INSIGHT: Heavily discounted US volumes shift global PE dynamics

Author: Ben Lake


LONDON (ICIS)--US origin polyethylene (PE) has drastically altered trade flows across the globe. This, while a significant shift in the polymers market was fully expected.

The capacity expansions, linked to the surplus of ethane generated via fracking, had been discussed at length across the market prior to commissioning.

The situation has been complicated by the global economic slump that has been generated by among many other factors, the US/China trade war. Demand has collapsed as supply levels reach increasing length.

Increasingly desperate sellers of US material are promoting their polymer via price cuts. This may be having the exact opposite effect, however.

Limited demand has seen sellers with US volumes repeatedly cut their offer prices, sometimes almost day to day. As this has become a standard practice, buyers are becoming disincentivised from purchases.

The preference is now to hold back as much as possible, as it is expected that price cuts will follow disappointing sales.

“Customers have many, many offers from so many people” said a European trader.

"They can sit and smile and say it will get even better tomorrow” it added.

US material is largely bought from source by traders, to sell domestically as local buyers are put off by the risk of long transit times. Certain regions, such as Africa, have reported increase in direct discussions with US producers.

“Some distributers were in a panic to sell at even some big losses for ready materials” a Turkish trader said.

Supply pressure appears to be a significant driver of falling prices, traders have often already taken on the burden of storage. Deflated global demand has cut off any significant outlet for sales, leaving all markets over saturated.

The size of the increase in production can be seen in the tables below.

HDPE 2014 2015 2016 2017 2018
Production 6661 7026 7116 7314 8206
Import  1038 1171 1250 1097 1156
Export 1667 2084 2357 2026 2559
LLDPE 2014 2015 2016 2017 2018
Production 4592 4679 4685 4888 6072
Import  1604 1608 1689 1835 1866
Export 1956 2194 2172 2325 3245

*Units= kilotonnes

The prevalence of US material is affecting most major markets. Even though trade between the US and China is limited, Chinese buyers are using US prices as their starting point with negotiations with Middle East suppliers.

There are rumours that South American producers may scale back exports as they cannot compete with US price levels.

Indian manufacturers face large backlogs of product and waning domestic demand, again fuelled by buyer’s confident in future price decay.

The eagerness to sell is flattening prices for all grades.

“In Africa now, bi-modal is talked cheaper than high density [polyethylene]” said an African trader

“Look at metallocene, in some areas it is cheaper than linear low density [polyethylene]” it added.

Desperation to sell can mean that better quality material is offered cheaper, which again reduces the perceived value of all related grades.

The key for many players looking forward is the US finding a price floor, halting the current downward trend. US sources believe that there is still room enough for $200-300/tonne of cuts while US production remains in profit.

As can be seen in the graph below, prices are already the lowest since 2008 economic crisis. Many markets are at their lowest level for the period they have been recorded by ICIS.

ICIS Editorial Chart goes here

US producers have also made it clear that they have no intention of cutting production rates, as they need to begin repaying capital outlays on their expanded plants.

For now, optimism is low, players are looking to US/ China trade talks, which are said to be progressing. A rollback of tariffs between the two countries would ease pressure on other regions but would see Middle Eastern sellers lose out. They are currently providing large volumes to China, in place of US suppliers.

Such is the saturation of material across the globe, that it would take a long time for demand to catch up with very high domestic stock levels.

A continued focus on discounting, as a means of attracting business, means that the PE market remains in permanent buyer’s market. Future developments may hinge on not just the presence of US volumes but also how sellers attempt to promote it. A continued focus on shifting as much volume as possible could keep prices muted .

Addittional reporting by Felita Widjaja, Linda Naylor, Lorenzo Meazza, Veena Pathare and Zachary Moore.

By Ben Lake


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