OUTLOOK: Europe PET torn between logistics mayhem and lockdowns easing

Author: Caroline Murray


LONDON (ICIS)--Gone are the days of predictable trends in the European  polyethylene terephthalate (PET) market as it rides the choppy waters of momentous global events.

The second half of 2021 will be characterised by higher costs for shipping, and industry which increasingly fails to offer reliability in delivery times.

Global warming is set to cause extreme weather events, like those just seen in northwest Europe or Chian, also set to hit logistics or production on occasion.

Finally, while the pandemic's long-term effect on end users behaviour remains to be seen, it is probably safe to say PET's old tranquil days are history.

Logistics will remain problematic.

Even if delays to shipments subside, costs are unlikely to fall significantly, according to sources.

“The view in Asia is it won’t get better until next Chinese New Year, and there is no guarantee it will get better after that,” a buyer said.

The market was thrown into disarray in late 2020 when it became clear that shipping was an issue that clashed with the damage caused by hurricanes in the US.

These events hit Europe-based buyers hard as the region became bereft of imports, while presenting an opportunity for suppliers in Europe – a net importer - to broaden their customer base.

However, it is not and will not be plain sailing for producers who require imports of feedstock, particularly purified terephthalic acid (PTA).

Their operating rates will remain sporadic unless demand for PET bottles drops back, which it traditionally does after the summer ‘peak’ season.

“The reason for the increases in shipping costs is that the movement of business was reduced," a trader said.

"Shipping lines restricted the space available. They will put vessels into service again and it will result in lower freight. When this will happen, I have no idea,”

To add to the burden, land logistics are as chaotic as freight logistics.

A typical prompt for end-user PET demand is warm weather; sales are expected to be higher as it will also coincide with the end of some lockdown measures in Europe.

People will move around until the fourth quarter, when sales should decrease.

The patterns of those sourcing PET resin, however, usually include pre-buying towards the end of the year.

This allows buyers to go into 2022 contract discussions clad in armour, but perhaps more importantly this year it would mean they would have stock after months of disappointment for many.

However, this comes at a time of huge uncertainty in terms of demand and supply, not least weather wise, as seen during the devastating floods, particularly in Germany and the Benelux.

Another hurricane season in the US could also disrupt the global flow of product, as would any other form of severe weather around the globe.

After all, extremes in weather are already haunting the world, not least in influential China.

The pandemic has obviously played a crucial role in the chemical markets, and we saw how PET rose through the fire like a phoenix, as it adopted its rightful place of crucial product in time of crisis.

That end-user panic that became evident in Q2/Q3 2020 however, failed to linger. End-users became accustomed to a new normal that did not involve emptying the shelves of supermarkets.

That said, delayed shipments and missing containers had a similar effect.

Sourcing materials such as food packaged in PET or beverages encased in PET has been an issue for some retailers. It is lucky then, that overall demand has disappointed when compared to a normal year.

While it is true that hot temperatures are luring tourists to holiday destinations, coronavirus infection rates are rising across Europe, presenting concern about what lies ahead.

The general feeling among commentators is that successful vaccination programmes have allowed for a more relaxed approach to the movement of people, and will lead to lockdown restrictions being more localised in future.

The PET end-user demand pendulum is swinging, as people crave normality at a time of total disarray, affecting different areas in a variety of ways.

Essentially though, requirements for PET resin in Europe are supported by the lack of imports, so Europe has become more dependent on local product.

"Buyers will try to prebuy in Q4 but we dont want to offer anything for next year until we understand [the situation better]," a producer said.

The risk of paying extortionate shipping fees, while not knowing when or sometimes where the product will arrive is too great for some buyers.

Product flows have changed because of this, so Asia is usurped by exporters such as Turkey and Egypt.

Meanwhile, Europe may be able to dispense of excess to the Americas, should the opportunity arise.

Sustainability is clearly a hot topic and is taking business away from virgin PET.

Recycled polyethylene terephthalate (R-PET) has become more so of late, because the price of R-PET has risen dramatically, as availability has fallen.

The chasm between R-PET and virgin PET prices is such that despite the pledges, many of those who normally invest in R-PET are switching once again to virgin PET.

“Demand for beverages across Europe is disrupted by the restrictions of the pandemic and is well below typical levels, which constrains the availability of bales for recycling at a time when demand for R-PET has escalated to unprecedented levels.

With virgin PET prices decreasing, this will attract some users, namely sheet players, back to virgin. However this will not compensate for the lack of beverage demand and ultimately R-PET feedstocks for the rest of 2021 and beyond.” Helen McGeough, senior analyst at ICIS said.

“Other factors impacting the flow of supply is UK customs, the continued delays and financial implications of this has positioned the UK market as less attractive for EU suppliers.

As a net importer of R-PET product and feedstocks, this leaves the UK downstream users with potential tightening of supply as domestic R-PET supply ramps up capacity, which will continue over the next 12-24 months,” McGeough added.

Substitution trends - PET and R-PET Europe

Cost-plus contracts in H1 have been over €300/tonne cheaper than freely negotiated and spot domestic prices in Europe, based on ICIS estimates of a €220/tonne annual fee*.

In the face of so much import disruption and quarantine regulations, there was heightened demand for European product, which pushed up spot and freely negotiated prices, leaving contracts trailing.

The unsustainable chasm has since narrowed, but which price format will headline going into 2022 is unclear.

The disparity has been enough to prompt early references to 2022 contract negotiations, including possible changes to formula strategies.

“All discussions are going on, but they are not fruitful discussions because it's too early – there are too many unknowns,” a trader said.

In addition to regular topics, participants will be talking about the shipping fiasco, pandemic demand expectations and the anti-dumping duty (ADD) on monoethylene glycol (MEG) from the US and Saudi Arabia, which recently provisionally became active.

Freight and container costs have killed many fresh import opportunities for PET and upstream products. Should imports maintain a premium or are on a par with domestic, this will put buyers off, thereby potentially playing into the hands of European suppliers come September/October.

Demand though, is unlikely to remain as good as it is in the hot-weather months, and while this may prompt producers to lower output, Q4 may look very different.

“Maybe we won’t have very good demand in October in Europe, and will be able to get cheaper PET from local producers,” a buyer said.

The biggest bottleneck for buyers is still likely to be the extortionate costs and precarious nature of container shipments.

It is the reason that domestic sellers are in the driving seat, at least for now.

Europe sellers have no need to fight for July demand, but predicting what is likely to happen beyond the now is pointless because of the unpredictable nature of today’s environment.

Being able to react quickly in these circumstances is a necessity, and therefore, also the only true forecastable point to be made.

Front page thumbnail image source: Keystone-SDA/Shutterstock

Focus article by Caroline Murray