INSIGHT: European polymers calmer at year-end but PE imports promise disruption

LONDON (ICIS)–European polyethylene (PE) and polypropylene (PP) players are set to close 2017 in calmer waters after the nervous sentiment caused by cracker shutdowns at the beginning of the year, but this could be short-lived for PE as the US and India bring on stream massive capacities.

At the beginning of 2017, a series of planned cracker shutdowns was leaving buyers a little nervous. What if these shutdowns led to another 2015? In that year product was in such short supply that prices soared and converters’ production lines were closed for lack of material.

There was no real expectation of a repetition of this in the first part of 2017, but buyers bought more than they needed, just in case, and by the time it became clear that product was not going to be short, polyethylene (PE) demand in particular ground to a halt.

The spread between ethylene and PE fell in May, leading to its lowest level in two years.

The accompanying chart shows the delta between ICIS low end, low density polyethylene (LDPE) FD (free delivered) EU gross prices compared to the prevailing ethylene contract price.

“Market fundamentals have not changed to the extent that prices could fall. There’s a lot of tactical buying going on,” said one producer.

In contrast, the spread between polypropylene (PP) and propylene remained strong, with some slight erosion, but PP was beginning to be seen as fundamentally healthier than PE, and this was expected to continue, especially in 2018 when new PE capacities come on stream.

Demand remained lacklustre for several weeks, as buyers lived from stocks, and also in the expectation of softening ethylene and propylene prices as crackers came back on line.

Ethylene and propylene prices did not soften, however.

Monomers were supported by the unexpected outage of Europe’s largest refinery in July, Shell’s at Pernis in the Netherlands, which prompted several force majeures, including ethylene and propylene.

Another problem at the company’s Moerdijk site, also in the Netherlands, in August continued to support a tight monomer situation.

No sooner had these problems in Europe subsided, than Hurricane Harvey struck the Texas coast on 25 August, leaving a trail of disruption at US chemical facilities in its wake.

In Europe, PE and PP as well ethylene and propylene became tight, and there was no relief for buyers.

Hurricane Harvey had caused outages and disruptions for production starting in late August, with many units returning to normal operating conditions in September. However, some outages or reduced rates continued into October.

The European September PE-ethylene spread rose and October contracted PE prices moved up, but only in line with ethylene this time.

By November, the game was up for producers, and buyers set themselves the target of achieving price reductions on both PE and PP.

They were more successful in PE than PP, managing to get a €30/tonne decrease when the ethylene contract rolled over.

PP prices have edged down a little, following the rollover of the November propylene contract, but some prices also rolled over.

It was at this point, however, when producers were relenting and giving away some of the monomer-polymer spread, that naphtha prices surged, and producers’ costs were compromised.

One producer was making the bold move of announcing a hefty increase for December PE prices.

“As a result of the margin compression and to be sustainable on current feedstock levels, Our order load is very strong also for December and in LLDPE [linear low density polyethylene] even stronger than November,” the producer said.

It was too early to see whether buyers would agree and pay up the extra €70/tonne supplement the producer was proposing.

Others were targeting a more modest hike, but by the beginning of December momentum was growing and most agreed that prices had reached the bottom of the cycle.

One significant difference between expectations and what actually happened in 2017 is the level of imports that Europe has seen.

The pull from Asia has been strong, but new capacities in North America have not had the impact that some players had expected would begin in 2017.

Delays caused by Hurricane Harvey have been largely to blame, and now some sources are saying they only expect any real imports from the new plants in the second quarter 2018.

The outlook for 2018 diverges for PP and PE.

PP producers are relaxed and confident for next year: there is no oversupply expected, and demand is growing at a good rate.

European economies are stronger, and the market will be balanced.

For PE the picture is not so rosy: new capacities in North America, but also India, are expected to be sending material to Europe in volume by the second quarter, and prospects for the second half of the year are unclear.

PE and PP are used in packaging and the manufacture of household goods. PE is also used in agriculture and PP in automotive.

Pictured: 14,000 white PE boxes at London’s Tate Modern exhibition Embankment by Rachel Whiteread
Source: Eye Ubiquitous/REX/Shutterstock

By Linda Naylor