INSIGHT: Europe chemicals markets ‘starting to collapse’ on faltering demand
LONDON (ICIS)–Shifting market fundamentals are changing the landscape of Europe’s chemicals sector, with demand falling sharply and the lack of buying appetite characterising negotiations.
The focus has pivoted from pressure on supply chains to meet the clamour for material; after the traditional summer slowdown, European producers have returned to find demand is muted as inventory levels remain high.
DEMAND EBBING AWAY
Gas supplies in Europe remain under threat, which in turn is pushing up production costs.
Coupled with weak demand, this is leading to some manufacturers opting to slow production.
“Markets are starting to collapse. The only good thing is that we are all sitting in the same boat,” said one acrylonitrile (ACN) buyer.
This sentiment was echoed across the ACN market with both buyers and producers talking of reducing run rates in the fourth quarter.
“We are now thinking of supplies for next year and have started talks with suppliers. It is going to be a tough year for them,” said another ACN buyer.
“Those product routes that are a couple of synthesis steps away from refinery were affected the most, for the time being at least. But it will not stop the impact also on products higher up the value chain,” said Oliver Schwarz, analyst at Hamburg-based Warburg Research.
“It will just take a bit longer for this to happen.”
This sentiment is echoed by the pessimistic sentiment characterising the olefins markets, with no pickup in demand expected for September.
The can could be kicked even further down the road.
PRODUCTION SLOWING IN
An integrated olefins player said it was having discussions to decide what to do, arguing it could try to reduce offtakes and postpone into next year.
“But everyone wants to postpone. Maybe there are some works that can be done, so plants can be shut down,” it added.
Propylene appears keenly impacted by the current dynamics, with one derivatives producer saying it has considered cutting production completely at one European site during November and December.
Another propylene derivatives producer said that they had already reduced run rates in August, but added there was no signs of a recovery and, in turn, it may have to pull back even further for the rest of the year.
“The gas and electricity prices kill the business. We have already had the first businesses closed or insolvent. Sentiment is at an all-time low,” the propylene derivatives producer added.
“We are in deep, deep, deep trouble, most [propylene] derivatives production is cut – some completely – and there is no demand for propylene. You cannot give it away,” said another propylene source.
The European methanol market is facing similar challenges, as high storage levels in Rotterdam and the lack of buying interest could start pushing prices down.
“It’s incredibly slow. It’s been like that from the last three weeks,” said a methanol trader.
“Now, looking forward to the next month or two, if things don’t change, it’s likely to be a slow and dry market.”
As US chemicals major Dow announced it was dropping global polyethylene (PE) operating rates by 15% at the end of August, this demonstrated the severity of the length in the market.
“This was an alarm bell, and I would expect other product groups to fall in line with that,” said Warburg Research’s Schwarz.
Methyl methacrylate (MMA) demand is down 20-30%, compared to the previous year, according to one producer, while one phenolic resins manufacturer said demand was now 15% lower than in the same period of 2021.
Polyethylene terephthalate (PET) plants have also already gone offline due to poor demand and high costs.
There is a heavy PET maintenance schedule set from now to the end of the year, but how much will come back online as planned is debatable.
“Due to market conditions, I guess most will think twice before coming back online,” a PET source said.
Similarly, in the recycled polyethylene terephthalate (R-PET) market, demand is also wavering, and the outlook remains pessimistic.
Hot weather and increased tourism across Europe have resulted in better PET bottle consumption, which means more post-consumer bottle (PCB) bales – the feedstock for R-PET flake and food-grade pellet (FGP) – entering the recycling stream.
At the same time, several end-use markets have used the summer months to slow or stop production or carry out routine maintenance on lines, reducing demand for flakes and, in some cases, FGP.
This has lead to an increase in flake availably on the market, softening demand.
As energy prices have continued to rise, this has led to recyclers stocking less PCBs and are also slowing production to cope with the higher costs, which could leave less recycled content available for consumption into 2023.
GLOBAL TRADE FLOWS
The volatility is also rattling the engineering plastics market; one source said it is not sure how the rest of the year will play out: strong demand in the first half was fading in the third quarter.
“Who could have imagined Russia will have an impact on energy prices. Then, China pushing up inventories and throwing prices,” said the engineering plastics source.
“Producers with high inventories have a real problem because fresh material is coming in from Asia with [low prices].”
One of the most significant factors weighing on the market is the shift in trade flows, with increased volumes coming from Asia also hindering European producers from preserving their margins.
“Inventories are rather full at Asian producers, and they are looking for outlets. If they can ship, because there are still logistics constraints and lockdowns in China, they will try elsewhere,” said Schwarz.
“Prices in Europe were higher at first but now the product glut has become global.”
Butanediol (BDO) demand for Europe is also down; for the demand that is left, people are trying to source from other regions to take advantage of arbitrage and supplement, or completely replace, their European product,” said one BDO buyer.
It added: “Arbitrage is open, high costs in Europe and specifically gas, create a certain cost base for European producers. Asian producers have lower cost base, and no-one in their region is buying material. Asian producers will have a reason to export.”
The same impact is being tracked on the isocyanates and polyols markets, as there is more potential to import from Asia, which is also facing lower demand in line with COVID-19 restrictions in China.
Sentiment in Europe is not expected to pick up through the winter, with expectations that this could spill over into 2023.
“It is basically the end consumer that is going on a buyers’ strike, as no-one knows how much money they will have in their pocket passed life’s necessities,” said Schwarz.
There is no end in sight for a reduction in gas prices in the near-term, and so this will continue to have an impact on the chemicals market.
There could be opportunity for some to prosper, as distributors are yet to feel the pinch and as demand unfurls supply constraints.
These have skewed the market for some time but could be resolved in due course, potentially resetting fundamentals for when demand returns.
Front page picture source: Jeppe Gustafsson/Shutterstock
Insight by Morgan Condon
Additional reporting by Zubair Adam, Eashani Chavda, Jane Gibson, Jane Massingham, Yashas Mudumbai, Caroline Murray, Matt Tudball, and Nel Weddle