Europe polyolefins weather coronavirus storm but April disruption widely expected

LONDON (ICIS)–European polyolefins have so far managed to weather the coronavirus storm that plunged global financial markets into their worst week since the 2008 financial crisis.

There is no escaping the spread of uncertainty that the coronavirus has caused, with the Chinese economy practically grinding to a halt in January and February.

For the European polyethylene (PE) and polypropylene (PP) markets, the show must go on, according to sources, and for now there is very much a ‘business as usual’ mentality in the region.

“Europe will behave differently to China, we will not shut,” said one European producer.

Even for players in Italy, the European country most affected by coronavirus, production continues for now and the effect in logistics has been limited.

There have been some initial push back from truck drivers, concerned about the quarantines in the Northern Italy region. See bottom for PE and PP production sites in Italy.

DEMAND PICK-UP
Sources expect a short-term uptick in demand as buyers look to build safety stocks before the market conditions become more challenging.

Prices have been on a downward cycle for some time, with C4 (butene-based) linear low density polyethylene (LLDPE) over 20% lower than this time in 2017.

Hand-to-mouth buying strategies prevail, with stocks at a lower level for buyers, who have been spoilt for choice for suppliers since the colossal rise in capacity in the US.

There has been a significant rise in US capacity, with close to an additional 7m tonnes of PE capacity coming onstream between 2019-2023, according to ICIS data.

Imports have slowed in recent months, with both the low density polyethylene (LDPE) and LLDPE markets reaching a healthier supply and demand balance.

Delays to US shipments continues, with a wider shortage in containers linked to the global restrictions on logistics.

There will also be a reduction in Middle Eastern volumes, with a number of maintenance stops taking place, and prices there higher than Europe.

Local production hiccups have also relieved some of the market length, with previous issues for Dow at Tarragona, Spain, and Borealis at Stenungsund, Sweden.

The improved balance and also a rally in naphtha earlier this month resulted in some increased in the retrospective February contracts.

Pricing momentum has reverted as crude oil fell off a cliff in late February as the world turned bearish on the coronavirus potential effects.

EUROPE TO FEEL THE PINCH
“If the existing emergency does not reduce soon, the global supply and demand balance will deteriorate on missed PE consumption from China, with strong implications also for Europe in 2020,” ICIS analyst Lorenzo Meazza said.

There is continued speculation over the impact on Europe’s supply if parcels that were previously destined for China are redirected.

Markets like high density polyethylene (HDPE) pipe are protected, given the EU’s regulations on pressure pipe.

EU regulations imply that there are stringent and expensive approval processes in place for pressure pipe, and so the sector is largely immune from the pressure in the wider HDPE market.

Any redirected volumes will only arrive in April, potentially late in the month, with increasing issues for logistics and some ships subject to quarantines.

The March ethylene contract settled at a €50/tonne drop, and a €20/tonne drop in propylene.

PE and PP producers are looking to recover some margin, with net PE prices on the lower side of the market below the ethylene contract.

“We have lost a lot, you are coming to a level that you would consider reducing assets,” said one local seller.

Buyers are seeking the full monomer decrease, with supply still readily available.

SPOT SUBDUED
The anticipation over the monomer settlement and the uncertainty led to a subdued spot market across the board last week.

“I have never known it so quiet – It’s a mixture of people waiting for the monomer settlement and coronavirus. There’s just no spot demand at all,” said one trader.

However, demand has improved since the fourth quarter, with consumption at that period particularly poor.

Consumption in January and February was largely in line with expectations, with a solid start to March offtake at this stage.

As Europe cannot escape the sense of unease from the ever-developing global coronavirus outbreak, March may turn out to be for PE and PP only the quiet before the storm.

– Italy accounts for 7% of the European production capacity of PP and 6% of PE.

– The most dependent sector on Italian plants is LLDPE, as nearly 10% of the production in Europe is based there.

– Ferrara’s site, producing PP and LDPE, is the only one located in the northern Italy area considered as the epicentre of the outbreak, just a few kilometres away from the Veneto.

– Another HDPE plant in Rosignano is close to the most affected region, but out of the risk area.

Map of north Italy’s affected areas published by the UK government
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Front page picture: Mostly empty streets in Milan on 27 February 
Source: Mourad Balti Touati/EPA-EFE/Shutterstock 

Focus article by Katherine Sale

Interactive content by Miguel Rodriguez-Fernandez

Additional reporting Miguel Rodriguez-Fernandez and Linda Naylor