OUTLOOK ’13: Europe PET faces plant closures unless margins improve

By Caroline Murray

LONDON (ICIS)–The European polyethylene terephthalate (PET) market is in limbo as producers decide how best to limit losses in the face of new capacities affecting Europe and continued upward pressure from raw materials.

New PET capacities are being introduced at a particularly sensitive time for the economy and this is compounding the likelihood of existing capacity closing in 2013.

“[The market] needs someone big to stop for the balance to be addressed…the market is already struggling to push through raw material increases…the bottom line is there is more volume, and even if the plants do not run flat out, there is probably over 1m tonnes of new capacity. If you took 20% off all that is running in Europe, it probably wouldn’t even touch that,” a PET buyer said.

Southern Europe, where some of the oldest and least competitive assets are, is the region most at risk of plant closures, sources said.

“In south Europe there will be a number of PET producers who won’t survive,” according to an upstream monoethylene glycol (MEG) producer.

As a PET buyer puts it, “…the playground might be once again shaken up.”

Although it could be anyone’s game, as importers to Europe are also at risk because of questions over quality of service and logistics for example. It is not just a matter of price where importers can perhaps make cheaper PET.

“The whole package has to suit,” the buyer said.

New lines in Egypt and Turkey will start up hot on the heels of the most recent new capacities in Oman and the Netherlands.

Meanwhile, Spain’s Novapet intends growing its speciality grade PET business by modifying one of its commodity-dominant lines in Barbastro, Spain, and reducing output at an existing, smaller speciality line at the same site.

Some European producers may be burning money, or working close to variable costs, but owners have to weigh up the odds, as closing down plants is an expensive business.

Margins for upstream paraxylene (PX), which feeds into PET’s primary raw material, purified terephthalic acid (PTA), are inflated and should the economy fail to improve, PX prices will surely have to decrease.

“It will probably be a fast fall that will drag along all the other raw materials and this is what people are scared of,” according to a PET producer.

On paper, both PX and MEG should be tight in 2013, unless the poor economy pulls down PET demand.

Asia’s PTA capacity is expected to reach 69m tonnes/year in 2015, a 60% increase from 43m tonnes/year in 2011. The impact of this on the Asian PX market will be felt markedly in Europe, where monthly contract talks continue to take their cues from the far east.

Europe is structurally reliant on MEG imports and for 2013, buyers and sellers expect a balanced-to-short market.

“For 2013, I am indeed a bit worried about the [MEG] availability but on the other hand it was easier than expected to get “good” contracts for 2013… So I guess the vendors are also worried about the global economic crisis,” a buyer of MEG said.

Market players hope that there will be less volatility in the crude oil and naphtha market than in 2012 which led to record adjustments and record high monthly ethylene contract prices, affecting the downstream MEG price. But ethylene prices will continue to be primarily driven by upstream costs and the supply situation, rather than the strength of demand.

Those PET accounts held to a raw material formula in 2012 paid more than those operating on a spot and freely negotiated basis. How they decide to buy PET in 2013 is testament to their expectations.

“In 2013 security of product [is key] but we foresee pressure on raw materials in 2013. This means we will avoid any prices being linked to a fee – ideally they will be linked to a market indicator,” a second PET customer said.

The ‘fee’ is the price paid over the cost of conversion.

This may be a risky attitude as the market could tighten on the back of potential plant closures, other customers and suppliers warn.

“Spot needs to be higher or [the market will] face severe problems next year,” according to a third PET buyer.

PET producers and converters alike will be fighting for sales volumes in 2013.

“There is a lot of risk out there, economically mainly. I don’t see the light at the end of the tunnel yet and 2013 has the makings of a tough year,” a PET customer said.

($1 = €0.77)

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