PE arbitrage opportunities into Europe tantalisingly close

LONDON (ICIS)–Polyethylene (PE) arbitrage opportunities are looking tantalisingly close, according to market sources in May, but downward pressure in both Asia and more recently Europe still make importing risky, they said.

Much depended on the grade of PE in question and the region offers were coming from, and all eyes were on new capacities coming on stream in several regions.

New production in North America, India and also China was imminent, and while they are expected to have an impact in Europe in the future for the time being they were having little effect.

Capacity already on stream in North America led to PE imports from that region in 2016, but firming US prices and low European pricing meant that imports had dwindled in 2017.

US prices were falling in May, however, and some buyers were scenting new opportunities.

The recent sharp fall in US free on board (FOB) prices have left an opportunity for high density polyethylene (HDPE) blowmoulding buyers in Europe, as Asian prices are still not attractive for US sellers in spite of their erosion (see chart).

At the recent ICIS 6th Global Polyolefins Conference in Vienna, sources pondered over how much differential between Asian and European prices would be necessary to lead to a shift in volumes from regular exporting regions, such as the Middle East, from Asia to Europe.

A gap of $200/tonne was suggested as one to watch, while $250/tonne between Asian cost and freight (CFR) prices and European delivered duty paid (DDP) levels would be a good rule of thumb delta to consider as feasible for volumes to turn towards Europe.

Asian PE buyers were generally viewed as more flexible than Europeans, whom some sellers described as demanding, and Asia was the destination of choice for most of the new capacity that was due on stream, and also for that which had come on stream in the past years.

The slew of North American ethylene and PE capacity due on stream in the coming months is breathtaking in its scope, and while delays could mean less product hitting the market at once, much of it is destined for export.

China is also increasing its PE capacity, and is moving toward self-sufficiency.

At present, however, only some PE grades are workable for imports into Europe, with HDPE blowmoulding being one.

Europe is a huge net importer of C4 (butene based) linear low density polyethylene (LLDPE), but imports of this product are not as workable as for HDPE.

“We have sellers of LLDPE on our backs to buy product for Europe,” said a trader, “but their numbers just don’t work.”

In India, ONGC Petro-Additions Ltd (OPaL) put into operation early this year a 340,000 tonne/year HDPE unit, and two swing HDPE/LLDPE lines with a combined capacity of 720,000 tonnes/year, according to market sources.

Reliance Industries Ltd (RIL) is also expected to start up a low density PE (LDPE) unit and a HDPE/LLDPE swing plant in Jamnagar, India.

Sources expect India to become a net exporter of PE as these capacities come on stream.

Many potential buyers in Europe are cautious as prices have started to erode, and some buyers were also convinced that June prices would fall.

This assumption was based on low demand that started in April, but also lower crude oil and naphtha prices.

Many sellers were not convinced that the current low demand would continue, as they expected stocks built in the first quarter of the year to have been used up by June.

“We already see accounts trying to live from inventories,” said a producer, “but this is coming to an end…so July should be strong.”

On Monday 15 May, crude oil prices also rallied strongly, potentially confounding expectations of weaker upstream pricing to come.

Buyers of imported PE have to make the choice over which direction prices will trend in the coming weeks, and while PE from new capacities was bound to arrive into Europe at some point, the big question was when.

“There’s a large price gap between Europe and Asia right now,” said one HDPE buyer, but this was not the case for all PE.

PE is used in packaging, the manufacture of household goods and also in the agricultural industry.

Image source: Imaginechina/REX/Shutterstock

Focus article by Linda Naylor