Tougher times for PE producers

Polyethylene (PE) producer margins were under pressure in the second quarter and will have dampened profitability for some of the integrated petrochemical majors.

In the US particularly, margins have come off the extraordinary highs of a few years ago and could be said to be tracking back to more normal levels.

But PE in the US currently is hardly normal, given the huge new volumes of production brought on stream and the considerable volumes of ethylene feedstock that have begun to follow.

Integrated margins for producers in the US of low density polyethylene (LDPE) and high density polyethylene (HDPE) fell most sharply despite weaker ethylene prices.

Buoyant profitability has given way under market length for integrated players and weaker prices.

The ICIS integrated margin model for HDPE in the US, based on ethane feed, in the second quarter shows the most precipitous fall globally year on year.

The margin tracked much lower in the second quarter compared with the first quarter of this year. In addition, the integrated margins for both polymers were considerably less than at the most recent high point in the fourth quarter of 2017.

Producers face their greatest challenge in the second half and into 2019 as ethane, ethylene and PE availability balance out in the new normal of considerably greater nameplate capacity for both olefin and polymer.

The normalisation of PE prices and margins continued globally in the second quarter, however.

The LDPE naphtha-based margin loss (shown in red on the chart) for integrated players in northeast (NE) Asia widened markedly from May and, for both LDPE and HDPE, the margin loss at the polymer units was much more significant than in the fourth quarter of 2017.

LDPE and HDPE producers in Europe enjoyed high integrated margins based on naphtha feedstock for three years between 2015 and 2017, but margins have tracked lower in 2018.

The most recent high point was in the second quarter of last year and while there was some recovery from the downward trend in the first quarter of this year, it continued in the second quarter.

Producers in Europe are braced for the arrival of higher volumes of PE imports from the US.

While not the logical market for new US PE, Europe’s markets will be in the firing line if exports to China becomes more difficult as the trade dispute with the US develops.

Chinese traders are already avoiding US PE, according to sources.

Europe is a low-priced market for the polymer, so not the most attractive, but if there are excess volumes to be sold that is another matter.

There has been little impact from US imports on the European HDPE market as yet, and an impact is not expected until the fourth quarter.

An additional 6.5m tonnes of new PE capacity will be on stream in North America by the end of next year, which is a 42% increase. By 2022, US capacity is expected to increase by 77%.

Volumes from the US are expected to have an impact on prices globally, and this will come at an inopportune time for naphtha-based producers which have had their margins squeezed by feedstock costs in the higher oil price environment.

EUROPE PE TALKS UNDERWAY

PE pricing discussions are under way for July and buyers are finding it hard to squeeze anything out of sellers in spite of the €15/tonne drop in the upstream July ethylene contract.

“I tried to get a reduction, but just couldn’t,” said a buyer who settled early in the month.

Many buyers settle at the end of the month, and clearly these prices were not yet done.

“We’re still in discussion,” said another. “We’ve managed to get a minus 5 [€/tonne] for one grade, but the rest is still on rollover.”

Margins are still good at the cracker level for PE producers, but the gap between ethylene and PE has been narrowing, with producers unable to pass on the full monomer increases in recent months.

July is only halfway through, and there is still plenty of time for things to change, but for the moment sellers seem to be digging in their heels.

Buyers are still waiting for the arrival of fresh imports from new capacities in North America, and while these will inevitably appear in Europe at some time, the prospect of significant volumes arriving in 2018 is fading.

The possible exception is metallocene linear low density polyethylene (MLLDPE), but here too so far only trial volumes have been seen.

There is, however, oversupply in this market, as downgauging becomes ever increasingly important and producers prepare for this. Sources said it will take some time for this market to get into balance.

In the C4 (butene based) LLDPE sector, spot prices have stabilised, and there is a feeling that material is getting into better balance.

Word-of-mouth reports suggest that imports are not as strong in volume as they were, and volumes from the Middle East into Europe are reduced.

There is ample low density polyethylene (LDPE) on offer, and LDPE spot prices have been soft, but high density polyethylene (HDPE) supply is balanced to tight, depending on the grade.

July discussions will continue for some time, and sources are keeping an eye on upstream crude and naphtha prices to determine where August prices might land.

Holidays in southern Europe will impact demand, and this could affect end-month negotiations when they take place, but so far, sellers are showing little flexibility.

PE is used in packaging, the manufacture of household goods, and also in the agricultural industry.

Additional reporting by Linda Naylor