Europe PE faces falling demand, higher capacities as fortunes with PP diverge

LONDON (ICIS)–The European polyethylene (PE) and polypropylene (PP) markets have so far survived relatively unscathed the pandemic-induced recession, but the true testing times are yet to come as weakening demand meets increased capacities.

Moreover, the two products’ outlooks are likely to diverge as some downstream sectors recover quicker than others.

DIFFICULT EVEN BEFORE COVID
PE players in Europe were bracing themselves for a poor 2020 as increased low-cost capacity globally would affect profitability in the region.

New PP volumes were also on the rise, mainly in Asia, but it was more weak demand in the automotive industry that was the concern for the market, and PP players were more relaxed than their PE counterparts.

However, PE has so far registered unexpected strength in 2020 on the back of booming packaging applications as consumers were locked in for months and the sharp fall in crude oil prices, factors which helped European producers to remain profitable.

An unprecedented fall in automotive demand, as production plants across Europe went idle during the pandemic’s peak, has greatly dented PP.

Despite a spike in non-woven and fibre grades, expected to continue in the mid-term, the overall portion of PP used in medical and personal protective applications is fairly small and unable to offset the fall in automotive.

Around 10-11% of European PP goes into that industry.

PE HOLDS UP, BUT FOR HOW LONG?
The pandemic-induced containment measures have caused a significant decline in overall economic activity and steep demand destruction for some petrochemical products, but overall PE demand has not fallen much below pre-crisis levels.

However, according to ICIS analysts, this strong demand is slowing down.

Low density polyethylene (LDPE) and linear low density polyethylene (LLDPE) are the grades most used in the strong packaging sector; while they are expected to remain buoyant, they are likely to come down from the levels in the second quarter when consumers’ panic buying set in.

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PP is also used in the packaging sector, and PP film is expected to remain good, but it will need to face the automotive downturn.

The appliances sector is set to improve as some pent-up demand appears on lockdown easing.

REALITY AT THE PLANTS: BLEAK
Most sources expect those sectors that have been performing less well in the first half of 2020 to gradually improve, although others are set to slow as players along the chain destock.

Many converters are running at reduced rates and consumers are being slow to return to shops since lockdowns started being eased.

It is unclear whether this will improve in the remaining of 2020, especially as new outbreaks are being recorded and the pandemic is pretty much still a present reality.

The CEO of chemicals major LyondellBasell, Bob Patel, said in an interview with the UK’s Financial Times in June that the PE and PP markets had grown in the past 25 years, with the sole exception of 2008 with a drop of 3-4%.

Patel added, however, that the fall this year could go up to double digits.

With a decline in growth for PE, a delay in new capacity start-ups is being mulled by players; a total of 7.1m tonnes of capacity were due on stream this year, but 2.7m tonnes of them could be shifted to 2021.

According to ICIS analysts, a reduction of the average plant utilisation rates is to be expected, and this could last into 2021.

In the PP market, 15m tonnes of fresh capacity are planned over 2020-2021; ICIS analysts expect average global operating rates of 82% if all the projects are completed; 78% of capacity additions will be in Asia, and 59% specifically in China.

Planned cracker outages in Europe will naturally limit some monomer feedstock in the second half of the year, following strong output in the first half.

Imports have been a large feature in the PE market in Europe for many months, particularly from the US, although imports have slowed down in 2020 as Asian volumes returned and European prices have been too low to work.

As European prices rise on higher feedstock costs, and more material becomes available, stronger import volumes could reasonably be expected to move into Europe.

Ethane-based US PE has been growing in volume in the past three years.

PP has been less susceptible to imports and will probably remain so, although new capacities globally are expected to have an impact.

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CIRCULARITY STILL THERE
Although the pandemic has caused a pause in EU plans for recycling and a circular economy, an outlook for PE and PP could not ignore the issue: the EU plans to push ahead with its green agenda.

PE and PP recycling volumes are in their infancy compared to recycled terephthalate (R-PET), but 2020 so far has had a negative impact on recycling rates as virgin PE has been trading consistently below the price of recycled product, leading to substitution.

Collection rates have been disrupted due to lockdowns, and investments in recycling have been delayed.

In the longer term, however, consumer pressure on sustainability remains strong, and legislative measures have been postponed but not abandoned.

Delayed investment and limited underlying growth in 2020 will make it more difficult to hit already-ambitious 2025 targets by some large consumers brands.

Equally, the deep recession this year is also likely to exacerbate existing packaging suitable recycling material shortages.

PE and PP are used in packaging and the manufacture of household goods. PE is also used in agriculture, and PP in automotive.

Front page picture source: LyondellBasell

Focus article by Linda Naylor

Additional reporting by ICIS Analysts Fabrizio Galie and Lorenzo Meazza and ICIS Editors Miguel Rodriguez-Fernandez and Mark Victory