Polyolefins At A Tipping Point

By John Richardson

EUROPEAN polyolefin markets are at one of those fascinating tipping points following the recent price recovery.

Ethylene spot prices rebounded late last week with July sales much better than those in June, wrote Nel Weddle, European ICIS pricing olefins editor, in this report.

Propylene, however, remained under pressure because of a long market.

The same pattern was reflected downstream where polyethylene (PE) spot pricing had strengthened while polypropylene (PP) remained under downward pressure because it was perceived as still too expensive.

But in both ethylene and PE the rapid change in the European mood was such that reductions in August contracts were no longer the only option under discussion; rollovers or even increases were being mentioned.

In Asia, the recovery seems a little less clear cut. Traders, producers and buyers keep mentioning one word over and over again – “affordability”.

They agree with a HSBC assessment, published in a report released last month, that in inflation-adjusted terms PE, PP and polyvinyl chloride (PVC) prices were the highest that they had ever been in March 2011.

That month marked the end of a clear upward direction in crude, reducing the incentive of resin buyers in China to “buy forward”.

March and every month since then has also seen further monetary tightening as China attempts to bring inflation below 4%. This has placed a great deal of pressure on the small -and medium-sized enterprises (SMEs) that make up the bulk of the country’s resin buyers.

So the worry is that if prices go up by too much too quickly – before the battle against inflation has been won, enabling Beijing to result to relax monetary conditions – there will be a kickback from the converters.

Another big worry is that crude, buoyed by greater stock market confidence, might enter a new mini bull-run.

“Some of the less well-integrated Asian cracker operators would then face either stomaching weaker margins or attempting to pass-through prices that might well not be acceptable to the buyers,” said a source with one major producer.

This would be a familiar problem, according to a report released by Nexant ChemSystems late last week.

“(The) average profitability of the South Korean industry (in the second quarter) fell to a six quarter low,” wrote the petrochemicals consultancy.

It attributed this to rising naphtha costs and weak polyolefin exports to China.

One trader repeated his earlier comment that a lot of resin remained in the hands of the traders.

“The improvement in Asian pricing over the last two weeks is mainly down to the traders acquiring volumes. If the buyers do suddenly come back in big numbers, then whoosh – pricing could really take off.”

But, of course, the other possibility is that the traders end up getting burnt.

As for supply, the blog is still struggling to get a definitive answer on whether higher Saudi crude production has resulted in more polyolefin output. This would be the result of greater availability of associated gas.

Contradicting the plastics converter we quoted earlier in the week, our trader source said: “I am not seeing bigger volumes coming out of Saudi. Several grades remain tight.”

A Middle East-based chemicals analyst, however, said that the Q2 financial results released by Yansab, the SABIC subsidiary, showed its production had increased. Two and two makes four or five?

“Parent company SABIC’s volumes were also up in the second quarter, but this might have been to do with greater overseas output,” he said.

One obvious explanation for tightness in PP is reports of mechanical problems at two Saudi facilities. This has taken 1.1m tonnes of annualised capacity out of the market, if the reports are accurate.

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