European polymer margins are at their highest level for years after a very strong start to 2015. But does this signify a renaissance or just a short-term fillip for an industry still beset by structural challenges?
European polymer margins are at their highest level for years after a very strong start to 2015. But does this signify a renaissance or just a short-term fillip for an industry still beset by structural challenges?
The weak euro, steady demand growth and some supply interruptions have created a window of opportunity for producers to lift margins that for years have been below reinvestment levels.
It is over five years since the start-up of the last new major polyolefin project in Europe as markets in Asia, the Middle East and the US — with advantageous feedstocks or larger growth potential — attract the lion’s share of investment. In fact, Europe’s polyolefin production capacity has shrunk. And this has been one of the catalysts for recent shortages as the reduced local capacity has left Europe increasingly dependent on polymer imports that have fallen sharply since the start of the year because of the weakness of the euro. Buyers previously working regularly with importers have had to source more of their requirements in the local market and this has put additional strain on Europe’s aging polyolefin plants. A number of production issues, both technical and feedstock-related, led to force majeure declarations around the region.
The supply constraints caused by the lack of imports and technical problems have been exposed by an increase in polymer demand since February. Some argue that this boost in demand is artificial, driven by stock fluctuations rather than ‘true’ economic recovery. Polymer converters carried as little stock as possible at the end of January as they sought to minimise their exposure to the falling price of oil. They were then forced to buy in February to build inventories to a comfortable level for spring. At the same time, the weak euro is supporting more exports of polymers and finished manufactured products. This may be a key factor supporting current demand levels and tightness on the polymers market.
That said, there are also signs of underlying economic growth. The Markit Purchasing Manager’s Index (PMI) — which measures industrial production and confidence — showed its highest reading for 10 months in March with encouraging growth in almost all the countries surveyed. Industrial growth has a knock-on effect upon employment figures and consumers’ confidence to make discretionary purchases. French car company Peugeot recently announced that it will increase production to meet raised demand after European new car registrations increased for the 19th consecutive month in March. Polyolefins are present across a high number of sectors and demand is therefore closely linked with this recovery.
First-quarter results from chemical and petrochemical producers have been largely positive and bear this out. Lower oil prices may have impacted revenues, but volumes and margins have improved with companies citing the effect of exchange rates and improving market conditions.
Few believe the market has fundamentally changed in a way which could justify renewed investment, but for the short term confidence is improving.
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