INSIGHT: Europe PET demand outlook unclear as lockdowns ease, market remains in survival mode

Author: Caroline Murray

2020/05/26

LONDON (ICIS)--The polyethylene terephthalate (PET) industry in Europe had a surprisingly good run on sales during March’s pandemic shopping spree, but there is no getting away from the toll of a depressed economy.

Consumer focus was on essentials. And on the shopping list were 1l, 1.5l even 2l PET bottles of water and olive oil, for example.

Plastic-clad fruit and vegetables and other foods encased in packaging won over shoppers because of the hygiene aspect.

April demand was still good, particularly the first half, but the panic has since disappeared.

“For a month and a half, supermarkets were full of fruit in baskets and food on trays. They still are, but not as much,” a buyer said.

Now that lockdowns are easing, and people know they are more likely to be able to pop out to the shops as and when they need to, the situation is not half as dramatic as it was.

“Demand in central, western and north Europe is keeping pretty stable. It’s not increasing as per the usual season, but it hasn’t fallen versus quarter one. I would say that the softening of lockdowns is having a positive effect. May and June look good already,” a producer said.

SMALLER BOTTLES LOSE THEIR APPEAL
What this pandemic has done is cutting sales of carbonated soft drinks, and the small 500 ml PET bottles have lost their appeal.

“Demand for thermoforming [and water] is compensating for the lower demand in beverages,” a second producer said.

Yes, hand sanitizer is highly sought after, but households have bulked up and while we are using them way more than ever before, there is only so much one can use in a domestic situation.

FROM R-PET FLAKES TO CHEAP VIRGIN RESIN
Interestingly, the 'war on plastics' that had grabbed the public’s attention seems like a distant memory. The public has embraced certain plastics as life-saving materials that also pack essential items.

This is not to say the war on plastics is over, and that there is considerable work to do in order to tackle climate change, but for now at least, the negative image for PET is diminished.

Meanwhile, the recycled PET (R-PET) market itself is struggling to maintain its effectiveness because of the chasm that has opened up between R-PET and the cheaper virgin PET.

The shift from recycled PET flakes back to virgin has damaged the recycling industry in Europe.

Virgin PET has been too cheap to compete with, and the financial pressures in the recycling sector are so great that they suggest R-PET flake plant closures (possibly permanently) are likely in the next few weeks.

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While every little bit helps in a financial crisis, the benefits for virgin PET are still small, as R-PET content normally amounts to around 20-30%, up to 50% if you’re talking sheet.

Because of the price differential between the two PET grades, ICIS senior analyst for recycling, Helen McGeough does not expect any real recovery in terms of flake usage until mid-2021.

PREFERENCE FOR DOMESTIC PURCHASES
2019 saw a massive influx of imports as buyers refused to succumb to domestic suppliers’ price proposals on their cost-plus fees, leading to a price war effectively between European suppliers and importers so 2020 began on a relatively even keel in terms of prices.

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This time last year the discussion involved the abundance of imports and the reduction of operating rates by domestic producers.

A very different picture was painted in the first quarter of 2020. Imports were  reduced significantly, and domestic production was back in demand.

Both the preference to shorten the supply chain and the Asia-Europe price spread remaining low were likely contributing factors.

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The expectation of polymer plants operating at lower rates in 2020 seems a logical prediction in a year of lower demand and economic uncertainty.

But European PET resin appears to be the anomaly.

Operating rates for PET resin producers in Europe are expected to remain flat or increase by 1% or 2% this year as demand returns to the domestic market after a particularly heavy import year in 2019.

Now though, apart from traditional importing regions such as Italy and the Balkans, buyers have less appetite for purchasing material they will not see for six weeks, for example.

So not only are European suppliers able to compete with imports, they have the added advantage of being the more attractive option in terms of logistics in a world where nothing is certain.

“I won’t speculate on the summer period [demand]. It's a crisis that we need to overcome,” the second producer said.

While markets have reacted to recent strengthening upstream, the PET industry remains cautious and demand unpredictable.

TOURISM: KEY TO SUMMER PEAK SEASON
The cancellation of outdoor events such as festivals, concerts and football games with live audiences is having a detrimental effect on PET offtake.

“What is normally driving the summer peak is holidays, festivals, etc, and these pose a huge question mark,” a trader said.

Life operates at a vastly different pace to how it used to. Many people could have afforded to go abroad on holiday, but with social lockdowns, and less cash to go around, tourism came to a complete standstill.

Tourism is expected to pick up, but not necessarily to how it was before.

This chart is derived from Eurostat data and we can expect a vastly different graph for 2020.

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The data behind this next graph comes from Cirium’s flight tracking analysis; Cirium is a travel data and analytics company that, like ICIS, is part of Relx.

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What we may see this year is a greater appreciation for one’s home nation and the 'staycation' may be what we plan for.

That said, borders are beginning to open, there are more cars on the road and planes are beginning to take to the sky once more.

Carrier Ryanair has plans to return to a 40% capacity European flight schedule from 1 July. EasyJet has also stated that it plans to restart some flights on 15 June.

Meanwhile, beverage producers are sitting on unsaleable bottle stocks and fresh demand is low as many converters are already covered.

While the role of PET imports remains vital, markets may continue to home in on domestic PET sales, more so perhaps than before.


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FIXED-PRICE DEALS BUOY H2 DEMAND
The general downbeat mood across the globe has encouraged a low-cost production environment, creating a cheap-enough value chain to entice PET buyers and sellers to commit forward at fixed prices for H2 2020 deliveries.

After all, many of us are experiencing moments of normality again.

On the other hand, there was an increase in PET stock replenishment during April and May that could curtail requirements for the second half of the year.

The successful ousting of competition from importers by reducing domestic prices and the limitation of buyers’ risk when buying local means that sellers in Europe have managed to gain margin over cost-plus contracts.

European PET is likely to still dominate sales over imports, but if customers have bought sufficient to cover demand, then really the need for imports diminishes anyway.

“We may still have an oversupplied market based on European material,” a trader said.

PET TO CONTINUE IN SURVIVAL MODE
In summary, we are all having to change what we do and how we think.

This situation is not going to suddenly disappear so even the PET industry, although it caters for necessities like food and water, is treading cautiously and will continue in survival mode for a while yet.

PET resins can be broadly classified into bottle, fibre or film grade, named according to the downstream applications. Bottle grade resin is the most commonly traded form of PET resin and it is used in bottle and container packaging through blow moulding and thermoforming.

Fibre grade resin goes into making polyester fibre, while film grade resin is used in electrical and flexible packaging applications. PET can be compounded with glass fibre for the production of engineering plastics.

Insight by Caroline Murray and Susan Mair