European polymers face difficult winter on demand destruction, competition for supply

Key European polymer markets face a bearish cocktail of demand destruction from the cost-of-living crisis and planned extra supply from new plants that could leave the industry facing a supply-demand hangover.

Polymers, including polyethylene, polypropylene and polyvinyl chloride which underwent a coronavirus-induced boost from working from home and pharmaceutical needs, now see demand weakening on a worsening economic picture and anticipated additional production capacity largely from China and the US.

Inflation, important for credit and so for large-scale projects such as those in construction, is weighing on the outlook for polyvinyl chloride.

The European Central bank announced July 21 it had raised interest rates for the first time in 11 years and that more increases are on the way in the coming months.

Platts, part of S&P Global Commodity Insights, assessed free delivered Northwest Europe PVC spot prices at Eur1,730/mt Aug. 10. They have shown a steady decline since Eur2,050/mt ($2,084/mt) on May 4.

One producer said Aug. 11 that manufacturers were reducing stocks in expectation of lower prices for European material. Some see demand for the rest of the year at 50%-70% of that during the first half of 2022, the producer added.

"[There are] high costs in August and, possibly, the next months and the expectation of more price reductions increase the pressure on manufacturers, and I expect more production cuts – after already low utilization rates in July," the producer said.

Other polymers, more exposed to discretionary consumer spending, are feeling the heat from the cost-of-living crisis. This is only likely to worsen as winter approaches, when significant energy costs will become more apparent. This implies 2023 will be a year of lower volume growth for consumer petrochemicals, analysts at investment bank UBS said in a research note Aug. 8.

Easing supply chains

Threats to end-consumers' pockets point to reduced buying appetite from petrochemicals used in the automotive and packaging sectors; chiefly, PVC, polyethylene and polypropylene.

Homopolymer PP spot prices have dropped 31.7% from record levels of Eur2,050/mt FD NWE on April 27 to Eur1,400/mt Aug. 16.

FD NWE low density PE prices have fallen some 32.4% from a high of Eur2,220/mt April 26 to Eur1,500/mt Aug. 16.

PE demand from the durables sector has been affected since early in the summer with sources noting falling prices were doing little to attract buying interest due to inflationary pressures and macroeconomic fears.

Converters serving the food packaging sector reported they had seen demand drop from highs reached during the coronavirus pandemic, spurred by home working and fewer meals out, back to 2019 levels.

Producer Borealis sees PE and PP prices coming down in the second half of the year in line with general consumer spending consumption, as people look to economize amid higher household energy bills and inflation, CEO Thomas Gangl told S&P Global's Chemical Week in an interview after the company's Q2 interim results.

Much will depend on how imports and prices are affected by lockdowns in mainland China and any further supply chain disruptions at major ports, he said.

Logistics have been a challenge, with rising demand meeting a backlog at key shipping hubs. This means petrochemical production capacity increases in Asia, the Middle East and US in the last two-to-three years have had limited opportunity to compete significantly with European producers selling in Europe, as bottlenecks in supply chains have kept global markets fairly disjointed and limited imports.

Worldwide supply of PE and PP have risen from 115 million mt/year and 77 million mt/year in 2017, respectively, to 147 million mt/year and 99 million mt/year, according to data from Platts Analytics.

These glitches in distribution are now easing and new capacity will cause more product, once destined for Asia, to find its way to Europe, Joshua Forber, global petrochemicals analyst at Platts Analytics, said.

"The next 18 months will see petrochemicals manufacturers in Europe and globally face intensifying competition, after steady global capacity builds over the last three year," Forber said. This presents the prospect of capacity closures, he added

Falling polymer production

European producers of polyethylene terephthalate, used widely in drinks bottles production, and PVC have cut production since July.

One PET producer source said it had been battling high production costs as the price of feedstock paraxylene was at record highs due to limited supply and strong gasoline blending pool demand. This coincides with weak demand for PET and competitive imports.

Despite a decrease in the feedstock prices over the past month, PET production margins remain under pressure from the elevated energy costs.

Ample availability of competitively priced virgin PET in Asia also keeps European producers awake at night. Some sources pointed out over the past weeks that domestic producers have to compete with PET imports despite the longer delivery time from Asia.

The Northwest Europe PET spot price picked on July 27 at Eur1,750/mt before lower feedstock prices and weaker demand started to weigh on pricing.