Pricing To Struggle For The Rest of 2012

By John Richardson

Further confirmation of the themes we raised yesterday emerged from an interview with a senior polyolefin industry source, with some important new analysis.

Profitability in Asia is the worst of any of the three regions, he told us, although volumes remain good.

In the US, he characterised demand as “pretty reasonable”, but said the major reason for very firm US prices was a heavy turnaround season. As for Europe, it appears to us that producers continue to manage the market in order to carefully match supply with weak demand.

In contrast in Asia, despite all the talk of maintenance work that we detailed yesterday, he added that supply remained adequate.

Discussions we held with a refining and chemicals analyst add a worrying dimension to the supply outlook. Purchases of naphtha by Asian cracker operators have increased of late, he said, suggesting that they are about to raise production.

Part of the reason might also be stronger co-product credits from butadiene.

Another motive could be an anticipated boost for polypropylene (PP) from higher Thai auto production – which we again discussed yesterday.

Whatever the explanation, the naphtha cracker players are likely to face some disappointment as the commoditised end of China’s polyolefin market will struggle in terms of pricing and margins for the rest of this year, added the senior executive.This is, of course, unless there are major production problems.

He gave the following reasons for his view:

*End-users in China  remain cash-strapped because of tight credit, are struggling with higher labour costs and labour shortages, and lack confidence about the macro-economic direction. He said: “Ninety five percent of China’s plastics business is short of money and 5 per cent, the bigger converters making higher-value films etc, have a lot of money and so are expanding. There is a deliberate government policy to close down lower-end manufacturers in the southern and eastern provinces. They want them to move west, to create jobs in the less-developed parts of China, or go overseas.”

*No converter or distributor will want to stock-up on polyethylene (PE) in H1 ahead of the start-up of the bulk of ExxonMobil’s new Singapore capacity. Some of that capacity has already come on-stream. Material from the apparently imminent start-up of the ChevronPhillips joint venture high-density PE (HDPE) and PP plants in Saudi Arabia has also yet to hit the markets.

Interestingly, the source remains confident on volume growth in China, predicting that both the commodity and speciality ends of the polyolefin business will grow by healthy multiples over GDP (gross domestic product).

This suggests, perhaps, that there will be enough financially healthy converters around to drive growth during a painful process of industrial restructuring.

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