The pressure that has built from all sides on the polyethylene (PE) industry looks likely to continue in 2020. Europe began 2019 with healthy integrated PE margins, but they dropped significantly towards the end of the year to the point that some producers are trimming operating rates, saying that integrated margins are unacceptably low in some grades.
International PE spot prices are at the lowest since December 2008 — when crude and naphtha prices were also considerably lower because of the economic crisis — and this has squeezed margins globally. The European market has been pressured by this and by imports: EU-28 high-density (HDPE) and linear low-density (LLDPE) imports have grown by the equivalent of one new production site for each grade in the past two years, significantly outstripping demand growth.
This has inevitably affected PE prices and margins for European producers, which have mostly tried to diversify away from import-heavy commodity markets. There is little sign of a let-up. World-scale plants are scheduled to start up in Malaysia and Oman in 2020, alongside increased production from plants that are ramping up in Russia, Indonesia and the US.
This has been compounded by slowing global PE demand growth, caused by economic uncertainty and the effect of protectionist trade policies on Asia-Pacific manufacturing. European consumption has entered a weaker cycle, with the IHS Markit Purchasing Managers' Index (PMI) showing contraction in the eurozone manufacturing sector since February. The general slowdown is exacerbated by particular weakness in the automotive sector and by campaigns to encourage avoidance of plastic in the vital packaging industry. The latter is having a small effect on volumes but a significant one on sentiment.
European producers are fairly positive about contractual commitments secured for 2020, and there is some cause for optimism with the breakthrough in US-China trade talks. The interim agreement will buoy economic sentiment, particularly in Asia-Pacific, and could see some US PE exports redirected to China after tariffs were lifted against LLDPE octene and metallocene HDPE. But, there is little expectation that these underlying demand issues will disappear overnight.
Exposure to local and global oversupply in ethylene and other cracker products caused a sudden drop in European integrated PE margins at the end of 2019. Integrated PE margins take in two stages of the production process — the steam cracker, which produces ethylene from ethane, naphtha or LPG, and the polymerisation unit that makes PE. They are a measure of profitability in Europe because — with the exception of two small specialised manufacturers — all European PE producers manufacture their own ethylene to a large extent.
An exceptionally busy maintenance programme supported cracker margins in 2019, but restoration of full production has exposed the length in cracker product markets and caused margins to fall. This is a major problem for integrated European PE producers, which had allowed the PE-ethylene margin to fall and relied on their cracker businesses to support overall profitability.
Capacity increases globally means that this pressure on margins is likely to be sustained.
None of this is a surprise. The industry has anticipated for two years that global PE capacity increases would squeeze margins. European producers are well-prepared, having invested in cracker feedstock flexibility and rationalised less competitive assets. But the speed of the change will unsettle an industry that has enjoyed above-average margins for the past five years.
Factors including holidays and end-of-year inventory control make it hard to judge underlying trends in December. Producers will hope that demand recovers in the new year as buyers need to restock, but will need to consider their options if this fails to materialise. Some may reduce operating rates to support the market balance. ExxonMobil stopped production at its Gravenchon HD/LLDPE unit in northwest France for a period because of low margins, although its latest is that production is running. Lower production rates may become more prevalent as producers batten down the hatches and wait for global demand to catch up with supply.
By Will Collins
