Polymer producers and converters have been battling against high and volatile feedstock and energy costs. These have been a dominant theme for months: the price of oil has fed through into feedstock ethylene prices and left polyethylene makers struggling to maintain margins.  

Feedstock propylene prices have climbed higher putting upward price pressure on the global polypropylene markets. Relatively strong demand has kept the polymer markets tight giving converters little respite from high prices.

LLDPE

Demand for linear low-density polyethylene (LLDPE) was stronger in the final quarter of 2007 and in the first few weeks of 2008 than that for either high or low density polyethylenes. But producer margins were under pressure as feedstock ethylene costs rose on the back of higher priced naphtha.

Crude prices rose 19 per cent, naphtha matched the increase and the Q1 2008 quarterly ethylene contract in Europe was negotiated 10 per cent higher. Asia-Pacific ethylene prices were essentially flat over the period but US Gulf spot ethylene prices shot up 23 per cent.

The rising feedstock cost environment was mirrored on the London Metal Exchange (LME) with regional plastics contract prices rising through the period and particularly into the new year.

European polyethylene futures contract prices traded in a relatively narrow band between $1,410/tonne and $1,470/tonne in the quarter against the backdrop of concerns over continued demand pull. But as oil approached the psychologically important $100/bbl, mark prices rose sharply and hit $1,615/tonne at the end of February.

In the US market in September, the pressure appeared to be on polymer producers to maintain prices as prospects of demand softening were strong against the backdrop of the sub-prime mortgage crisis. However, with record high crude prices helping push up ethane values and tight ethylene supplies, producers strove to drive US polymer prices higher.

North America LLDPE futures prices moved higher through the quarter from $1,225/tonne to $1,360/tonne at the year end and continued to gain ground in the first weeks of 2008.

The upward pressure was apparent in the physical markets as most producers reported that they had been unable to fully recover lost margins as feedstock and energy costs rose. Some seasonal year-end slackening of demand was also apparent as buyers and sellers sought to reduce inventories for tax purposes. The LME regional contract gained further ground, however, fully reflecting cash market sentiments. Prices spiked in February and again in early March rising above $1,450/tonne.

The Asia LLDPE market through the final quarter of 2007 and into 2008 was characterised by high naphtha and ethylene feedstock values putting upward pressure on prices in a still robust demand environment.

Asia was quiet early in the year due to China New Year holidays. But the Middle East started firm and subsequently eased as more product became available.

Prices moved higher on the regional Asia LME cash contract before the end of calendar 2007 following a relatively quiet fourth quarter. From a low of $1,300/tonne at the end of October prices moved above $1,380/tonne at the end of December and continued to climb to the end of February. Prices hit at high of $1,570/tonne and were steady going into March.

LLDPE was expected to remain tight in Asia and the Middle East in the first half of 2008 before new capacities came on stream to help lengthen the market. The impact of this wave of new ethylene and polyethylene capacity will be global but Europe as a region is likely to be hardest hit.

PP

The European polypropylene (PP) market was less tight than that for LLDPE throughout the fourth quarter and customers were confident they would not have to accept higher prices. But production outages helped tighten the market.

Prices were under downward pressure at the start of 2008, yet the almost inexorable rise in the price of oil and naphtha pushed feedstock propylene prices higher and polymer producers were in a position to raise prices.

The market is fully aware of structural changes in PP that are likely to affect European producers more than most. Significant new production capacities come on-stream this year and next in the Middle East and Asia and China demand growth is considered by some to be under pressure.

The LME regional Europe PP contract price was steady at around $1,560/tonne through much of the fourth quarter of 2007 but moved up sharply at the start of 2008 as the oil price neared $100/bbl. A high of $1,665/tonne was reached but the contract traded in the $1,620 to $1,660/tonne range into February before falling sharply to $1,550/tonne at the start of March.

Producers INEOS and Basell closed two older PP plants in Europe in the first half of 2007, taking down a total of 440,000 tonnes of capacity. Some new capacity targeted at higher added value market segments will be brought on-stream.

In North America rising propylene on the back of higher priced oil put upward pressure on polymer prices. Injection grade spot prices were pushed up about 13 per cent over the quarter as feedstock costs rose and moved higher still at the start of 2008. The LME regional PP cash contract moved above $1,250/tonne at the end of September and hit $1,500/tonne towards the end of January. Prices have weakened somewhat since early February to around $1,430/tonne.

Polypropylene demand was seen to be softening, reflecting problems in the US economy and the housing market in particular. Demand for exports was also lower.

PP producers in Asia were under particular pressure in the final quarter of 2007 and running into the start of 2008 as product price increases failed to keep pace with rising propylene costs. Some in the industry expected propylene prices to rise beyond a 15 month high of $1,300/tonne cfr (cost and freight) Asia as cracker operators cut back operating rates in the face of high naphtha costs.

Polymer demand remained strong but supply was tight, although there was reportedly some buyer resistance to further price hikes in the important China market.

LME regional Asia PP prices began moving up in October hitting $1,380/tonne at the year end. Prices continued to push higher on the back of high feedstock costs hitting a high of $1,445/tonne in mid February. Prices have held running into March.

Nigel Davis
LME Ringsider enewsletter
Spring 2008