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Crude in freefall; will PE markets’ reaction resemble 2016 or 2008

by Esra Ersöz - eersoz@chemorbis.com
  • 19/03/2020 (12:57)
Crude oil prices in the US have recently neared $20/bbl, a threshold not seen since February 2002. Players are now widely trying to gauge the impact of nosediving oil on PE markets and see whether the last times crude oil futures suffered enormous decreases back in 2016 and 2008-2009 can give a clue about the bottom of PE prices.

Here is the review of how PE markets are performing now in China, Southeast Asia, Turkey and Europe when compared to 2016 and 2008-2009.

Crude hits 18-year-low, PE markets hover around 10-11 year-lows

After WTI and Brent crude oil futures tumbled 30% last week, the plunge has persisted as WTI crude lost another 35% by mid-week, marking the lowest settlement of the last 18 years.

In the meantime, PE markets are already trading at their lowest levels of more than 10-11 years. ChemOrbis Price Index suggests the lowest levels since November - December 2008 in China, Turkey and Southeast Asia while Italy is at its lowest since November 2009.

Today, apart from oil prices facing unprecedented falls, deepening recession concerns triggered by the COVID-19 pandemic and the recently started new capacities are weighing down on global PE markets.

PE partly shrugged crude off in 2016; what was different then?

The last time crude oil prices tumbled to below $30/bbl on NYMEX was February 2016, according to the weekly average data from ChemOrbis Price Wizard.

However, PE markets appear to have remained relatively strong across the globe at that time as prices stood considerably higher than the levels of today, as can be seen from the table below. Even though PE prices fell to some extent in line with plunging crude, they witnessed much lower levels before and after this period.

Lack of major economic woes

PE prices managed to hold fairly firm 4 years ago despite oil because a global recession was not accompanying the crude oil’s slump. Rather than recession concerns, it was the oversupply that pushed oil prices down in 2016 in tandem with the return of Iranian oil to global markets following sanctions. Thus, oil’s plunge did not find a substantial reflection on commodity prices at that time.

Limited supply propped PE up in 2016

A second important factor that helped PE remain partially indifferent to the sharp decrease in crude oil in 2016 was limited supply in the midst of globally growing demand. Supply limitations also pushed HDPE prices so high that they moved above homo-PP prices in Asia and Turkey between 2015 and 2017. HDPE’s premium over homo-PP was maintained until 2018, when new capacites built across Asia and the US started to gear up.

That’s why, it may not be fair to compare today’s PE prices to 2016 as the price-drivers were not the same.

Recession-driven slump in crude weighs heavily on PE as in 2008

Similar to today, the plunge in crude oil stemmed from economic recession globally in 2009, when futures moved below $40/bbl in February after losing ground by 80% from the all-time-highs at above $140/bbl in July 2008.

At that time, HDPE prices in China, SEA and Turkey followed oil lower, shedding approximately 60% in the same timeframe. Even though crude oil prices were much higher than today at around $50-60/bbl in mid-November 2008, PE prices hit the bottom in these three regions. Interestingly, crude oil prices maintained their downward momentum until February in 2009; however, PE prices shrugged this off and started to pick up.

Coming to today, the table below shows that current PE prices in China are still higher than the bottoms hit in 2008. Meanwhile, Turkey seems to be very near its all-time-low, according to ChemOrbis Price Wizard.



Europe’s PE market follows in crude’s footsteps

In 2008, Europe’s PE market drew a different picture than Asia and Turkey. The search for bottom in Italy’s HDPE market moved in lockstep with crude oil in February 2009.

Nowadays, spot HDPE film prices in Italy are standing at their lowest since 2009. Nevertheless, they seem to be still far from the bottom in 2009 at €730/ton FD. As Europe is the new hub for the COVID-19 outbreak and recession is around the corner on a global scale, further decreases seem inevitable in European PE market.

Massive capacity growth: Will it make 2020 more challenging than 2008?

Today somewhat resembles the situation in 2008 given the imminent recession. However, differing from 2008-2009, PE markets have faced sizable capacity additions in the past few years. That is to say, while PE demand is set to shrink, the market will have to tackle with a huge amount of PE capacity.

According to ChemOrbis Supply data, PE capacities have grown by 50 million tons since 2008. The start-up of these new plants gained speed after 2017, the half of which is located in Asia and followed by the Middle East and Americas.



Will logistic disruptions continue to stem rapid falls in PE?

Despite the pressure from upstream costs and supply-demand dynamics, PE prices have been resisting rapid and hefty price erosions because global logistics have been facing severe disruptions during the last couple of months due to measures taken for COVID-19 pandemic.

The border closures, reduced number of ships and shortage of containers have led to notably higher freight charges and this has kept the downward momentum in check in global PE markets so far.
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