Market intelligence: Europe MPG market on ice

07 March 2014 10:51 Source:ICIS Chemical Business

Players may want to rethink seasonality in the monopropylene glycol market. The de-icing fuild market was a bust, but UPR demand from the construction sector is on the upswing

In the winter of 2010/11, London was blanketed in snow almost overnight. Random strangers broke all rules of social solitude and started talking whilst stranded outside transport hubs, baffled by how so much snow fell so quickly.

In a city where erratic weather is the norm, the storm stunned even the most seasoned Londoner. In the petrochemical world, the sudden drop in temperature reverberated across western Europe.

There is, of course, a natural, weather-based, seasonal demand for any product. This is particularly true for the propylene oxide derivative monopropylene glycol (MPG) which is used as de-icing fluid at airports, ensuring that vital airplane parts do not catastrophically freeze in place.

The winter of 2010, however, saw MPG prices soar by almost €300/tonne in just one month as demand for de-icing fluid from airports grew faster than even sellers most optimistic projections. Availability plummeted because producers could not keep up with demand.

Although prices did eventually fall to pre-winter levels, it took nine months for this normalisation to occur. Shortly thereafter, comparatively modest price increases were seen on renewed winter demand in November 2011 before stabilising to more familiar levels.

The question the market needs to ask itself is: In this new age of extreme weather patterns, is traditional seasonality a thing of the past?

It seems logical to believe airports and airline companies can simply buy MPG when the temperature drops or when the first flakes of snow begin to fall. Not only would this be uneconomical, because prices will start to rise when sellers see the influx in demand, there is no guarantee the desired volumes can even be acquired at that point.

This is why MPG buyers tend to stock up in autumn and sometimes as early as the tail end of summer.

This late summer buying took place in 2013 when de-icing demand was more robust than originally predicted. Perhaps there was an expectation of an arctic winter akin to the “polar vortex” that has wreaked havoc in the US.

In 2013, European prices started their ascent in August and eventually plateaued at the end of November. Producers were bullish on prices and started building MPG inventories in anticipation of a long and snowy winter.

In an ideal world, sellers were hoping for a European winter cold and prolonged enough to deplete existing de-icer stocks, but not such a blizzard that would shut airports entirely. Naturally, if no planes were taking off, there would be no need to apply de-icing fluid on them.

But Europe was not blanketed with snow this time around. London saw no snow at all with temperatures hovering around 10°C on most days – very mild compared to previous cycles. Airport inventories are now full and demand for de-icing liquid is virtually non-existent. Even if a major snow storm hits in March and rages for a month, it would not be enough to deplete existing stocks and induce a significant amount of fresh ordering.

For the de-icing sector, this winter season is effectively over. Due to increased availability, competition has surged. Prices began a sustained downward slide at the end of January.

There are signs that seasonal demand has already been fundamentally altered by what some say are shifting ­climate patterns. In the autumn of 2013, on top of the de-icer restocking, European MPG prices were also buoyed by demand for unsaturated polyester resins (UPR), which are used in the construction sector.

Part of the reason MPG prices plateaued (and did not fall) in December and January was unusually high demand for that time of year from construction. The milder weather meant construction could continue past autumn when it would usually halt with the falling snow.

Traditional seasonality dictates that UPR demand in Europe only starts to pick up in late March at the earliest on the first glimpse of spring across the continent. As with the de-icing sector, in 2013/14, seasonal demand in the UPR sector seems to have been turned on its head.

It is unclear how the “regular” UPR season will play out this year. Logically, there should be weaker than normal demand given the near constant demand stretching from mid-2013 until now. However, the construction sector is a key indicator when measuring GDP growth forecasts and by those measurements the outlook in Europe is generally positive. The European Commission’s winter 2014 forecast projects overall GDP growth of 1.5% in the EU and 1.2% in the eurozone with growth expected in most member states. This represents a 0.1% upward revision compared with the Commission’s autumn 2013 forecast. The forecast specifically references the construction sector.

“Although financing conditions are benign on average, there are still substantial differences between member states and between firms of different size,” the Commission said. “Nonetheless, after declining strongly for several quarters, investment has rebounded and is expected to gain momentum over the forecast horizon, also to some extent in construction. Diminishing uncertainty should underpin stronger demand, which is expected to be the key driver of growth.”

Therefore, despite the recent mild weather prompting near constant UPR demand for construction, the requirement for construction material could exceed that of previous years if this undercurrent of recovery ultimately turns into waves of growth. At this stage, it is too early to gauge.

Although there has been an overall recovery in the EU, a north-south divide remains, the effect of which remains to be seen.

The changing of the seasons from sun to snow used to be something any business could reasonably count on. Not anymore it would seem. The build up of large volumes of de-icing fluid in preparation for a white winter has backfired and prices continue to decline.

To prosper in this new era of abnormal weather and climate uncertainty, petrochemical players need to rethink traditional ideas about seasons and seasonality.

By Stefan Naidu