INSIGHT: Packaging saviour of Europe PE market year to date, but for how long?

LONDON (ICIS)–European polyethylene (PE) markets are moving back to normal after a tumultuous period as lockdowns ease and demand returns to more normal levels, but can the resilient packaging sector continue to support PE through the rest of 2020?

Packaging is one of the major uses of PE globally, involving most grades, and it amounts to around a third of all polymer packaging; in Europe, around 60% of PE goes into packaging segment.

The coronavirus pandemic has brought mostly havoc and uncertainty; PE and the lockdowns-induced panic buying of consumer goods, however, meant that the polymer was in very strong demand during March-May.

Consumers panic-bought food and health and hygiene products packed in plastic, mainly film, and even June volumes remained strong, after many regions had eased lockdown and buying was getting back to normal.

By July, it became clear that June volumes were based on expectations of higher prices in July, but demand was nevertheless good, and uncertainty over the future meant that processors were not yet ready to destock.

Concerns about the environment and single-use plastic were no longer at the forefront of people’s  minds as consumers prioritised health and safety concerns.

Pricing was not really an issue in the panic-buying days of March and April, when panic buying of consumer goods led to very strong demand in packaging and logistics issues caused by virus fears meant that converters were more concerned with procuring material than the price they paid for it.

SPREAD STRONG
The ethylene/PE spread has emerged at its strongest since 2017, for both contracted and spot volumes, as PE prices lost only around half of the ethylene fall of March and April, leaving money in the pockets of producers.

things are getting tetchy in the European PE market as August pricing is discussed, as it looks like sellers are trying to cover the whole of the ethylene contract rise again.

There is a dissatisfaction from buyers, as they look at much-improved margins in the PE sector.

The crash in crude oil and subsequently naphtha prices in March led to a very hefty €300/tonne drop in the March and April ethylene contracts combined, while PE contracted prices fell by around €140/tonne in the same period.

This, in turn, left money in the pockets of producers amounting to around half of the drop in the monomer contracts.

By June, when upstream prices had started to rise again, PE prices also rose, leaving the monomer/polymer spread at its highest point since 2017, for both contracted and spot volumes.

Buyers are now in no mood to accept increases for August, in spite of the mild €21/tonne hike in the new August ethylene contract, and their own slowdown of demand is part of the reason for this.

“The market is so quiet. Demand is not high. Globally, the market is weak, with not a lot of demand,” said a large converter.

A producer added: “I saw bit of a decline in July. Overall, it was a tick below June but nothing dramatic, and only in the non-packaging film space.”

AUGUST: HINT OF NORMALITY
The August supply/demand situation in Europe is very different to that earlier in the year, when converters were scrambling to ensure they had all they needed.

There has been increasingly ample supply of almost all PE grades in recent weeks and a reticence from buyers to keep on paying more in what they consider to be a well-supplied market.

US imports, in particular, have not been as available in recent months and, in spite of this, there are no shortages of any grades, with only low density polyethylene (LDPE) and high density polyethylene (HDPE) pipe grade reporting any tightness.

LDPE tightness –used mainly in packaging – is mainly down to former and ongoing production issues.

“There’s nothing available from the US at the moment,” said a trader.

While it is clear there have been fewer imports available in Europe, this situation is not expected to last as new capacities come on stream and not only in the US but also in Russia, Asia, and the Middle East.

PANDEMIC NOT OVER
The uncertainty over the future of the markets remains, however, as fears of reinfection levels emerge.

Several businesses continue to run at low rates and the potential of high unemployment caused by the recession is in every player’s mind – all makes for a cautious market.

Even where demand is trending more towards normal levels, traditional trade patterns are still being disrupted, and most sources have little clarity over the near future.

There are PE sectors still doing well – packaging, appliances, construction – but how long demand can remain normal in others is unclear as supportive, state-funded schemes for businesses and individuals will come to an end by the autumn.

This will inevitably affect downstream demand.

New environmental rules in the EU are also expected to affect demand.

In July, the EU introduced a €800/tonne plastic packaging waste charge, effective January 2021, and this will clearly affect virgin PE demand, although the full impact is so far difficult to determine.

NOTHING AS EXPECTED
Looking back to 2019, European PE producers were bracing themselves for a poor 2020, with new capacities on stream, mainly from cheaper feedstock ethane.

While none could have prepared themselves for the reality of 2020, in terms of PE demand and PE margins, the year so far has proved to be relatively good for them.

The crash in crude prices meant not only an improvement in margins from local business where demand was good, but also opportunities to export that were not possible before, supporting volumes in Europe, some of which continues in the HDPE pipe sector.

In some ways PE has performed better than expected in 2020, but caution and uncertainty are very high for the months to come.

ICIS analysts expect PE production to be reduced, and also into 2021, as demand faces increased output.

Packaging demand can be expected to remain the most robust PE application, but is that enough to support the industry?

Insight by Linda Naylor