OUTLOOK ‘19: Europe PET supply will be the focus for 2019

Source: ICIS News

2018/12/21

LONDON (ICIS)--The supply of polyethylene terephthalate (PET) in Europe, and whether it will flow without causing surprising price swings, is what participants want to ascertain for their 2019 budgets.

After all, 2018 was punctuated by unexpected periods of significant tightness that often, but not always, stemmed from global, upstream events.

“The biggest concern is that we will have supply shortages in Europe. For the next couple of years we will have only a few domestic suppliers. If something happens with Rotterdam in the summer time it will have a huge impact…” a buyer said.

The traditional seasonality of the market still exists, and customers buy PET in preparation for the heat of the summer bottle sales season.

What is nerve-wracking, particularly following evidence of how fragile supply can be, is whether or not plants across the global chain manage to produce as planned, or imports arrive on time, thereby supplying the market when it most needs it.

“We saw in the second quarter [of 2018]: the impact of production problems. It would be unusual but not unprecedented to have continued issues two years in succession,” a producer said.

Europeans traditionally and still do commit to domestic volumes, alongside dipping into imports that provide competition.

The graph below shows the correlation between Europe and China prices over the course of 2018.

-- But buyers seem to have learnt from recent years and adopted a fresh attitude.

For 2019, buyers have threatened to bring in considerably more volumes from outside the region, in response to the output problems in 2018 but also partly in resistance to the individual increases producers targeted for 2019 conversion costs.

“I think there will be a resurgence of imports next year. Together with the purified terephthalic acid [PTA] producers, PET producers did a massive mistake by asking for crazy high formulas,” a reseller said.

The following graph shows an estimate of how wide the gap was between freely negotiated prices and contracts based on raw material plus a conversion fee, at a time of severe tightness.

This chasm is what participants are attempting to moderate for 2019.

Freely Negotiated v Feedstock-plus contracts

-- It should be noted that 2018 conversion costs varied significantly, according to the timing of negotiations and the size of account for example. The graph above gives an indication of where some may have settled.

Rising costs of upstream purified terephthalic acid (PTA) formed the greater part of PET producers' justification for higher contract prices in 2019.

"PTA was the golden goose for PET producers this year, in terms of 2019 contract negotiations," a second buyer said.

Only time will tell if the appetite for PET imports has been or will be as big as some would have believe. As prices have been on a downward trajectory for much of quarter four, the financial benefit to buyers when the product actually arrives, is debatable.

Any delays in product arriving from other regions could swing market direction.

“Do they walk the talk? ... We talk to major customers and book the same kind of volumes with these majors … The hottest quarter is quarter two. It is very difficult to predict in this volatile world, but I know supply is less than demand in the summer season so you need imports," a second producer said.

"Will the Chinese or South Koreans be there in quarter two and quarter three, and do our customers want to gamble they can get imports?” the producer queried.

One cannot contemplate the outlook of PET without considering the huge uncertainties in the macroeconomic, geopolital arenas, including the US-China trade war and Brexit.

But it has all been so erratic, it makes it impossible to truly know what lies ahead.

“Big organisations have been making big changes to forecasts in a short space of time,” a third buyer said.

Just when the market may feel it has a handle on 2019 dynamics, and figures out say, the trend in crude oil pricing, all this could easily be pushed aside by the effects of tightness in upstream paraxylene (PX), for example.

The rise in favour of recycled plastics is another in the string of discussion points for PET.

How it may or may not influence demand and supply for virgin PET already in 2019 adds to the intrigue.

Commentators are leaning towards an assumption that virgin PET will not be negatively impacted by recycled PET (R-PET) until 2020 and beyond, but not everyone agrees.

"Our potential consumption for virgin PET could drop by a third in [2019] ... In our market I see virgin displaced by R-PET and if I were a virgin producer, I would have one eye thinking my virgin demand is going down here," a fourth buyer said.

Substitution trends - PET and R-PET Europe

-- The industry may have got used to attempting to second-guess the roller coaster ride that defines the PET market, and may therefore, be heading towards 2019 with confidence and clarity.

Or the supply/demand dynamics of 2019 could end up just as surprising as it was in 2018.

--

PET is used in fibres for clothing, containers and bottles for liquids and foods, thermoforming for manufacturing, and in combination with glass fibre for engineering resins.

Top picture source: imageBROKER/REX/Shutterstock

Focus article by Caroline Murray