INSIGHT: Tight PE supply in the Americas prevents price erosion

06 May 2014 18:17 Source:ICIS News

By George Martin

HOUSTON (ICIS)--Market conditions for polyethylene (PE) in Latin America have changed this year, with ethylene and PE parting ways. Tight supply has kept PE prices up, despite cheaper feedstock and sagging demand.

In past years, ethylene prices increased sharply in the first quarter because of cracker maintenance, then later declined gradually to a low point for the year, usually reached in July or August.

In 2014, PE prices in the US Gulf started high because they did not decline in December as market players expected out of observing historical price behaviour.

Ethylene costs have been going down gradually in the past year (see chart below) but PE prices have ignored feedstock behaviour as a result of tight supply.

C2 and PE chart

Demand has not been strong in Latin America this year, and special circumstances have aggravated conditions in some countries.

Take for instance the case of Mexico’s Pemex, a company that reduced prices on 7 March by 4.5% even when all importers of US product were seeking a 6 cent/lb ($132/tonne) increase in April.

The main reason for the price reduction was growing inventories for Pemex and the whole distribution chain.

The April increases by importers of US product did not materialise in Mexico as planned. Only a couple of cents/lb was implemented, and the increase affected only a limited number of customers, sources said.

In Brazil, a country with high import tariffs and only one producer (Braskem) associated with state-owned Petrobras, there were two price reductions in April.

The first one was justified by gains of the local currency relative to the US dollar and the decline was as much as R150/tonne ($67/tonne).

In the last week of April, a new reduction was applied, this time for R200 for high density polyethylene (HDPE), R150/tonne for low density polyethylene and R100/tonne for linear low density polyethylene (LLDPE).

Resellers in Brazil had been warning that many plastic converters were falling behind on payments, reflecting softer demand throughout the chain.

Maintenance turnarounds justified a $100/tonne increase in Argentina in April, despite a remarkable stabilisation of the currency at Ps8.00 per dollar, but demand has been declining in the country since late January, when a 24% devaluation of the currency took place.

In Colombia, plastic converters continue to buy minimal volumes while waiting for lower prices ahead that may not materialise unless supply improves substantially.

Local producer Ecopetrol had important maintenance to its 60,000 tonne/year LDPE units in March, a procedure that prolonged beyond initial expectations.

Mexico has one 100,000 tonne/year LDPE train stopped for a maintenance schedule to last until the end of May, and has recently performed unscheduled maintenance on the 300,000 tonne/year Morelos swing plant.

Dow Chemical has had maintenance procedures in Argentina, which have tightened supply on that country, and the LDPE plant in Chile has had considerable down time in recent weeks for lack of feedstock ethylene from ENAP, the local refiner.

The 46,000 tonne/year LDPE plant in Talcahuano, Chile, is a likely candidate for permanent closure later this year, as sources close to the negotiations between ENAP and Dow consider this outcome as very likely.

Dow has a long-term contract for the supply of ethylene from ENAP, but it could close the plant if ongoing negotiations fail to produce acceptable results for both sides.

This plant does not have economies of scale, is old and lacks a steady supply of raw materials, reasons that have repeatedly spawned rumours of permanent closure in the past couple of years.

With much production lost because of maintenance turnarounds and no new PE capacity starting in Latin America until the second half of 2015, the region will have to rely increasingly on imports from the US Gulf, the Middle East or Asia.

Importers in the region do not see viable prices in the US Gulf, and supply from other continents can be spotty at times, depending on demand conditions in the exporting regions.

Supply has been tight in the US Gulf in addition to being expensive, a situation that could be corrected in 2017 or later, when ethylene and PE production goes up in North America in the wake of the planned ethane cracker boom.

Until now, the feedstock advantage provided by abundant natural gas from shale has only benefited petrochemical producers with access to chemicals from natural gas, but nobody else downstream.

PE prices should be much lower in Latin America at this time in view of low costs and sagging demand in the region, but this cannot happen with the current supply conditions.

This situation is serious for small plastic converters, who could be pushed out of the market or forced to merge with others to survive.

($1 = R2.23)

By George Martin