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Disrupted marketplace requires active, informed negotiating stance

By Jeremy Pafford on 22-May-2020

Five months into 2020, here’s where we are:

  • Companies literally and figuratively have ripped up their plans and guidance on 2020 business expectations, as the coronavirus pandemic has made conditions unsettling in the near term and uncertain in the long term.
  • The global economy’s descent continues, with the only question now being whether the bottom will be deemed a recession or a depression.
  • Demand for most chemicals and polymers is subdued as rising unemployment and business shutdowns have consumers watching their spend or struggling to find money to spend.

One of the pockets of OK demand has been in polyethylene (PE) for packaging, which for example got a boost in North America and Europe in March and April from consumers stocking up on staple items as stay-at-home orders began to be issued in those regions. And while the run on food and beverage items has subsided, people still have to eat, so packaging demand for staples has a high floor when it comes to how far it can fall.

Meanwhile, demand from China for US PE exports has increased in recent weeks due to tariff exemptions and that region’s reemergence from its coronavirus outbreak.

Thus, even amid the economic downturn, it is understandable that US PE producers are separately pushing for higher prices in June.

Is there a case to be made for higher prices? Absolutely. Is there a case to be made against higher prices? Absolutely. But it’s my view that what will happen in those negotiations will be specific to the individual negotiations and not a market-wide price movement, and that whichever side “wins” in those various negotiations will be the side armed with the most complete suite of information.

June negotiations are critical, with the month marking the end of a quarter and the first half of the year. But with the extent of the economic downturn and the length of the pandemic looming as major unknowns, criticality is a month-to-month proposition for both suppliers’ and customers’ bottom lines. In other words, every negotiation counts.

In US domestic PE negotiations, suppliers can point to higher international pricing, higher upstream ethane pricing and announced curtailment of production by the likes of Dow Chemical and LyondellBasell. In a recent article for ICIS subscribers, Analyst Lorenzo Meazza wrote that PE production “globally is expected to run at reduced rates or the rest of 2020 as growing capacities will meet slowing demand for most end sectors.” Meazza also explained that lockdowns on movements also helped created logistical kinks in some PE supply chains.

But packaging buyers such as fast-moving consumer goods (FMCG) companies and retailers can point to continued high inventories for PE and slackening consumer demand following the run on staples that occurred in March and April when consumers feared the worst from safer-at-home orders issued by governments. Consumers have since adjusted to spending more time at home, quelling the panic-buying demand, and deteriorating economic conditions have them conserving cash or suffering from a lack of cash due to the worsening unemployment picture.

US June PE price negotiations can go either way, but it will only go one way if you bring no supporting data to the negotiating table, and that way is poorly for you and poorly for your company’s bottom line. Business conditions have changed dramatically and will evolve from here, so it is vital to know not only the current situation but also where we likely are headed from here.

Just as businesses have altered their expectations for 2020 and 2021, so have the ICIS consultants and analysts who manage our robust Supply & Demand Database (SDD).

The database has been updated with new forecasts for production, consumption, operating rates and more emanating from the economic downturn and demand shifts caused by the pandemic. Such forward-looking data is vital to strategising for today and tomorrow, whether on the supplier or buyer side.

Negotiations too often result in a winner and a loser, with the winner having leveraged greater insight into past, present and future conditions. But both sides can “win” if they each are well-informed as their enter negotiations.

Now is the time to be proactive in obtaining that insight. My ICIS colleagues and I would be glad to help you do just that.

ICIS links of note for the week (subscription required):

Sentiment shifting in US PE markets as export offers rise
Sentiment is showing signs of shifting in the US polyethylene (PE) market. Export offers are starting to trend higher while price increase initiatives have been announced in the domestic market.

Chemical distribution resilience comes through amid coronavirus crisis
More than ever, the role of chemical distribution as an essential component of industrial and consumer supply chains is in the spotlight. Coming out on the other side of the coronavirus crisis, distributors are set to become even more efficient with an acceleration towards digitisation as well as a renewed focus on ESG (environmental, social, governance).

US PVC contracts for June nominated higher as demand creeps back amid lower operating rates
US producers of polyvinyl chloride (PVC) have separately nominated June contracts higher by 3 cent/lb ($66/tonne) as lower operating rates limit supply and demand begins to creep back. The announcements come as a bit of a surprise and some market participants say that the outcome will certainly depend on how demand recovers as coronavirus lockdowns ease.

US HCl caught between two collapses in demand
US hydrochloric acid (HCl) continues to suffer demand collapses from two directions: a drop in the number of oil- and gas-well completions in US shale fields and a sharp decrease in US steel production with the idled US automotive manufacturing. Those end-use segments represent a large chunk of overall US HCl demand, perhaps approaching half of total demand when oil prices where high and hydraulic fracturing of new oil and gas wells was in full swing.

US fuel ethanol producers continue to face margin pressure, some consider the switch to industrial production
US fuel ethanol producers continue to feel margin pressure, despite indications of demand recovery, as stocks remain elevated and consumers remain hesitant to resume their normal lives. Fuel producers continue to lament the low margin territory that has resulted in shutdowns across the industry, as the coronavirus has essentially halted road travel.

Latin American PET prices remain steady despite bullish Asian trend
Most Latin American polyethylene terephthalate (PET) buyers remain on the sidelines as the local economies experience the impact of the pandemic. This lack of buying interest is contributing to flat resin prices. After many weeks of intense end-user buying activity that supported high PET operating rates across the Americas, consumption of PET-packaged products seems to be declining, mainly because of economic factors.