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US ethylene outages boost European and Asian PE producers

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US PE Sept14Polymer traders must be already counting their end-of-year bonuses, as the value of the US$ rises whilst crude oil prices weaken.  The biggest bonuses will likely go to polyethylene (PE) traders competing with US producers.

The reason is that US ethylene spot prices are currently at record levels.  An astonishing 10% of US ethylene capacity has been out of action since March due to outages.  And as ICIS’ John Dietrich notes, 14% of capacity will be down in October due to further planned turnarounds.

These supply outages have pushed US PE export prices to their highest level since August 2008, despite the slowdown in global demand.  And US competitiveness is being further reduced by the changes underway in oil and currency markets, as the chart shows:

  • US HDPE export prices have risen 13% this year, up from $1477/t to $1675/t today (purple line)
  • The US$ has risen from €0.72c in May to €0.78c today versus the euro (green)
  • It has also risen from ¥101 to ¥109 since July versus the Japanese yen (brown)
  • Brent oil prices have fallen from $114/bbl in June to just $98/bbl today (blue line)

Unsurprisingly, US polyethylene exports are being badly hit.  Overall they are down 10% so far this year versus 2013 as the second chart shows, based on Global Trade Information Services data:

US PE Sept14b

  • Exports have fallen to most major regions – down 7% to LatAm, 64% to ME; 30% to SEA; 24% to NEA
  • Only China volumes are up, due to average export prices there being just $1673/t versus $1751/t globally
  • And most interestingly, US imports from Europe have been increasing – up to 36KT by July versus 6KT in 2013

The major oil and currency moves have only taken place in recent weeks, so have not yet appeared in the trade statistics.  But last week’s ICIS pricing reports for polyethylene give a clear picture of current developments.  European producers have seen a rush for export cargoes, causing markets to temporarily tighten.  As Matt Tudball reports:

“Traders are re-exporting cargoes of HDPE film out of Europe because the weaker euro is offering better arbitrage opportunities in other markets. As a result, the European market has tightened, causing prices to rise according to market sources.”

European end-user demand remains weak, so this tightness will likely be only temporary.  European cracker producers are no doubt already ramping up output as fast as possible, to take advantage of this unexpected windfall.

They are ideally placed to boost exports, with the euro down 8% since May.  Today’s lower oil prices will further boost their export competitiveness.

As a result, it seems almost certain that Q4 will see a major rise in exports to the US itself, where US ethylene consumers are being squeezed by lack of supply and record high price levels.   As one buyer told Dietrich, “We’re not making a pound more than we need to.  It’s bad business to be in the spot market.”

Asian producers and traders may also decide to join the party.  Asian domestic prices are under major pressure due to China’s slowdown, as Chow Bee Lin reports:

A slew of lower-priced domestic cargoes offered to the spot market weakened the appetite for imported PE resins. Most traders and downstream manufacturers stood on the sidelines as they were bearish about the outlook. Meanwhile, a Middle East producer slashed its price offers significantly, which negatively affected market confidence in the week. In line with this, traders are expected to cut their price offers to the spot market”.

Market conditions like this are a gift to traders.  And Q4 is likely to be the gift that goes on giving, as favourable exchange and feedstock movements look likely to continue.

The irony of the situation will not escape blog readers, however:

  • The US is planning to ramp up ethylene capacity by over 40% due to the possible shale gas cost advantage
  • This has always seemed a badly flawed investment proposition to the blog, as it has argued over the past year
  • It does not believe there can possibly be a market for the scale of new capacity being planned
  • And, of course, today’s ongoing supply outages mean that the US is actually losing global market share

Senior executives need to urgently review their expansion plans before it is too late, and refocus instead on the transition taking place to the Boomer-led New Normal.

Their current problems confirm that access to low-cost supply is no longer sufficient to guarantee future profitability.  Instead, securing demand outlets in a low growth world must take priority, if they want to create sustainable profitability.