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Downstream operations slacken amid virus-hit logistics, low demand in Europe

by Manolya Tufan - mtufan@chemorbis.com
  • 23/03/2020 (09:12)
With Europe becoming the new epicenter of the COVID-19 pandemic, run cuts or closures at downstream plants have been on the agenda. Meanwhile, rising freight rates amid a shortage of containers and increased checks at borders indicate that supply chain disruptions lurk around the corner.

Lockdowns trigger run cuts, demand woes

Players reported that order cancellations and temporary shutdowns at plants are likely to be seen more frequently as a result of the logistics mishaps as well as demand contraction in certain sectors.

The COVID-19-led lockdowns in Italy, Spain, and France have disrupted businesses particularly for retail, travel, tourism, houseware, construction and automotive industries. Travel bans have weighed on manufacturing and services processes, paving the way for order cancellations.

Rising freight rates, lack of manpower in factories and goods delivery drivers particularly to Italy also pose challenges for manufacturers. Some converters, who already work at half capacity, are mulling over halting operations in the following days.

Stricter containment measures may be imposed due to the increasing number of cases and the lockdowns may be extended, as was the case in Italy. Italy has recently closed all non-essential factories and businesses until April 3 in further attempts to contain the spread of the virus, while groceries, pharmacies, postal and banking services would remain open.

Stimulus measures unveiled to support economies

Lockdowns around the globe and in Europe heightened fears over economic contraction.

Thereby, central banks have moved to mitigate the economic fallout from the pandemic, with the European Central Bank (ECB) launching a 750 billion euro ($820 billion) debt-buying program.

Auto makers suspend production, ABS under strong pressure

The automotive industry has been hit hard by the virus after months of contraction.

Several carmakers have suspended their operations in Europe and other virus-affected countries mainly due to the disruptions in the supply chains as a result of the coronavirus pandemic as well as health concerns.

A distributor affirmed, “Some companies are suspending production at their plants due to the containment measures amid COVID-19. Manufacturers close their plants to cope with the demand erosion. Plus, the automotive sector is very slow.”

A distributor said, “Our demand is slow as regional fairs have been cancelled or delayed amid virus concerns. Some of our ABS orders have been postponed as a result.”

According to several players, the full effect of the COVID-19 pandemic on the businesses will only manifest itself in the coming months. A reseller said, “Lockdowns led to the closure of toy shops and appliance stores. We may see the impact of the COVID-19 on ABS demand more clearly in May.”

Demand burst seen for disposables, medical applications

Meanwhile, demand has been good for medical applications and food packaging. Although sustainability concerns had a negative impact on disposable usage in the past months, demand for single-use items including bottled water and food packages soared lately in the wake of the COVID-19 outbreak.

Meanwhile, a buyer in Italy said, “We hope that the tax on plastic packaging will be suspended.”

Logistics challenges may reduce supplies

Players are wary of collapsing logistics operations any time soon. Now that certain sectors are facing order cancellations both from the local and export markets, this is going to add to the sluggishness.

If consumption declines further in case of extended lockdowns, run cuts may be seen through the entire production chain. A lack of feedstock availability may lead to closures of petrochemical plants in the near term. A few sources claimed that a South European producer reduced operating rates to 50% for PS.

A PVC player opined, “If stricter measures are imposed, major European producers may halt production, leading to reduced supplies. We think that the April outlook will be determined by supply rather than demand. Despite bearish expectations for ethylene, the PVC market may not follow the monomer’s outcome.”

“Petrochemical plants are running normally for the time being. We could also send our cargos normally but it’s not certain we will continue doing so next week. Truck drivers have to wait for long queues due to the stricter containment measures at the borders and they do not want to drive to this destination afterwards. Buyers have already purchased beyond their needs during March with fears over closure of the borders,” a major market player remarked.

April drops seem inevitable

With the slump in upstream markets, European polymer markets are bracing themselves for further drops in April. The bearish outlook has already slowed down demand as March draws to a close.

According to ChemOrbis Price Wizard, spot naphtha prices on CIF NWE basis plunged by 53% compared to the start of March. This sent spot prices to their record low levels since ChemOrbis started to collect data in 2008.

When it comes to monomers, spot styrene takes the lead in dramatic drops following the slump in the energy complex. This was followed by spot ethylene, for which supplies have been long, while spot propylene witnessed smaller drops. ChemOrbis data show that spot monomer prices dropped more than 34% for styrene on FOB NWE basis while ethylene and propylene on FD NWE basis fell by more than 15% for and 9% since early March, respectively.

April monomer settlements are expected to be closed with up to three-digit drops for styrene and ethylene while €70-80/on decreases are foreseen for propylene.

It remains to be seen how far polymer prices will move south. Sharp drops amid a possible demand collapse do not seem to be a remote possibility. On the other hand, some players opined that supply disruptions amid paralyzed logistics may alleviate the awaited plunge in prices.
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