough to make a significant difference to the supply and demand balance through the July-August period and beyond, when the next round of European cracker turnarounds start.

“Several players said that there has not been a structural shift in demand in Asia, and describe the renewed demand as a normal function ahead of planned maintenances given the extensive de-stocking during recent months.

“One source said any expectation of a return to the very healthy March-May period was akin to clutching at straws.”

Cracker operating rates have recently been cut by 10-20% in an effort to rebalance lengthy supply, according to some producers.

PE and polyvinyl chloride (PVC) inventories were reported to be still very high.

“Initial (July contract) pricing ideas of minus Euros50-130/tonne are filtering through from producers in the European PE market this week,” added European polyolefins editor Stephanie Wilson.

Triple digit reductions over June settlements, including as much as Euros120/tonne for low-density polyethylene (LDPE) and butene-1 grade linear low-density (LLDPE), were being discussed, she said.

European prices were still seen as too-expensive relative to Asia, suggesting the upper hand is now with the polyolefin consumers after two-and-a-half years of power residing upstream.

Or is it that the damage to the downstreamers has gone beyond a tipping point?

“The cracker operators can wheel their suitcases of money to their banks, but what about the longer-term prospects for European manufacturing?” said one rather jaundiced industry observer, who has since left for a sorely-needed summer holiday.

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