INSIGHT: European packaging demand unravelling as lockdowns ease

Author: Morgan Condon

2020/07/02

LONDON (ICIS)--As with most end markets, dynamics in the European packaging industry have been completely restructured in the wake of the coronavirus pandemic.

Initially, packaging was deemed sturdy enough to support pricing in the chemicals sector.

As the crisis has unfurled, production at full capacity in Europe was rendered impossible for much of the second quarter.

As the region adapted to lockdown restrictions, sentiment has started to deviate from previously buoyant levels at the beginning of quarantine, distorting price directions in the chemicals industry.

THE GOOD
Feedback from some market participants indicates that demand for packaging had been performing well, particularly at the end of the first quarter through until May.

The polyethylene (PE) market has been particularly strong; one converter said demand rose by 200% in April, year on year, while growth for the March-May period stood between 50-100%, it added.

Another PE packaging converter recorded a boost of 30-50% in volumes during the peak months as well, providing sustained demand while the need for material in other industries was subdued.

While prices trended modestly down, producers were able to retain plump margins as feedstock costs nosedived, in line with crude oil.

Demand for styrenics, nylon and cyclohexane (CX) used in packaging and film applications all rose during the period.

Similarly, demand on the polyethylene terephthalate (PET) market has remained strong through the pandemic as its use in food packaging has been more resilient than other sectors, despite restrictions on movement.

“Our demand has not been heavily impacted by coronavirus. On the contrary, unlike electronics and automotive, people kept drinking and eating,” said one PET producer in June.

“Also, since the last crisis of 2008 we have been running flat out. It is true that summer events are cancelled and international tourism is not expected to come back. Europeans will, however, stay home and after lockdown period want to ‘celebrate’ life.”

THE BAD
Although the quarter started on a strong footing for the packaging sector, this was not sustained and prices fell in line with the wider macroeconomic downturn.

As crude prices have maintained more stability, the well-cushioned margins that built up in early Q2 started to erode as olefins prices rose again.

Furthermore, previously healthy demand started to run out of steam as the first half of 2020 drew to a close, marking a significant change in sentiment.

The same PE converter who had benefitted from a 200% increase at the start of the quarter said that, by the end of June, demand was lower year on year.

The other PE converter who made gains of 30-50% earlier in the year also noted a dip in June, and uncertainty on what will happen over the summer has clouded optimism on the market.

Typical pre-buying has not been as common as in other years, despite the prospect of increased monomer prices in line with crude.

As lockdown restrictions continue to ease in Europe, demand for food packaging used in takeaways is expected to wain as restaurants are able to feed people on site.

The nylon market has already felt the effects of this softening, although the outlook remains broadly stable, while polystyrene (PS) packaging applications have taken a larger hit.

“Demand for food packaging is slower than in May because lockdown measures are [easing and] going back to normal. I expect demand to slow down further to normal levels,” said a PS buyer.

Weaker demand for packaging has eroded demand for printing inks, with one methyl ethyl ketone (MEK) buyer ruling itself out of the market for the next three months due to ample stock.

Ethyl acetate (etac) demand is slightly below average after inventory build-ups at the start of lockdown.

This capped purchasing interest through May and June but could leave room for some buyers to re-enter the market in the coming months if stocks begin to dwindle.

While PET demand usually peaks in summer, bullish sentiment could trickle into the dynamics of this market as well.

“PET demand has been really good lately… In a few weeks, we will see the brutal reality of the lack of demand,” said one PET trader recently.

Competitive domestic PET prices enabled European producers to compete with recycled material and any imported volumes, but weaker demand may continue to put pressure on the market.

“The final product is our competition at the moment - it’s mission impossible. Companies are dying in this part of Europe… Foil delivered to this part of Europe is the same price of the virgin material we are buying”, said one PET buyer.

The quick rise and decline in packaging demand was likened by one PE converter to the consumer trend spike in toilet roll.

At the beginning of lockdown, frenzied demand drained supply, but after the initial panic about the uncertainty of resources died down, availability has returned to normal levels.

Although the trend in consumer buying has been to order things online, providing a boost for some aspects of the packaging market, the e-commerce industry is driven by fewer, bigger players, which is not enough to warp dynamics for the whole chemicals industry.

THE RECYCLING
Although under pressure from cheaper virgin material, dynamics on the recycled PET (R-PET) market are governed by other inelastic factors, such as ongoing sustainability targets and brand pledges.

This has kept demand consistent and prices remain at a premium to virgin material.

The market followed the same buy-side impulse to stockpile material at the start of the pandemic, but demand has also flattened out for recycled material, which may be driven less consumption of goods in Europe.

“A lot of people [are] in unemployment now, and lower income means [they are] not buying so much, especially when they can go each day to the supermarkets and get what they need,” said one major food packaging producer.

A change in consumer habits – increased demand for fresh produce – could also weigh on the packaging industry, as public consciousness of health remains a key concern.

UNCERTAIN SHORT-TERM
Although the packaging industry has bucked many of the trends that weighed down in other sectors throughout the second quarter, the overall uncertainty about how the pandemic will develop has capped long-term outlooks across the board.

Lifting lockdown measures may erode demand as upstream prices start making a recovery, which could eat into any gains made earlier in the year.

If consumers are still reticent to eat in restaurants and venture out to the shops, then the packaging sector could be marked by higher demand on a longer-term basis.

Front page picture source: Jochen Tack/imageBROKER/Shutterstock

Insight by Morgan Condon

Additional reporting by Zubair Adam, Anne-Sophie Briant-Vaghela, Nick Cleeve, Marta Fern, Caroline Murray, Linda Naylor, Barbara Ortner, Matt Tudball, Nel Weddle and Stephanie Wix

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